Russian oil giant Rosneft has acquired Essar Oil, India’s second largest private refiner, for $12.9bn. This deal has been in the works since 2014, and is the biggest foreign acquisition in India’s history. 

Saudi Arabia’s Aramco had also expressed an interest in Essar Oil. Although Rosneft, along with European trader Trafigura and Russian fund United Capital Partners, signed the deal in Mauritius on October 14, 2016, matters dragged on as banks sought to clear their exposure to debt-laden Essar.

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This big-ticket FDI deal strengthens ties between the world’s largest oil producer and the world’s fastest growing oil consumer. With a controlling stake of 49% (Trafigura and UCP hold another 49%), Rosneft gets to retail its products in India. Plans are afoot to expand Essar’s retail network of 3,500 outlets to 6,000 nationwide. Rosneft will pay royalties to the Essar Group for using the brand name of Essar Oil in these outlets. According to a Reuters report from Moscow, Essar plans to double the throughput of its refinery and create a petrochemicals facility over the medium-term. The Russian company intends to adopt what it calls “an asset development strategy” in India. Essar Oil’s refinery, port and related infrastructure at Vadinar in the western state of Gujarat also enables efficiencies in the supply of oil to various countries in the region.

From Essar Oil’s original promoter’s point of view, this acquisition reduces the group’s debt burden by mofre than 60%. Significantly, this deal represents the largest deleveraging in Indian industry. Essar Group director Prashant Ruia explained that of the deal’s total value of $12.9bn, around $5bn debt at the group level is settled through this transaction and another $6bn debt of Essar Oil will be taken by the Rosneft consortium. Even minus Essar Oil, the group remains in the oil and gas space with its 9 million tonne refinery in Stanlow, UK. The group also has a different interpretation to Rosneft’s of a non-compete pact – to not build another refinery or petrol stations in India – stating that it is only for three years and not forever.

N Chandra Mohan is an economics and business commentator based in New Delhi.