Varun Shipping recasts debt by raising dollar loans against ships

Mumbai: Mumbai-based Varun Shipping Co. Ltd, the largest owner of vessels that can transport liquefied petroleum gas (LPG) in India, has reorganized nearly Rs 2,000 crore of debt by transferring some of its ships to overseas subsidiaries which, in turn, used them as collateral to raise inexpensive dollar loans, and used the proceeds to repay costly Indian ones.

The transaction, the first of its kind in India, took place in early June in consultation with a consortium of banks, two bankers familiar with the deal said on condition of anonymity. An executive with a Mumbai-based ship management firm described the transaction as an “accounting gimmick” designed to save on taxes and overcome some maritime regulatory restrictions.

Yudhishthir D. Khatau, vice- chairman and managing director of Varun Shipping, in late June confirmed the development without divulging details. He said his company had reorganized the debt by transferring assets to overseas subsidiaries.

Subsequent text messages sent and calls made to his mobile phone for details did not elicit any response. Manali Parekh, vice-president (corporate affairs, secretarial and legal) and company secretary, declined to comment.

Varun Shipping’s debt reorganization comes at a time when many companies, battling high interest rates and an economic downturn, are approaching their creditors to restructure loans. Indian banks recast around Rs 40,000 crore of debt in the year ended 31 March.

According to Mint research, Varun Shipping had debt of Rs 2,900.25 crore in the September quarter of the last fiscal.

A senior executive at a public sector bank, requesting anonymity, said Varun Shipping had decided to “apportion the assets and businesses” to some overseas entities, which pledged them as collateral to take dollar loans that were used to close the parent’s rupee loans.

“It is a good thing that they have done and probably the first time someone has thought of this kind of idea,” the executive said. “As lenders, we have no problem in giving them fresh loans as they have not defaulted on their existing loans and have duly repaid their old loans. Besides, there is a clear business case for the new entity and the ships are in demand.”

The bank where the executive works has exposure to Varun Shipping.

“Varun Shipping will get two benefits through this re-organization. The company will get huge savings as the interest rates (overseas) are much lower compared to rupee loans and this would be a natural hedge as it is also earning in dollars,” said a senior executive at an investment bank.

The same person said the company doesn’t need shareholder approval for transferring the assets to overseas subsidiaries.

His reference to a natural hedge is a reference to the depreciation of the rupee, which has lost about a fifth of its value against the dollar in the past year.

The domestic currency hit its all time low of 57.30 a dollar on 22 June. A year back, it was around 44.5 a dollar level. It closed at 55.93 a dollar on Monday.

While bankers refused to divulge client-specific information, a senior executive with another large public sector bank that has exposure to Varun Shipping, said domestic loans may cost as much as 10-13% compared with the 4-6% charged by overseas lenders. Loans raised in dollars, yen or Swiss francs are cheaper and helps clients with overseas earnings, he said.

Varun would also benefit by not having to hedge the debt (which would cost additional money) because it would get paid with overseas earnings that wouldn’t be exposed to exchange-rate fluctuations.

“This is an accounting gimmick done with an eye on saving taxes and also to overcome regulatory restrictions imposed by India’s maritime administration,” said an executive with a Mumbai-based ship management company who declined to be named because of company policy on speaking to the media.

Some of the ships sold by Varun Shipping to its overseas subsidiary have been leased back by the parent company through a so-called bare boat charter cum demise (BBCD), a form of ship acquisition that also qualifies for cargo support from government agencies and for plying along the country’s coast, said the same executive.

In a public tender, ships owned by Indian entities and registered in the country have a so-called right of first refusal to match the lowest rate quoted by a foreign flagship and take the contract, according to rules set by the Directorate General of Shipping (DGS). The country’s coastal trade is reserved for Indian-registered ships and foreign ships can be hired to operate in its territorial waters only when Indian ships are not available, and that too with the regulator’s approval.

“Since local fleet owners except Varun have very few LPG carriers, the ships leased by Varun through the BBCD route can claim the right of first refusal to carry cargo on local routes in case Indian ships are unavailable for the contract,” said another Mumbai-based shipping industry expert, who also declined to be named.

Besides, Varun has opted for the tonnage tax introduced by the government from 2004. Tonnage tax is a levy based on the cargo-carrying capacity of Indian-registered ships and reduces the tax outgo of local fleet owners to 1-2% of their income compared with the corporate tax rate of 33.9%.

After transferring the ships to an overseas subsidiary and by bringing it back through the BBCD route, these ships can still claim benefits under the tonnage tax scheme because this is permitted under the new levy subject to a cap/limit on such in-chartered tonnage, said the industry expert mentioned earlier.

Mint could not ascertain how many vessels are now registered with the Indian company and how many with the overseas subsidiaries. According to a 14 February press release, Varun Shipping owned and operated a diversified fleet of 21 vessels comprising 11 LPG carriers, three crude oil tankers and seven anchor handling towing supply vessels.

Shares of Varun Shipping on Monday closed down 2.11% at Rs 16.25 apiece on BSE, while the 30-share Sensex fell 0.74% to close at 17,391. 98.

pr.sanjai@livemint.com

P. Manoj in Bangalore contributed to this story.