The Gujarat Electricity Board's (GEB) silence over the non-objection certificate sought from it by the Ruias for selling the group's 100 per cent stake in the company and the financial institutions reluctance to approve the debt-recast proposal submitted by Marathon have proved to be the stumbling blocks.

While the GEB is taking its time to decide on the politically-sensitive issue, the delay in the Essar Power debt recast has also contributed to the "in-decision" of the GEB.

Marathon has made a series of presentations to institutions seeking a reduction in interest cost on Essar Power's Rs 1,550-crore outstanding loans, and changing the debt profile as well. The US-based major has sought a 4 per cent reduction in interest rates from 19 per cent to around 15 per cent. It also wants an increase in the average life of the loans from seven-nine years to 12-14 years.

If FIs accept the proposal in its entirety, the tariff could come down by up to 8 paise per unit leading to savings of close to Rs 20 crore for GEB. "As both the crucial issues have not yet been sorted out, there may not be any option left but to exercise the renewal clause in the initial agreement," an institutional source said. If both FIs and GEB formally decline from giving their consent, the agreement between Marathon and Essar could be scrapped and fresh negotiations may be initiated. In such an event, talks could be initiated for a 74:26 shareholding pattern, with the Essar group being forced to remain minority shareholders, and subsequently, sale of power to Essar Steel will not be termed as "third-party sale". However, it is unlikely that Marathon will agree to such a restructured deal.

The Ruias had initially sought to retain 49 per cent in Essar Power, but later chose to sell their entire holding for raising funds.

GEB had earlier also opposed to Essar Steel selling its entire stake and availing power at a concessional rate. If the Essar group flagship is to source power at the grid rate, it would then render the steel project financially unviable.

The Rs 720-crore deal will lead to a much-needed funds inflow of around Rs 380 crore into Essar Steel, by virtue of its holding in Essar Power. Essar Steel had earlier in July defaulted on a $250-million floating rate note redemption obligation.

INSIGHT:

Need to end stalemate
The problem faced by GEB in issuing an NOC is hard to understand. In any case, it is not feeding Essar Steel fully but is collecting demand charges for stand-by facility. This will continue after the change of management also. As regards FIs, if the deal goes through, the change in the management ought to be reflected in the interest rate. It cannot be anybody's case that the Ruias' risk profile should be at par with that of Marathon. The point is that the unit started generating power before a PPA was signed and that ought to have been factored in the interest rate.

-- Urmik Chhaya