Dabhol demerger turns into LNG battle; here’s why

Efforts by lenders to hive off the LNG regasification unit at Dabhol power plant into a special purpose

vehicle (SPV) have been stymied by Power Finance Corporation (PFC) and Life Insurance Corporation

(LIC) who have come up with specific demands.

PFC, which has loaned RGPPL (Ratnagiri Gas and Power Private Limited) —which houses up the Dabhol

plant — an amount of R1,200 crore, wants that the exposure be extended to the SPV. This is probably

because the LNG business is more profitable than the power business, say some lenders in the

consortium that FE reached out to. In fact, they confirmed PFC has written a dissent note to the RGPPL

board expressing its unhappiness with the demerger. “PFC’s nominee on the board has said the firm is

not comfortable with the demerger scheme and wants the loan exposure to extend to the LNG plant,”

one banker said. The dissent comes even as RGGPL has already moved Delhi High Court asking for

approval to split the company.

The state-owned insurer LIC, which had loaned the project Rs 1,400 crore by subscribing to government

-guaranteed bonds, is willing to continue to fund the project provided the government extends the

guarantee. The project is being refinanced via the 5/25 route which allows the borrower to pay back the

loan over a longer time period. The insurer is not comfortable with stretching the repyament period,

sources said, unless it has the the government’s backing.

RGPPL is being restructured with the 5 million tonne LNG regasification unit being spun off into an SPV

which will take on 50% of the total debt of R6, 981 crore.

In FY15, RGPPL reported a loss of Rs 1,443 crore on the back of Rs 169 crore in revenues. Its finance

costs were Rs 779 crore.

A report by Ernst & Young (E&Y) which studied the demerger noted that if PFC is allowed to lend to the

LNG unit, the demerger would not be tax neutral. That is because in its utilisation certificates, RGPPL has

been stating that the PFC loan was being used for the power plant alone. Meanwhile, PFC has argued

that since it has not specified how the exposure should used it should be allowed to lend to the LNG

plant as well.

“All the parties have agreed to appoint additional solicitor general Sanjay Jain to look into the matter

and decide what should be done,” one of the bankers said.

Meanwhile, LIC has told other lenders it would like the government to extend the sovereign guarantee

till 2032 for it to be able to continue to fund the project via the 5/25 scheme. This means the

government must agree to extend the guarantee period by another 7-8 years. Under the scheme,

lenders will extend the loan repayment period upto 2032 so as to ease the pressure on RGPPL’s cash

flows.

LIC is understood to be miffed because it has not been receiving interest payments regularly. While

other lenders are planning to write off the unpaid interest as unsustainable debt, LIC says it cannot write

off the unpaid interest —of Rs 276 crore — on an insturment which is backed by a sovereign guarantee.

Lenders said they met Sharmila Chavaly, Joint Secretary (I&E), Department of Economic Affairs, recently

and requested her to address the issue. “She has assured us that once the scheme for demerger is filed,

the government will look into it,” a senior banker said.

Following the collapse of Enron-— the original promoter of RGPPL — a clutch of lenders including IFCI,

ICICI Bank, IDBI Bank, State Bank of India (SBI) formed a company to take over the offshore borrowings.

It was to this company’s bonds that LIC had subscribed in 2005. The money was subsequently loaned to

RGPPL.

NGS INDIA