India defers decision to cancel Reliance Naval warships deal to allow company revival plan

File Photo: Anil Dhirubhai Ambani Group’s Anil Ambani (right) at the Pipavav shipyard during take over in 2015.

By N. C. Bipindra

New Delhi: India is keeping a decision to cancel a deal for five warships at bay to see if the beleaguered Reliance Naval Engineering Limited (RNEL) is able to revive itself or if a take-over of the debt-ridden shipyard can happen so that the critical naval shipbuilding project is not torpedoed.

According to top Indian government officials, the Indian Navy had in February recommended the cancellation of the Rs 2,500 crore ($335 million) contract with RNEL signed in May 2011 following the failure of the shipyard to deliver the five 2000-tonne Naval Offshore Patrol Vessels (NOPVs) on time between 2014-15.

There had been no progress on the two of the five warships that are partially constructed and are now docked at the shipyard. The first NOPV is 80 per cent ready, while on the second, around 30 per cent construction work had been completed, according to officials, who did not wish to be named citing rules.

The money paid till now by the government for the NOPV project has been recovered through the cashing of the RNEL bank guarantees worth Rs 980 crore ($130 million) in 2018. However, the time lost by the navy in inducting these NOPVs cannot be compensated, the officials said.

The defence ministry is currently seized of the navy’s recommendation for cancellation of the contract. However, the consideration before the ministry officials is the partially-built warships that are docked at the shipyard and if the two of the five NOPVs could be finished and delivered to the navy at the earliest.

Why should the navy give up on an asset that could be readied quickly, as partial construction has been completed on the NOPVs? This a question that the defence ministry is grappling with, the officials told Defence.Capital.

The other option before the defence ministry is to see if any other Indian private or public sector shipyard can take over the erstwhile Pipavav Defence and Offshore Engineering Company shipyard that is currently an asset of RNEL and complete the NOPVs project for the navy. Or, at least complete the two NOPVs standing there, the officials said.

But the option of a take over of the project is a complex one, as there has to be an assessment and audit of the partially constructed warships and the cost of completion of the project by the company taking over the project.

Mazagon Docks Shipbuilders Limited and Larsen and Toubro are two companies that have functional shipyards that could take over the project, the officials said. Meanwhile, Janes defence magazine reported today that Russia’s state-owned United Shipbuilding Corporation (USC) has been linked with a move to acquire the troubled RNEL.

The Russian shipbuilder, which has a long-standing aim to expand its profile in the Indian naval shipbuilding market, was reportedly one of several investors to express interest in acquiring RNEL during a round of bidding for the company that ended late June, it said.

RNEL, in a filing with the Bombay Stock Exchange (BSE) on June 30, said its lenders have now approved an additional round of bidding that will conclude in late July. The extension is required to attract additional investors in light of COVID-19 restrictions, the report said, quoting the lenders.

In late May, RNEL lenders sought Expressions of Interest (EOI) from buyers for the sale of the private shipbuilder under the Insolvency and Bankruptcy Code. RNEL was admitted for insolvency proceedings on Jan. 15 by the Ahmedabad bench of the National Company Law Tribunal.

The last date for submission of EOIs was June 27, while the final list of prospective resolution applicants was to be issued on July 17, according to an offer notice issued by the resolution professional. Now, more bids would be facilitated through an extension of the EOI document that was originally issued through the BSE.

According to a Business Standard report, five entities have made bids to acquire RNEL, including USC, though no confirmation has come from either RNEL or the entities themselves.

Companies with a minimum net worth of Rs 600 crore ($80 million) and a consolidated group turnover of at least Rs 2,000 crore ($270 million) can bid for RNEL. The eligibility for financial institutions and private equity investors is Rs 1,000 crore ($133 million) of minimum assets under management.

The company is being sold to recover outstanding loans of Rs 43,587 crore ($5.8 billion). Of this, the resolution professional has admitted Rs 10,878 crore ($1.45 billion) of dues of financial creditors, and another Rs 32,693 crore ($4.38 billion) is under verification. Operational creditors have claimed another Rs 1,922 crore ($257 million) from the company, of which only Rs 485 crore ($65 million) has so far been admitted by resolution professional, the document said.

2 replies »

  1. RNEL has been in dire financial straits for a long time now. Yet this Govt has for some reason been delaying order cancellation for many years. This applies to the Coast Guard Cadet Training ship as well as the FPVs. The Shipyard’s AGM minutes of 2014 and 2015 indicates that the construction of vessels were on schedule. However not a single one of them has been delivered. This speaks a lot about the Navy’s “Warship Overseeing Team” and the Ministry of Defence. Undoubtedly, delivery extensions have been granted at the highest levels for some unknown reasons. Now, with little choice left, the MoD/Navy is contemplating getting the two NOPVs (Sachi and Shruti) completed at Public or Private Yards (as per this article). Even if this decision does come through, it will take months or may be years for the process of awarding the work to another shipyard. The reason being that the MoD will have to go through a bid process IF Private Yards are considered. Yes, they can avoid the bid process by simply nominating one of the Defence PSUs or Cochin Shipyard to complete the vessels. Perhaps this is the best option available and will result in the Navy getting the first two NOPVs albeit with a delay of about four or five years. On completing the two partially done vessels, the nominated yard can carry on with the build of the balance three vessels. In all likelihood, it will take many weeks or months of dilly dallying before a decision is made. In the meanwhile, the two hulls will continue to rot due to lack of upkeep and preservation.

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