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6th September 2004: The Bombay High Court on Friday approved the merger between Jindal Iron and Steel Company (Jisco) and Jindal Vijayanagar Steel (JVSL). The court in its verbal order while approving the amalgamation also directed Jisco to execute an Rs 133 crore bank guarantee in favour of the notary.

Seshagiri Rao, the director (finance) of JVSL said, the final order will be effective only after the bank guarantee is given. On Thursday, Jisco agreed to offer a bank guarantee to secure the claims of Balli Kloeckner GmbH (BKG), which is a creditor of Jisco, in case the latter wins an ongoing arbitration case.

            BKG agreed to withdraw its objection to the merger following the acceptance of Jisco’s offer to furnish a bank guarantee from Punjab National Bank (PNB) securing its claims until arbitration proceedings are over. The merger will also have to be approved by the Karnataka high court. On Monday, an affidavit would be filed in the Karnataka High Court, said Mr. Rao. The Bombay high court had on Thursday dismissed the application filed by the IT department on the grounds that it did not have a legitimate interest in the matter.

            The IT department had opposed the merger on the grounds that Jisco owed Rs 63 crore to the department as advance tax. The merger, when approved, will be effective from 31 March ’03. According to the scheme of amalgamation, Jisco will be merged with JVSL, following which the merged entity will be called Jisco.

3rd September 2004: The income tax (I-T) department’s application opposing the merger of Jindal Iron and Steel Company (Jisco) and Jindal Vijayanagar Steel (JVSL) was dismissed by the Bombay High Court on 2nd September. The court held that as the central government has already given its consent to the merger, the I-T department, being a part of the government, has no locus to intervene. The court also rejected the application on the grounds that it lacked merit.

The dismissal of the petition is likely to pave the way for the merger, which has been hanging fire since March ’04. The I-T department had claimed that it was Jisco’s creditor and that the company owed the department Rs 63 crore on account of advance tax. Balli Kloeckner GmbH (BKG), another creditor, has also agreed to withdraw its objection to the merger following the acceptance of an offer from Jisco to furnish a bank guarantee from Punjab National Bank (PNB) securing BKG’s claims until an ongoing arbitration was concluded. Any loss arising out of fluctuations in foreign exchange will also be covered in the Rs 133-crore bank guarantee.

            BKG had intervened in the court on the ground that Jisco owed it Rs 133 crore. Jisco has, however, disputed the amount. The matter is now under arbitration in Sweden. The arbitrators Vinson & Elkins have estimated that it will take 18-24 months to conclude arbitration.

Jisco has already filed the format for the bank guarantee, which is expected to be approved in the court on Friday. An operational order sanctioning the scheme of arrangement and amalgamation could also be expected from the court on Friday, said the company officials.

The scheme of amalgamation will also have to be approved by the Karnataka High Court which had earlier passed an order asking the company to seek the approval of Bombay High Court following which an approval could be granted. A JVSL official said that as of now no litigation have been filed against the merger in the Karnataka High Court. He added that the Karnataka High Court should approve the merger if there are no interventions.

3rd September 2004: For the proposed merger of Bharat Petroleum Corporation (BPCL) with Kochi Refinery Ltd (KRL), Industry analysts estimate a swap ratio of 0.6:1. It is based on several valuation parameters, including the current assets and market valuations of the two oil companies.

            While analysts’ estimate that the proposed swap ratio likely to be 0.6-0.7 BPCL share for every KRL share, companies are known for surprising the market with a totally different swap ratios. Sarthak Behuria, the CMD of BPCL yesterday said that the company had revived plans for merging its subsidiary KRL with itself. BPCL currently holds 54.81% stake in KRL. Industry circles said the proposed merger move would be a win-win situation for both the companies. A senior analyst with Enam Securities said, “A merger would strengthen KRL’s business model from a pure refiner to integrated operations, while for BPCL it would enhance its captive refining capacity to 16m TPA (post-merger), closer to its market participation.”

            Analysts said merger with KRL would lend greater stability to BPCL’s earnings in times of high refining margins and pressure on marketing margins. The merger would also partially resolve the tricky issue of central sales tax (CST) for KRL since BPCL buys about 50% of BPCL’s production. KRL has a problem of CST under-recovery to the tune of about Rs 180 crore annually. A research report prepared by Enam estimated the likely swap ratio for the proposed BPCL-KRL merger at 0.70:1 based on a replacement value of Rs 857 per share for BPCL and Rs 600 per share for KRL.

The report put the per share value of assets of BPCL at Rs 28.39 crore and that of KRL at Rs 8.9 crore. Similarly, the per share value of BPCL is worked out to be Rs 25.7 crore and that for KRL is Rs 8.3. KRL operates a stand-alone refinery that processes 150,000 a day (7.5 million metric tonnes per annum). BPCL, on the other hand, processes 180,000 barrels per day (9 million tpa).
In terms of gross refining margins, KRL has an edge over BPCL, with its average refining margins hovering around $5 per barrel against $4.60 per barrel for BPCL.

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