Cairn stock falls 6.6% over $1.25-bn loan to parent

Corporate governance firms say Sebi should probe non-disclosure to exchanges

Corporate governance advocates and analysts have slammed Cairn India, an Anil Agarwal group company, for extending a loan of $1.25 billion to Sesa Sterlite, another group company, at generous terms, instead of using the cash for development of its operations.

Cairn India's stock on Thursday fell 6.5 per cent to Rs 322 a share, losing Rs 4,400 crore of market value, as angry investors gave a sell order on the company's shares. Cairn had indicated after its June quarter results on Wednesday that the two-year facility to the foreign Sesa subsidiary will yield better returns than its fixed deposits. This was the first time the company made this disclosure.

But investors are not buying the argument. "Although Cairn's management believes the interest rate earned is more than that received from its fixed deposits in the US currency, we believe it is negative for all shareholders of Cairn India, as the corporate loan of Libor plus three per cent rate of interest is too cheap, and hampers overall capital allocation of Cairn," says Motilal Oswal Securities Analyst Nitish Rathi.

Of the loan, Cairn has already disbursed $800 million so far and plans to disburse the rest in the next few weeks. The company had cash and cash equivalents of $4 billion on its book as of June this year.

Corporate governance advocates say Cairn did not make disclosures to small investors about such a large related-party transaction; this itself was a violation of Sebi norms and warranted an investigation. "This is in complete disregard of the disclosure norms. Of the loan, almost $800 million has already been disbursed. And the company chose to do it before October 1 when, according to the new company law, a majority of small shareholders need to clear such related-party transactions," says Shriram Subramanian, Founder of InGovern Research Services.

Analysts say the company has taken the necessary approvals for extending this facility from the Board and Audit Committee, in which the related parties were not allowed to vote. However, the related-party loan facility is worrying in the light of large debt levels of Sesa Sterlite, they say. Sesa Sterlite's consolidated debt stood at Rs 80,000 crore as of March this year after London-based Vedanta transferred its stake in Cairn and its debt to the Indian company.

"The management ruled out the option of returning surplus cash to shareholders in the form of higher dividends, as the company might require the given amount for capex on development of new discoveries from 2016-17 onwards, by which time the loan will be repaid to the company," write Kotak Securities analysts Tarun Lokhotia, Sanjiv Prasad and Vinay Kumar in a note. "We see the related-party loan facility to a subsidiary of Sesa Sterlite as a significant negative, as it warrants concern on effective utilisation of existing cash/equivalents and future cash flows of the company, notwithstanding the near-term economic rationale indicated by the management," they write.

Cairn India reported a 65 per cent year-on-year decline in its consolidated net profit for the April-June 2014 quarter, owing to a change in depreciation procedures. The net profit was also below Street consensus estimates of Rs 2,538 crore, but revenues were mostly in line with market expectations. The bottom line also took a hit, with a 38.5 per cent year-on-year jump in regular depreciation and amortisation and nearly two-and-a-half times jump in exploration cost in the first quarter.