Mumbai: The unlisted telecom company of the diversified Essar Group, Essar Teleholdings Ltd (ETHL), has approached insurance firms and banks with a proposal to raise $900 million (Rs4,266 crore) by pledging a part of its 33% stake in Vodafone Essar Ltd, two people familiar with the development said.
“Barclays Capital, India, has given us a proposal to lend money to Essar Teleholdings at an interest rate of 10%,” said a senior executive of a private insurance firm, who has received the proposal.
Mint has not reviewed the proposal and Barclays Capital, the investment banking arm of the British bank in India, could not be reached. According to this insurance firm executive, the company is seeking loans for two years.
He also said the investment bank has offered his firm a guarantee of a large private Indian bank for the loan. He does not want to be identified as he is not authorized to speak to the media.
Under the norms laid down by India’s banking regulator, banks are not allowed to offer guarantees on bonds, but they can do so for loans. They earn a fee on such guarantees.
According to a senior banker, a 10% interest rate is quite attractive in the current market. The prime lending rate (PLR) or the rate at which banks are expected to lend to their most creditworthy borrowers varies between 11% and 12.5% for public sector banks that account for about 80% of the Indian banking industry. However, many of the loans are given at below PLR.
Banks are expected to cut their PLR by about 50 basis points in the next few weeks. One basis point is one hundredth of a percentage point. The insurance firm approached by the investment bank for the loan has not yet taken a decision on the proposal.
The plan is to distribute the loan among quite a few lenders and if the company defaults on repayment, these lenders have the right to sell the shares, pledged with them, to recover their money.
ETHL’s 33% in Vodafone Essar, the third largest mobile phone company by subscribers, was valued at $5 billion after the UK firm paid $11 billion to purchase Hutchison Whampoa Ltd’s 52% stake in the company in May 2007.
Since then, ETHL’s valuation has gone up with a substantial rise in the subscriber base. In 2007, at the time of the Vodafone deal, the company had 24 million subscribers, a number that has since risen to around 74 million.
Vodafone Essar adds nearly 2.7 million customers every month and out of every 100 Indians, 26 use cellphones.
Bharti Airtel Ltd, the largest telecom company by revenue and by number of subscribers, has a market value of about Rs1.62 trillion.
The Ruias, the promoters of the Essar Group, have an option to sell the 33% stake to Vodafone Plc. by December 2011 for not less than $5 billion.
“We have already raised nearly $3.6 billion from international lenders against a part of the shares in Vodafone Essar and have plans to raise nearly $900 million from the domestic market,” a senior official of the group confirmed to Mint on the condition that he would not be named in the story.
An Essar spokesperson declined comment on the fund-raising plan.
“It is true that we have a put option for the 33% stake till December 2011 and we have raised money in the past. We have been receiving proposals from many investment bankers to raise money against our shares in Vodafone Essar,” another group official said. He, too, does not wish to be identified as he is not authorized to speak to the media.
In 2008, the Essar Group raised $3.6 billion from international banks against a part of its holding in Vodafone Essar and bought steel companies in Canada and in the US, and expanded its telecom network in Africa.
It is currently enhancing its refinery capacity in Jamnagar to 33 million tonnes (mt), from 12mt now.
Unlike its peers such as Tata Steel Ltd that purchased Corus Plc. for $12 billion and Hindalco Ltd that bought Novelis Inc. for $6 billion with borrowed money from overseas lenders, the Essar Group has been leveraging its stake in Vodafone Essar to support its expansion.