The Vedanta Resources’ takeover of Cairn India may not have too much trouble clearing government hurdles, as the deal requires approval from only Securities & Exchange Board of India (Sebi) and Reserve Bank of India (RBI). The Anil Agarwal-promoted Vedanta Resources or Cairn Energy Plc may not even need approval from the ministry of petroleum or the oil sector regulator Director General of Hydrocarbons.
The Sebi approval is required by way of disclosures and for the open offer, while the RBI approval will be needed in case of overseas repatriation of foreign exchange.
While the petroleum ministry remained uncertain if Cairn Energy or Vedanta requires the ministry’s approval, Sesa Goa said the approvals were required from shareholders of Vedanta and Cairn Energy and approval of the RBI under Foreign Exchange Management Act. “As of the date of this public announcement, to the best of the knowledge of the acquirers (Sesa Goa), there are no other statutory approvals required to implement the offer other than those specified above,” Sesa Goa said in its open offer document.
Sesa Goa, a Vedanta group company, has offered to buy 20 per cent stake in Cairn India on behalf of Vedanta. It, however, added that in case any other approval is required at a later date before “the closure of the offer, the offer shall be subject to all such approvals”.
Vedanta or Cairn Energy, which is selling a minimum 40 per cent stake in Cairn India through its Cairn UK Holding Plc, are likely to only inform the government. With exploration and production business requiring several other approvals like environment and mining lease clearances, no company will like to antagonize the government, said an expert who did not wish to be quoted.
A Cairn India executive quoted article 28 of the production sharing contract (PSC) for the Barmer block stating that it talked of only assignment of interest in the PSC. It is not there in this case since it is shareholders of Cairn India who are changing. Besides, the PSC has been signed by Cairn UK Plc, the 100 per cent subsidiary of Cairn India. “The clause under PSC entered into by the operating consortium of oil and gas blocks with the government is triggered only when one of the members decides to quit,” he added.
The proposed deal, which could see Vedanta spending up to $9.6 billion to acquire 51-60 per cent in Cairn India, has not gone down well with Oil and Natural Gas Corporation, a partner with Cairn India in all its three producing blocks besides five other blocks. Cairn India has 10 blocks in India, including the Barmer block in Rajasthan, which has added around 18 per cent to India’s crude oil production of 674,000 barrels a day.
The deal will set a legal benchmark for India, which had privatised its oil production and exploration in the 1990s, but has not yet dealt with such a situation. There is no one global benchmark for such approvals, since each country follows its own rules. Jagannadham Thunuguntla, equity head, SMC Capitals Ltd dismissed news of the deal running into problems. “The anxiety, which is being built regarding the deal, is bound to happen and is part and parcel of any multi-billion dollar deal. There are bound to be some hiccups,” he said.
The ministry of petroleum & natural gas and government-controlled ONGC are studying the deal between two UK companies. The only way they can block the deal is through a counter offer to Cairn Plc. Accordingly, ONGC can make a counter-bid between August 17 and September 7.
Under Regulation 25 of Sebi’s Takeover Code, a company or entity can make a competitive bid (in response to an open offer) within 21 days from the date of public announcement of the open offer. With the deal being considered overvalued by most experts, the chance of ONGC bettering the offer was unlikely. Besides, ONGC would need to pay the non-compete fee of Rs 50 over an above Rs 355 a share for which the deal has been valued. “ONGC is already present in the oil asset. Just to take a stake in the company, why should it pay so much? It can invest that money in any other asset,” said Thunuguntla.
Senior officials said there was no clarity on the issue of approval as yet, since it was too early for the government or ONGC to react. Vedanta’s open offer for a 20 per cent in Cairn India will begin on October 11.
