After showing signs that it was willing to agree to government riders to save its deal with Vedanta Resources, UK's Cairn Energy has asked its Indian unit to convene a shareholders meet to vote on the preconditions set for approval of the $9-billion transaction.
Cairn Energy holds 52.2% stake in Cairn India and together with Vedanta's 28.5%, it commands three- fourth of voting rights that can see any resolution through.
The board of Cairn India had on February 10 passed resolution opposing change in contract to make the company liable for payment of royalty and cess on oil produced on its showpiece Rajasthan fields as precondition for approving its parent Cairn Energy selling 40% stake to Vedanta.
Cairn India had then felt that the riders were against the interst of the company and its shareholders especially minority shareholders.
But today at its meeting in Edinburgh, Cairn India board decided to seek shareholder approval for the riders through postal ballot.
"The company has received a requisition" from Cairn Energy "on July 21, 2011 under Section 169 of The Companies Act, 1956, to convene an extraordinary general meeting of the company to consider the conditions imposed by the government of India," Cairn India said in a press statement.
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"Based on the above mentioned requisition, the Cairn India Board has noted its obligations under section 169 of The Companies Act, 1956 and has today, further to the letter from the government of India, reached a conclusion that it would be appropriate to hold a postal ballot of all the shareholders to consider the conditions imposed by the government," it said.
Interestingly, the company received a formal letter communicating the preconditions set by the Cabinet Committee on Economic Affairs (CCEA) just before the beginning of the board meeting today.
Cairn India board would have found it difficult to accept the preconditions that will cost it $900 million in revenues annually, the easier way for its predominat owner was to go to shareholders where it has a comfortable majority.
Analysts said it would have been difficult for Cairn India board to explain why it compromised on the interest of shareholders to facilitate one shareholder's exit.
The government's nod to the transaction is subject to Cairn or its successor agreeing to treat royalty payments on Rajasthan oilfields as recoverable from oil sales.
Also, Cairn India will have to withdraw the arbitration it has initiated disputing its liability to pay Rs 2,500 per tonne oil cess on its 70% share in the fields.
Besides, the approval will be subject to ONGC, which has a stake in all the three oil and gas producing properties and five out of seven exploration assets of Cairn India, waiving its pre-emption rights.