JSW Steel To Merge Its Subsidiary JSW Ispat To avail Tax Benefits

JSW Steel, one of the largest steel producing companies in India, is likely to merge its loss making company JSW Ispat that was acquired in December 2010. As per media reports, the company is expected to announce the merger within 15 to 20 days. The share swap ratio could be between 1:65 or 1:75, which means JSW Ispat shareholders would get one share of JSW Steel for every 65 or 75 shares held in the company.

JSW Ispat, prior to the acquisition, was known as Ispat Industries Ltd. The company went into a financial crisis in the year 2009 when it was not able repay its debt worth Rs 9,500 crore. The situation worsened when it started making losses and some of the plants were shut down.

Finding value in this company JSW Steel in 2010 bought a 41.29 per cent stake to bring the company out of the debt with a plan to turn around the loss making company into a profitable one. JSW renamed it as JSW Ispat Steel and refinanced its Rs 6,000 crore debt to bring it out of corporate debt restructuring.  The deal was at decent valuations for both the companies but the major challenge for JSW Steel was to make Ispat profitable. In July, JSW Steel’s chairman Sajjan Jindal had said that the merger process would begin once JSW Ispat post profits. 

After making continuous losses for the last few years, JSW Ispat has finally  posted a decent profit of Rs 478.24 crore for the quarter ended June 2012. And for the full year 2011-12, the net loss of the company stands at Rs 263.64 crore against a net loss of Rs 1,872.29 crore in 2010-11. This has green-lit the company’s plans for its merger. With this merger JSW is aiming at multiple benefits, including a tax gain of about Rs 2,088 crore on which JSW Ispat would be laying claim as it has started making profits. The merger will dilute the stake of JFE Steel, the second-largest shareholder in JSW with 15 per cent stake. If  JFE wants to retain the stake then it would have to make additional investment. This will be a major gain for JSW considering that JSW’s debt post merger will increase by more than Rs 6,000 crore from its current net debt level of Rs 16,600 crore as on March 31, 2012.

JSW Ispat operates 3.2 million tonne production capacity at Dolvi near Mumbai while JSW Steel operates 11 million tonne production capacity. Post the merger, JSW will become the second-largest domestic steel producer with 14.2 million tonnes per annum production capacity, after state-owned Steel Authority of India (SAIL). The company, while announcing the results for the june quarter, had stated that its net deferred tax asset as on June 30 stands at Rs 2,087.94 crore and it is confident of claiming it in the future when it will have sufficient taxable income.