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RIL-RPL merger: Tax gains clinched issue

BS Corporate Bureau

Sales tax benefits, transfer pricing issues, a 7-year tax holiday and more has played an important role in RIL deciding to merge Reliance Petroleum with itself.

Though RIL's managing director Anil D Ambani refused to quantify gains from the sales tax benefit (which would accrue since RIL acquires a bulk of its raw material requirement from RPL and has to pay sales tax on it), he only said "this varies depending on the price and the goods."

"The merger also sets to rest all transfer pricing issues," Ambani said, referring to the pricing of raw material that RIL acquires from RPL.

But Ambani hinted at substantial gains from a 7-year tax holiday, which is currently available to RPL, and would accrue to RIL even after the merger.

But Ambani made a specific case of savings in interest costs if the triple-A rated RIL decides to refinance loans taken by the double A-plus Reliance Petroleum.

"RPL has a debt of Rs 70-80 billion," Ambani said, adding that "if you look at the differential between rates on AAA and AA+ paper, we are looking at savings of 50-100 basis points."

Ambani said the merged entity could refinance Rs 60-70 billion of existing loans, through fresh loans at a lower rate. RPL has two debt instruments of non-convertible debentures - Rs 10 billion and Rs 50 billion.

Considering the proposed merger, Crisil has reaffirmed AAA and P1+ credit ratings for RIL and has placed RPL's existing AA+ credit rating on rating watch, with positive implications.

The proposed merger will result in accretion of over Rs 13 billion to RIL's profit and acquisition of facilities valued over Rs 210 billion.

Moreover, the merged RIL now has 12 per cent equity available for a strategic sale to investors/financial investors or to place it in the international market through ADR/GDR.

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