The ongoing stalemate between the petroleum ministry and Cairn on clearing the proposed sale of a majority stake in Cairn India to Vedanta, has raised concerns over Cairn India’s minority shareholders’ rights.
Some of the proposals by the petroleum ministry – sharing of royalty burden with ONGC or asking Cairn to forefeit its right for dispute resolution – are being considered a unilateral imposition of government fiat. Similar concerns have also been raised by the ONGC camp.
In August 2010, Vedanta and Cairn announced a majority buyout by the former in Cairn India in a deal worth $9.6 billion. But seven months later, despite the Prime Minister’s Office (PMO) seeking early closure of the proposed transaction, the approvals were not in place.
Cairn India, listed on both BSE and NSE, has over 200,000 shareholders. While the promoters hold 62.25 per cent of equity in the company, the remaining 37.75 per cent is held by domestic and foreign financial institutions, the public and Malaysia’s national oil company Petronas.
Vedanta Resources, for example, in a recent letter to the petroleum ministry had put the issue on record. Explaining their rationale for not being able to accept the new clauses, Vedanta Resources CEO MS Mehta wrote: “As per our current understanding, such proposals would involve a significant departure from the terms of the existing contracts entered into by the GoI and Cairn India Limited (CIL). We also understand that these would have a material adverse impact on CIL’s value and this would negatively impact the interest of all shareholders including minority shareholders. Acceptance of any of these proposals was likely to be challenged by CIL’s minority shareholders under the Companies Act.”
Mehta went on to explain that since Vedanta was not yet a shareholder in CIL, it was difficult for them to accept such proposals. Vedanta was not party to the production sharing contract (PSC) between CIL and GoI. So, “As Vedanta will not be party to any of these contracts and would be a mere shareholder of CIL, it would be neither possible or appropriate for Vedanta to agree to any of these conditions which directly impact their terms — particularly as this impacts the rights of the minority shareholder”.
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Experts echoed similar views. “You cannot keep such a significant deal in a limbo for so long. Either way, decide fast. The delay here is so large that it impacts all shareholders, including the minority shareholders. This is bordering into the ridiculous,” said Shailesh Haribhakti, executive chairman & managing partner of BDO Haribhakti, a leading chartered accountancy and consulting firm.
But others like former Sebi member and IIM Ahmedabad Professor JR Verma is of the opinion that oil, like telecom, was considered a strategic sector and therefore world over, including in the US, the sovereign has a huge role.
In 2005, US political backlash thwarted CNOOC’s $18.5-billion deal with Unocal. “Decision should have been taken fast. But this industry happens to be one where companies around the world are completely at the mercy of the host government. And all investors should be careful of these facts. It’s just like pharma, where a regulator can block a new drug and billions of dollars of research that goes behind it,” said Verma.
However, contrarian views also do exist. “In the backdrop of the RIL-RNRL judgment of the Supreme Court, the government has to balance several competing interests. Even ONGC has minority shareholders. Why burden them with unfair royalty payout? So, the government has to balance the interests of Cairn, Vedanta and ONGC shareholders with that of a much larger national public interest,” said a leading corporate lawyer, requesting anonymity.
Even on clauses like forfeiting the right to appeal, he said these conditions should be interpreted in a manner that the stock market and the investors can accept with stability. “You cannot have a situation where the public offer will coincide with a pending litigation.”
On the issue of changing the royalty mechanism and the preemptive rights of ONGC, he said the government was making its arguments based on the earlier Canoro Resources case, where it had cancelled the PSC after the shareholding of Canoro’s parent entity changed in Canada. “The government is simply sticking to its former position that even for transfer of shares a prior permission was needed. It cannot change its stand to rationalise one interest against another.”
Others said Vedanta’s decision to pay an additional Rs 50 per share as a non-compete fee to Cairn is equally against the interests of the minority shareholders who will be left out of it. “Its not illegal but it may also be frowned upon as the new takeover code suggests doing away with it,” said a Mumbai-based lawyer who refused to be identified as both ONGC and Vedanta are among his clients.
ONGC, which is coming up with a mammoth Rs 13,000-crore follow-on public offer that will see government holding come down to 69.14 from the current 74.14 per cent, also has minority shareholder interests.
In December, the public shareholding in the company stood at 13.56 per cent while the remaining has been with institutions. In its FPO document, ONGC has even listed the royalty burden as a risk factor in the disclosures. But analysts say there were more shades of grey in ONGC’s claim that the royalty payments from the Rajasthan blocks have made the otherwise lucrative venture loss-making and unviable for them.