 "Essar Oil might have to pay Rs 1,800 crore to minority shareholders")
Essar Oil might have to pay up to Rs 1,800 crore to minority shareholders following the $10.9-billion (Rs 72,800-crore) deal between promoters Ruia family and Russian giant Rosneft and other investors. Last year, when the company made the delisting offer, the market regulator had directed that if the price paid by Rosneft worked out to be higher, the minority shareholders would have to be paid the difference.
According to calculations published by proxy advisory firm Stakeholders’ Empowerment Services (SES), the value of each Essar Oil share works out to between Rs 357 and Rs 388. Considering the delisting price of Rs 263, the Ruias might have to shell out anywhere between Rs 94 and Rs 125 per share to the minority shareholders. For 142.49 million minority shares, this works out to a total payout of between Rs 1,341 crore and Rs 1,787 crore.
Applying normal practice in mergers and acquisitions, SES has constructed the following picture of debt and working capital as on March 31, 2015 (the last available annual report). Long-term debt on Essar Oil books totalled Rs 17,612 crore. It also had a negative working capital of Rs 4,451 crore. “In normal practice, equity value = enterprise value-debt (long term). With this, equity value comes to Rs 55,188 crore and even if one assumes that working capital is also included in the deal price, the value will be Rs 50,737 crore (Rs 55,188 crore minus Rs 4,451 crore),” SES said.
In a statement, Essar: "Essar seller entities will abide by the commitment made to Sebi and Essar Oil minority shareholders at the time of delisting. We will pay the difference between delisting price and the final equity price, at which shares are sold by Essar seller entities to Rosneft. The final price will be determined by independent experts and would be known at the time of completion of the deal later this year. We believe that this would put to rest any concern or doubt being raised by anyone in this regard and we have no difficulty in assuring the minority shareholders who have or will (till exit window is open) participate in the delisting process that there interest in this regard will be taken care of."
The Sebi directive on Essar oil delisting was as follows: “Provided that, notwithstanding any delisting of equity shares of the company, the promoter/s of the company shall be responsible to pay the difference between the transaction price with Rosneft and the final delisting price to those shareholders whose shares were accepted in terms of the delisting regulations, if the former is higher.” The company is required to come up with a public notice within 10 days of the finalisation of deal with Rosneft giving all details and calculations.
“The important question is, when does the time limit of one year start and end? From the date of original delisting offer or from the revised date when revised price is announced and paid to shareholders who tendered shares?” SES said.
While the directive explicitly covers Rosneft, it is silent about other investors. While Rosneft gets 49 per cent, Kesani Enterprises (owned by a consortium led by Trafigura and United Capital Partners) gets the other 49 per cent. When asked what if the price was different for other two investors citing some premium or other fee, J N Gupta of SES said, “They might not make it so obvious. If they do that, it would be clear to everyone that it is being done to avoid paying minority shareholders.”
SES felt that calling the deal the biggest foreign direct investment (FDI) would be a misnomer. “Entire promoter holding is held by promoters outside India. Therefore, whatever amount is paid to promoters for equity will be paid abroad and nothing will move to India from this deal. Whether promoters out of this amount bring anything in future to India is a separate issue and not connected to this deal. Debt will remain as it is unless new promoter pays the debt back to lenders. Therefore, there is absolutely no FDI in the deal, which is touted as the biggest FDI deal,” SES said.
If HUL buys out Colgate tomorrow, will the consideration paid by Unilever UK to Colgate in US/UK be FDI? Certainly not and this deal is no different, the proxy firm added. Essar’s take was that this was the largest investment made by any foreign company in India and the proceeds would be used to repay Indian and foreign banks.
While SES was sceptical about money going to bankers, it also raised a question about the tax treatment of the deal, drawing a parallel with Vodafone. “SES does not have any tax expertise and cannot comment on taxation issues. However, if there is any capital gains tax, what will be tax implication of this deal on promoters? Will Rosneft and others asked to deduct taxes or will it be another Vodafone?”
