KOLKATA (miningweekly.com) - The Indian government has ruled out providing sovereign guarantees to government-owned companies planning to raise foreign debt to fund overseas oil and mineral asset acquisitions.
The government decision has been conveyed by the Finance Ministry to government-owned oil and mineral companies, such as Steel Authority of India Limited (SAIL), iron-ore miner NMDC Limited, Oil India Limited and Coal India Limited (CIL), which were planning flotation of bonds overseas to fund their acquisition plans, an official in SAIL said.
The government’s decision against providing sovereign guarantees to public sector oil and mineral majors was based on India’s worsening current account deficit (CAD) and tapering foreign current assets, the official said.
The country’s CAD for October to December 2012 was pegged at 6.7% of India’s gross domestic product (GDP), rising sharply on falling exports, and spiraling imports of oil, gold and coal. According to Reserve Bank of India (RBI) data, foreign exchange reserves had fallen to $287.8-billion as of May 31, down from $292.07-billion in the previous week, largely owing to weakening of the Indian rupee:dollar exchange rate.
At a time when the focus of the Finance Ministry was to bring down CAD to levels of around 4.5% to 5% of GDP through aggressive wooing of foreign direct investment, and to bolster sagging exports, risking existing foreign currency assets through guarantees to proposed foreign currency denominated bonds was not thought fiscally prudent, the official added.
It was for this reason that, earlier this year, the Department of Economic Affairs under the Finance Ministry had shot down the suggestion to set up a Sovereign Fund for mineral acquisition, as mooted by the Planning Commission.
According to an official in the Steel Ministry, government companies, such as SAIL and NMDC, seeking to acquire mineral assets overseas - primarily coal and oil - would not be able to raise the required foreign currency through the issue of dollar-denominated long-term bonds at competitive coupon rates, owing to the fundraising instrument lacking a sovereign guarantee.
Given the current strains on government finance from the external environment and rising imports, drawdown from the foreign exchange kitty by government companies was not an option and, hence, funding of mineral and oil assets overseas would have to be re-scrutinised very closely, the official said.
Against the backdrop of limited government support, a new overseas acquisition strategy gaining ground in government circles, was the setting up of a special purpose vehicle (SPV) of government-owned mineral and oil majors, which would combine the balance sheet strengths of the respective entities in the SPV.
However, a group of officials within the Mines Ministry maintained that it would be difficult to follow through overseas acquisitions, as the priorities of the entities represented in the SPV would differ.
They cited the example of International Coal Ventures Limited (ICVL), a SPV of SAIL, CIL, NMDC and steel maker Rashtriya Ispat Nigam Limited (RINL), which had failed to conclude a single overseas deal since ICVL was first floated in 2009. NTPC Limited, the largest power producer, exited the SPV on the grounds that the latter failed to achieve its objective.