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For Essar Oil, the Supreme Court's adverse ruling in the company's long-running sales tax dispute with the Gujarat Government could prove quite costly.
The sales tax liability of Rs 6,300 crore is not only much higher than the Rs 4,543 crore cash reserve of Essar Oil as on September 2011; reports suggest that the ruling could also trigger the ‘default' clause in the company's ongoing corporate debt restructuring (CDR) scheme.
This may allow lenders under the CDR to convert their loans to the company into equity. As on September, Essar Oil's debt to equity ratio stood at more than three times.
The dispute centres on Essar Oil's eligibility for sales tax deferment under an erstwhile incentive scheme of the Gujarat Government. Since Essar Oil's Vadinar refinery commenced operations only in 2006, much later than the time limit specified under the incentive scheme, the Gujarat Government held that the company was not eligible for the sales tax deferment scheme.
Essar Oil contended that the delay was due to reasons beyond its control, primarily the 1998 cyclone, and hence, it was eligible for the tax deferment benefit. While the company won the case in the Gujarat High Court in 2008, the Supreme Court has upheld the stand taken by the Gujarat Government.
What could provide Essar Oil some breather is that it has been providing for the deferred sales tax liability over the past years, on a present value basis.
The company's profits may be cushioned to this extent.
As on March 2011, the company had disclosed contingent liability of Rs 4,802 crore on this account.
Related party Pact
Essar Oil's annual report for 2011 also discloses that it has entered into an agreement with one of its related parties Essar House Limited (EHL), under which EHL has undertaken to discharge the sales tax liability on the due dates.
However, if the sales tax liability is to be paid immediately, it is not clear whether and how Essar Oil's agreement with EHL will play out.
Drag on stock
The setback could act as a drag on the Essar Oil stock, which was showing signs of recovery in recent trading sessions on the back of progress in the company's refinery expansion plans. Over the past few months, the stock has been a major underperformer, with news about the alleged involvement of a group company in the 2G scam contributing to the pain. The stock dipped sharply in Tuesday's tradeclosing almost 8 per cent lower.
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