 "Employees walk past an Essar Group logo outside their headquarters in Mumbai")
The Ruias of Essar recently announced that they would sell their entire stake in Essar Oil to a consortium led by Rosneft of Russia for $10.9 Billion. The transaction, which will result in the largest foreign direct investment into the country, had been in the making for a while and is expected to receive all relevant approvals by the end of this year.
Industry analysts say it will kick-start a new trend in the oil and gas sector where deals have been few and far between.
"One major significance of the deal is that the (local) promoter of a large oil company is exiting completely in favour of a foreign investor, which has never happened before in India," says PwC India Partner and Leader (oil & gas industry practice) Deepak Mahurkar.
Mahurkar makes this point based on past instances of exits from oil and gas assets in India, which have taken long to close thanks to various regulatory and other issues.
Cairn Energy's partial exit from its India assets is one such example.
In August 2010, Cairn Energy started talks with Anil Agarwal's Vedanta to sell 40% stake in Cairn India. The transfer was completed only in December 2011 after the deal was revised to expedite the process.
In June 2011, Cairn Energy decided to go ahead with the deal in two trances: sell 10% first and then offload the remaining share after the receipt of approvals.
"As the Indian government is taking its own time in approving the $6.6 billion acquisition of Cairn India by Vedanta, the two business groups have decided to go ahead as far as possible without violating the law," said Nirmal Bang's Ashutosh Bhardwaj and Giriraj Daga on the rationale behind the new terms in a June 2011 report. "The move to sell 10% would not trigger government intervention as majority of the stake would still remain with British firm Cairn Energy," it added.
It also faced issues over royalty payments with state-run ONGC that owns 30% of Cairn India's oilfields in Rajasthan.
ONGC wanted the royalty it was paying to the government for the fields to be shared by Cairn India and made the resolution of the dispute a precondition to the deal.
To add to that, Cairn Energy is contesting a tax demand for its India unit. The Indian government in January 2014, using retrospective tax legislation, had issued a tax notice to Cairn Energy for alleged capital gains it made after an internal reorganisation of its India unit 10 years ago.
Deloitte Deloitte Touche Tohmatsu India Partner Debasish Mishra points out that the Essar deal enjoys sovereign support. "This (Essar) is quite a unique deal. Although it involves a private company, it seems like the deal has sovereign blessings."
The all-cash deal, which include Essar's 20-million-tonne-per-annum refinery in Gujarat as well as its pan-India retail outlets, was announced in the presence of Prime Minister Narendra Modi and Russian Federation President Vladimir Putin at the BRICS Summit in Goa.
Mehurkar adds other deals in this sector have faced delays for various reasons including regulatory hassles. "The country is very difficult to exit from. Anybody who has applied for assignment of their interest is looked at with suspicion by the regulators. Such applications for exit from the exploration and production business remain pending for long period. Even foreign national oil companies took time to get out."
To be sure, the Essar-Rosneft deal did face its own share of hurdles. The US sanctions on Russia and Essar's Indian banks could have played spoilsport; however, the company managed to ride out of these sanctions.
The US had imposed economic sanctions on Russia after the latter took over the Crimean region of Ukraine in 2014.These sanctions bar any business relations with Russian companies. This had made Indian banks wary of giving their clearance to the deal.
"The deal structure is such that it will not attract any sanction issue as Rosneft's share is just 49%," says a person related to the transaction who does not wish to be identified.
The deal is structured in two parts: the first sale and purchase agreement is for the sale of 49% to Petrol Complex, a subsidiary of PJSC Rosneft Oil Company, and the second is for the remaining 49% to Kesani Enterprises Company which is owned by a consortium led by Trafigura and United Capital Partners.
An oil and gas banker adds: "That was discussed internally and an opinion was formed that the sanctions may not be an issue. Also, the loans may get refinanced and the Indian lenders may not have exposure to the Russian company." An email query sent to Essar Oil on the Russian sanction remained unanswered.
Still, the Essar-Rosneft deal also took a longer time to progress from a non-binding agreement to a definitive one. Essar Oil and Rosneft signed non-binding agreements in July 2015, while the definitive agreement was signed last month.
Among potential deals in this sector which faced hiccups include Italy's Eni Spa which continues to struggle to exit from its investment in Hindustan Oil Exploration Company (HOEC). Eni holds more than 47% in HOEC and, according to news reports, has looked to exit from this investment owing to waning foreign interest in energy assets in India. The company has so far not announced any decision officially to exit from HOEC. However, it moved out of HOEC's management to an investor role in 2015.
Canada-based Canoro Resources, which held a few blocks in Assam in 2009, also wanted to sell its stake. However, the company later wound up its operations after it withdrew from the arbitration proceedings for a pre-NELP (New Exploration Licensing Policy) block in Assam. The company was in arbitration for cancellation of its production-sharing contract for an oil block in Assam.
Globally, the merger between Royal Dutch Shell and BG Group Plc is another example of regulatory issues coming in the way of a deal. The merger had hit a rough patch with the Chinese anti-trust regulator before it received its approval in December 2015.The debt-laden Essar group has been under pressure from the banking system to deleverage. The deal with Rosneft is likely to help it cut debt by Rs 75,000 crore, Essar Group Director Prashant Ruia had told Business Standard in an interview post the deal.
Ruia had added that the group had no further plans for asset monetisation. In addition to the Essar oil deal, the Ruias in recent years have sold their US-based business process outsourcing unit for $610 million (Rs 4,119 crore), Vodafone India stake for $5 billion (Rs 33,000 crore) and real estate, including an office, in Bandra Kurla Complex for Rs 2,700 crore.
"There is massive deleveraging of balance-sheet for the seller, while the gains access to the fastest growing energy market that might work as a decent hedge to (volatile) crude prices" Mishra adds.
This is the first M&A deal in the downstream section of the oil and gas industry - most deals in the past have been in the upstream exploration and production segment.
However, divestment in state-run refiner has been attempted in the past. "Our country also had mood swings over refinery disinvestment; at one time, divestment of HPCL and BPCL was also on cards but it never happened," Mehurkar says.
