Episode du 4/07
Cairn-Vedanta deal: Minority shareholders may challenge Govt
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MUMBAI: The controversial Cairn-Vedanta deal, approved by the government after 11 months of twists and turns, may see more drama ahead as minority shareholders may legally challenge stringent government conditions that directly eat into the company's profit and erode the value of the deal, a source close to the company's board told ET.
Cairn India's board is also expected to scrutinise the government conditions and assess their implications, the source said. While Cairn India's shares gained nearly 5% on Friday, responding to the deal's approval, some shareholders were not ready to accept conditions such as Cairn withdrawing arbitration proceedings over cess payment of 2,626.50 per tonne, which Cairn pays under protest. The other contentious condition is that Cairn must accept, without legal recourse, ONGC's view on the royalty payment mechanism, which in effect reduces Cairn's profit from the field.
"This is the first instance in India's corporate history when the government of India is denying judicial remedy to a private company and its shareholders, but this is not binding on individual shareholders who could seek legal recourse, stating that their equity value has been eroded," said the source.
Morgan Stanley has raised a similar note of caution and said in a report: "Although the deal is approved conditionally, Cairn India's board is yet to decide on whether to accept these conditions. While Cairn Energy and Vedanta control 80% of voting rights, we believe that Board of directors and minority shareholders may not accept these conditions," it said.
"We will be discussing the entire transaction in our upcoming board meeting and will take account of all contentious views," the source close to the board said.
Cairn India itself is not comfortable with the conditions being imposed by the government and all directors on its board may not endorse the deal without raising concerns, a source close to the top management of the company said. However, the views of the major shareholders, Cairn and Vedanta, which have been pushing hard for the deal, are likely to eventually prevail.
Minority shareholders would also have other points to contest the action of the government of India. "Also, if you look at corporate laws in the UK, given that the government of India and Vedanta are partners in a lot of other companies locally, this would be termed as a related-party transaction, especially, as being the owner of ONGC, the government is acting to protect its own business interest and thus cannot be seen as an objective regulator," added the source.
Late on Thursday, the Cabinet Committee of Economic Affairs (CCEA) finally cleared the 11-month old deal along with tough conditions involving the finances of India's largest onshore oilfield. Cairn India derives 90% of its revenue from these fields and holds a 70% stake.
ONGC, which pays the entire royalty on crude output from these fields, had been objecting to the Cairn-Vedanta deal, saying that its approval is a must for Cairn to sell a controlling stake of its Indian arm to Vedanta. The government supported state-run ONGC's demand that royalty paid by ONGC should be made 'cost-recoverable', which means royalty costs would first be deducted (recovered) from the sale proceeds of oil before profits are split between partners and the government. In effect, this reduces the profit available for sharing. Cairn has argued that ONGC, which pays the royalty on the entire output, should be allowed to recover this cost from the revenue of the field.
In a move that seemed to accommodate this particular condition, Vedanta recently agreed to buy another 10% in Cairn India as part of a restructuring that will result in a $600 million reduction in the price tag. The two sides agreed to drop a controversial non-compete fee under which Cairn was due to earn the equivalent of 405 per share, while the minority shareholders of Cairn India were only offered 355 a share under a mandatory open offer that closed in April this year.