Two years after the acquisition of US-based Novelis, Aditya Birla group company Hindalco [Get Quote] is expected to write off nearly Rs 7,000 crore (Rs 70 billion) from its net worth on account of asset impairment.

This is under the accounting norms of the Securities and Exchange Commission of the United States. The company has said it would use its share premium account of Rs 8,600 crore (Rs 86 billion) for this write-off.

The transaction may not have any impact on the cash flow of the company, said S Talukdar, chief financial officer of Hindalco.

However, it would bring down the net worth to the extent of the write-off, he said, while refusing to disclose the actual amount of the loss on account of the asset impairment. Sources said that the company has a total debt of about Rs 20,000 crore (Rs 200 billion) and the net worth is around Rs 19,000 crore (Rs 190 billion).

After the writeoff, the net worth will come down to Rs 12,000 crore (Rs 120 billion).

In 2008, Hindalco had raised Rs 5,000 crore (Rs 50 billion) through a right issue to boost its net worth. A banker involved in the deal said, "Since this loss is expected as is the prevalent norm in the overseas market and not because of the Novelis' performance, Hindalco had raised Rs 5,000 crore through the right issue."

Under the US law, the difference between the acquisition cost and the current value of the company needs to be adjusted and the acquirer will have to deduct it from its net worth. 

Novelis was acquired for $5.9 billion in 2006-07, while its current value based on cash flow is around $3.5 billion. This has resulted in a loss of $1.4 billion, sources said.

The US law says that the premium paid over the actual value of the company is treated as goodwill and should be written off. Daiichi Sankyo also had to write off close to $3.8 billion on account of Ranbaxy [Get Quote] acquisition.

The Hindalco stock fell 5 per cent to Rs 42.20 on Tuesday.