The Essar Group stake sale deal of Essar Oil with Russia's Rosneft for Rs 72,800 crore to be significant for the Indian banking system.

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In a research report by Kotak Institutional Equities, said that the formal announcement of the deal came in during the BRICS Summit in the presence of the political leaders of both the countries, India and Russia, which suggests a high degree of involvement of the Indian government in the transaction. Considering, that Indian PSU oil companies had earlier purchased a 49.9% stake in the Vankor oil block of Rosneft. 

On Saturday, Essar Group announced 98% stake sale in Essar Oil and 100% stake in Vadinar port to Rosneft, Trifugra and UCP. The Essar Group has a total debt of Rs 90,000 crore. With the stake sell, ICICI Bank, along with Punjab National Bank, State Bank of India and Axis Bank will be benefited as the company will be able to repay these banks.

Essar Group`s chief executive, Prashant Ruia, told Reuters, "Essar is working closely with the banks to work out a restructuring plan and some of the funds raised via the sale of Essar Oil would go into restructuring the operations of Essar Steel."

The deal will also be significant because the Indian banks have become very forceful in addressing the problem of bad loans. Also, for the past two years, Indian promoters may had little option but to sell profitable assets to reduce the debt. 

"Essar Group has total debt of Rs 1.3-1.4 trillion, with most of it raised from Indian banks. We note that, VTB, a Russian bank, will finance around Rs 260 billion of Essar Oil's debt (Rs 315 billion as per FY2015 annual report) as part of the deal, which will further reduce Indian banks' exposure to Essar Group", the report added.

How can Essel Group use the money?

Sanjeev Prasad, Analyst, Kotak Institutional Equities, in a note titled 'Stress but not too much', said, "The Rs 850 billion transaction will release Rs 450 billion of cash (our estimate) for Essar Group, which can be potentially used to (1) repay debt of Rs 235 billion in Essar Global Holdings and (2) reduce debt in financially stressed entities such as Essar Steel and Essar Power."

The Essar Group management, in a statements said that the company will use the cash available to reduce its debt. As per Prasad's view, the conpany will likely to repay the debt of EGHL, a holding company with Rs 235 billion of debt and Axis Bank, ICICI Bank and Standard Chartered Bank are the prominent lenders to EGHL. 

The company may invest a portion of the cash as equity in Essar Steel, which had a standalone debt of Rs 357 billion as per FY15 annual report, and in Essar Power to deleverage the companies.