Tuesday, January 17, 2012


The Ruias-controlled Essar Oil, which runs the country’s second-biggest single location crude oil refinery at Vadinar in Gujarat, will have to shell out Rs6,309 crore as sales tax to the Gujarat government.

Dealing a blow to the company’s balance sheet for the coming year, the Supreme Court on Tuesday set aside a Gujarat High Court order wherein the latter had asked the state government to consider Essar Oil’s request to grant it the sales tax incentive.

According to a release from Essar Oil: “The Supreme Court has upheld the stand of the state government as a result of which Essar is not entitled to the deferment scheme. It needs to be clarified that the scheme was not for sales tax exemption in toto, but was only for a deferment of payment of sales tax. In view of the judgment, the payment of tax which was to be made in deferred instalments, may face some changes in the timeline.”

So I recommend to avoid essar oil from buying as this may impact the balance sheet of essar heavily.Lets wait for further clarity from essar oil management

Under a special state government scheme - the Capital Investment Incentive to Premier/Prestigious Unit Scheme, 1995-2000 - Essar Oil was eligible for a tax deferment incentive of up to Rs9,100 crore for 17 years, provided the company would start commercial production from its proposed unit within a specified timeframe.

Essar Oil, which was building a 9-million tonne per annum crude oil refinery at Vadinar in Gujarat, was supposed to complete it by April 2003. However, the company failed to start work as a crippling cyclone hit the refinery site in 1998 and later, a pending case involving an NGO held up its construction.

Though the company restarted the project in 2004 and completed the process by November 2006 after resolving all the irritants, the state refused to consider it under the eligible parties for the sales tax deferment facility.

With the Supreme Court ruling going in state’s favour, Essar Oil will have to cough up the entire amount it enjoyed as benefits of sales tax deferment so far, which according to an Essar Oil release is Rs6,309 crore.

While this is just the tip of the iceberg, analysts say the judgment can actually open up a Pandora’s box for Essar Oil as the company is in the midst of a corporate debt restructuring (CDR). In fact, the current SC judgment can go against the conditions laid down by the company’s lenders during the restructuring exercise.

The Draft Red Herring Prospectus (DRHP) filed by Essar Energy during its listing read: “It is a condition of Essar Oil’s Master Restructuring Agreement (MRA) that Essar Oil obtains the benefits of the sales tax deferral.”

It further said: “In the event Essar Oil is unable to receive further extensions from the CDR lenders or the ongoing sales tax incentive litigation, this may be considered to be an event of default under the MRA. The CDR lenders will then have an option to demand payment of all outstanding amounts or convert such outstanding amounts into shares of Essar Oil.”