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Saturday, November 7, 2009

Essar arm's $1 bn bond issue under RBI scanner

The Reserve Bank of India (RBI) has put a question mark on the mega bond issue of Essar Teleholdings, a firm owned by the Ruias of Essar Gr.

The regulator has asked the bankers of Essar Tele to spell out how the company will use the money raised from its Rs 4,280-crore bond issue. It has also told them not to accept any money from investors.

When contacted, one of the bankers said the company has already replied to the regulator, and RBI could give a green signal in the coming days.

The Essar Group last month said one of its units, Essar Teleholdings, had raised Rs 4,280 crore by selling zero-coupon bonds to a string of mutual funds, banks and insurance companies. The company received applications thrice the amount it initially offered, but the funds are yet to reach the company. The company will have to prove that its end-use remains bona fide, to get the green signal for collecting the funds.

In an emailed response, an Essar Group spokesperson said, “The use of the proceeds is for strategic investments internationally and in full compliance with all the applicable laws, rules and regulations.”

But a banker who was part of the issue said the RBI is unhappy with the company’s disclosure in the information memorandum where it merely says the issue is for expansion of its overseas subsidiaries. The Essar Group is reportedly in talks to buy Shell’s oil fields in the UK and Germany for £1-1.5 billion. RBI wants Essar to explain how a telecom subsidiary (ETHL Communications Holdings) could raise funds for an oil and gas acquisition.

Second, not many companies in the past have raised funds in the local bond market for expanding their global operations. A company would rather do a dollar-denominated bond offering for financing an overseas acquisition.

Other bankers also said the receivables offered by the company as collateral—its put option to sell a part of its 33% stake in Vodafone Essar—has also not gone down well with the regulator. Fitch, the rating agency which rated the issue AAA, itself said Vodafone’s obligations in the put option linked the credit of the bonds to that of the British telecom firm. All this when the money could be ultimately used for acquiring oil and gas assets abroad, point out bankers.

“Essar did an issue in the local market simply because it may not have been able to sell its complicated issue in the international market,” said a banker who requested anonymity. “In these uncertain times, the appetite for Essar paper in the global markets is not exactly great,” he added.

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