Essar Power has agreed to pay financial institutions (FIs) dues of Rs 185 crore which are under dispute. The company said in a faxed statement to Business Standard on Wednesday that it had acknowledged a change in the Income Tax Act introduced in the last Budget.
The statement said: "The company has no overdues and is resolving its issues with the lenders." The company's new position could bring a satisfactory resolution to a vexed dispute.
The FIs had set a deadline of June 30 to recover their dues from Essar Power, and decided in principle to take legal action against the company if the matter was not sorted out by then. The two sides have been holding talks on the issue.
A Essar group official said on Wednesday: "The institutions have agreed in principle to give us time to pay. We've also suggested that our dues be converted into debentures." A top Industrial Development Bank of India (IDBI) source welcomed the development.
At the heart of the dispute between the institutions and the Rs 841 crore (as on March 31, 2000) Essar Power is the benefit that was available under Section 10 (23G) of the Income Tax Act, till the last Budget introduced a new clause in the Act.
Under the section, the institutions could claim a tax exemption on the net interest income from loans granted for infrastructure projects and pass this on to companies in the form of a reduced interest burden.
In a representation to the institutions after their May meeting , Essar Power argued that, as on March 31, 2001, it was entitled to a benefit of Rs 253 crore arising from the provisions of Section 10 (23G).
But with the introduction of Section 14A in the Finance Bill this year, the benefit granted under Section 10(23G) has been diluted and legislation has been passed disallowing the benefit for the past 38 years (the section has restrospective effect from April 1 1962).
Moreover, the new section restricts claims to a net basis in respect of all incomes exempt under the Income Tax Act, including income from infrastructure projects covered by Section 10 (23G) of the Act.
On Wednesday, the Essar group official acknowledged: "With the introduction of Section 14A, our claim is no longer sustainable."
At a meeting last month, the institutions decided to haul Essar Power to court if the company didn't come up with a proposal that was acceptable to them. They said that Essar Power had not submitted any "acceptable proposal for the settlement of its dues" even after IDBI, the lead institution, served a notice on it recalling its loan. ICICI, the other institution that lent money to Essar Power, too had issued a loan recall notice to the company but subsequently withdrew it.
Essar Power owes the institutions about Rs 1,450 crore. Of this, the company disputes about Rs 250 crore and had asked the institutions to deal with the disputed amount separately. For the remaining Rs 1,200 crore, it planned on floating 8-year infrastructure bonds carrying a coupon rate of 11 per cent. The company had requested the institutions to subscribe to these bonds.
Essar Power posted a turnover of Rs 841 crore and profit after tax of Rs 75.27 crore. It had reserves of Rs 121 crore on March 31, 2001.
At last month's meeting, the FI executives said: "All the institutions have taken a common view that benefits under this section should not be passed down to the borrowers. Besides, in our loan agreements entered into with Essar Power, there is no such condition. Consequently, there is no question of passing down these benefits to the company."
The company had taken the line that the institutions had overcharged it by Rs 227 crore. Essar has also taken credit for this amount on its books.
After the FIs meeting last month, Essar Power shot off a representation to IDBI contending that it had no overdues or interest pending. It pointed out that it had actually paid Rs 22.35 crore in excess interest to the banks and institutions.
The Essar group official said that the company had submitted a representation to the finance minister requesting him to reinstate the benefit of Section 10(23G) and that the Independent Power Producers Association of India too had taken up the matter with the government.
