The deal between Essar Power and Marathon Power of the US is slated to be called off, with the Gujarat government denying permission for third-party sale of power in the state.
An Essar executive confirmed the state government's intimation to the group.
"Since the state government is not allowing third-party sale of power, we have to convey the decision to Marathon Power," he told Business Standard.
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"However, we are willing to offer Marathon equity in Essar Power. Now, Marathon is to take a final decision," he added.
Marathon had signed a memorandum of undertaking with the Essar group to acquire the latter's stake in the 515 mw power plant for $170 million (Rs 750 crore). It was slated to be one of the largest acquisition deals in India.
While Essar Steel holds 42 per cent in Essar Power, Essar Oil holds 9 per cent and Mauritius-based Prime Hazira the remaining 49 per cent.
As part of the deal, Marathon had agreed to provide uninterrupted supply of 215 mw of power to Essar Steel for 20 years.
State government officials, however, said it was not against Marathon acquiring equity in Essar Power and selling power to Essar Steel.
Significantly, domestic banks which hold Essar Steel's floating rate notes have asked it not to sell the power company "as it is directly related to Essar's core business." Instead, they would prefer the company moving out of telecom, bankers said.