In 2007, Chennai-based chemicals major Sanmar Group acquired Trust Chemicals Industries (TCI) of Egypt through its Cayman Islands subsidiary Pharaoh Chemicals Limited (PCL), which took a loan of $300 million from ICICI Bank for the acquisition, according to Appleby records investigated by The Indian Express.
Records show the Sanmar Group then executed a series of financial restructuring moves through inter-company fund transfers that drastically altered the holding structure of the companies, with the freshly acquired entity — TCI — ending up as a 50 per cent shareholder of PCL, which was the holding company at the outset of the deal.
To execute the restructuring, records show, TCI was to take a loan of $485 million from BNP Paribas in December 2007 for buying a 50 per cent holding in PCL, along with the purpose of repayment of the ICICI Bank loan and an expansion of its business.
The BNP Paribas loan did not materialise due to the 2008 global financial meltdown, Appleby records show, but Sanmar managed to secure loans amounting to $565 million from a consortium of Indian banks at a time when the banking system was practising extreme caution in the wake of the slowdown.
This is testified by a senior functionary in Appleby’s Corporate and Commercial Practice Group, who noted that this was “a landmark transaction” in the prevailing environment and was “the first substantial international project loan” that was wholly financed by Indian banks.
What is more striking is that ICICI Bank — the original lender for the deal — was part of this lending consortium, alongside the State Bank of India, Bank of India and Indian Overseas Bank, among others, show records. Ultimately, in March 2009, the consortium provided a loan of $565 million to TCI in Egypt.
Appleby documents show that after being acquired by Sanmar Group, TCI planned to utilise $70 million from the BNP Paribas loan to acquire a 50 per cent stake in PCL, and another $140 million to fund the repayment of the ICICI Bank loan for the acquisition of TCI. Records show that the Sanmar Group followed the same fund deployment strategy as planned earlier for the BNP Paribas loan: buy stake in PCL, fund PCL to repay the initial loan of $300 million taken from ICICI Bank and use it for its expansion plans.
After the loan from the syndicate of Indian banks got closed in 2009, Simon Raftopoulos, Partner, Corporate and Commercial Practice Group, Appleby wrote in an internal email: “What is significant about this transaction: This transaction is a landmark transaction in the current environment and is the first substantial international project loan which is wholly financed by Indian banks.”
In its plan to repay the $300 million loan taken from ICICI Bank, the group planned a web of inter-company fund transfers and loan repayments — and utilise a part of the loan taken by TCI to fund PCL to repay the ICICI loan.
Appleby documents reveal that PCL, which started out as the holding company of TCI, eventually ended up ceding a 50 per cent shareholding to TCI through the series of transactions. These included transferring shares of a PCL Cayman Islands subsidiary to yet another Cayman Islands company that was a step-down Swiss subsidiary of Sanmar Holdings, the holding company of Sanmar Group.
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“TCI will invest $70 million by subscribing to shares of PCL. Further to Pre-closing Steps, PCL is no longer a holding company of TCI. Therefore TCI is not investing in shares of a holding company. Thus at this stage the total capital of PCL will be $140 million held thus 50% by PIL and 50% by TCI. PCL will have USD 300 million which will be used to repay ICICI,” states an Appleby document.
Appleby records examined by The Indian Express show:
One set of funds was used to settle inter-company loans worth double the amount. Documents reveal a complex payment structure where the same chunk of money flowed back into a set of three companies twice over to make it settle inter-company loans worth double that amount. The transaction involved the Group’s three Cayman Islands entities and initial funding of $90 million by their Switzerland-based immediate holding company, CAV-NILE.
In the transaction, the $90 million received by the Cayman Islands-based holding company went to its Cayman subsidiary that was utilised to repay its loan to PCL. From the same money, PCL used $42 million to repay the Cayman Islands holding company to which it owed $60 million. The remaining $18 million ($60mn -$42mn) loan was converted by PCL into equity.
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The Cayman Islands-based holding company received $42 million from PCL; it was again advanced to its subsidiary in Cayman Islands to repay PCL. At the end of the transaction, $90 million was used to settle loans amounting to $174 million among the three companies.
A spokesperson for Sanmar Group responds: The investment structure involving subsidiaries in Switzerland and Cayman Islands to invest in TCI was suggested by our Financial Advisors Bear Stearns, in 2007. This structure was designed from the point of view of raising funds from the US Bond Market. The structure was rather complex, but was wholly held by The Sanmar Group at all levels.
The plans for the Bond issue did not go through with the 2008 meltdown of the US financial markets, which also resulted in Bear Stearns going out of existence. However, by that time the structure had been put in place, and we had no alternative but to continue with it.
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We next tried to raise a dollar loan from the European loan markets through BNP Paribas. Unfortunately, by the time BNP Paribas got to the stage of actually placing the loan, the European markets had also melted down, and BNP expressed their inability to put through the transaction. Thereafter, our internal team raised dollar loans from the offshore branches of Indian banks using the documentation that BNP Paribas had developed. The support that the Indian banks gave to the project was invaluable, as all other sources of funding had dried up.
No loan was availed from BNP Paribas.
The total amount of loan taken from Indian banks was $ 565 million. $130 million out of this has since been repaid. We are current on all loan and interest payments.
Incidentally, the complex structure that was originally put in was finally simplified in 2017 with the permission of the Reserve Bank of India through a series of mergers. Today there is only one Swiss wholly owned subsidiary Holding Company between the Indian Company and TCI.