Cairn Vedanta Deal

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analysts caution that this investment in Cairn will not be in Vedantas area of expertise, and hence may not be fruitful. The LSE-listed diversified FTSE 100 metals and mining company Vedanta Resources Plc has acquired a majority stake in Cairn India in a deal valued at $8.5-9.6 billion. The Edinburg-based oil producer will part with 51-61% out of its kitty of 70% shareholding in Cairn India, while 20% is currently held by Petronas, Malaysia. Click here to read Jagannadham Thunuguntla, Equity Head, SMC Capitals view on the deal In the entire acquisition, while Vedanta will take 31-40% shareholding, 20% will be acquired by Sesa Goa (Vedanta Group company) that can easily fund the acquisition given the reserves of over Rs 7,000 crore as at the end of FY10. However, analysts caution that this investment in Cairn will not be in Vedantas area of expertise, and hence may not be fruitful. The impact was felt immediately post announcement, as the scrip corrected nearly 9% by close of trade to Rs 321 after opening at Rs 355 levels today. Although analysts remain divided on the valuation of deal at Rs 405/share, Vedanta plans going ahead with open offer of 20% shareholding, which comes at Rs 355/share considering the Rs 50/share being paid as non-compete fee. In the near-term, experts suggest that Cairn may see stock price movement move closer to the open offer price, but is a good long-term bet. The company has crude production potential of 2,40,000 barrels/day that can take care of 25% of India's requirement, and its new mentor (Vedanta) has sound track record of acquisitions and developing companies. Going ahead, what also remains to be seen is whether Sebi accepts the non-compete fee of Rs 50, or approves open offer price at Rs 405 providing an upside to stock price. Another interesting factor to be watched is whether Petronas will part with its shareholding in the open offer. Cairn India slumped 6.4% over its previous close post the deal announcement to end the day at Rs 332 levels, and trades 14.8x FY11E and 7.1xFY12E earnings estimates.

This article examines various Bilateral Investment Treaty claims that India can face due to the delay and pre-conditions in the Cairn-Vedanta deal. Introduction India Inc.s approach towards entry and exits of foreign investments may invite investor protection claims. Particularly, the Cairn-Vedanta fiasco may turn into a battle of many investor-State arbitration claims. The GoM are due to decide on the deal and have been warned by the foreign affairs ministry about the violations of Indias Bilateral Investment Promotion and Protection Agreement (BIPA) obligations. Background Of The Deal The deal involves three foreign entities Cairn Energy, Vedanta Resources and its subsidiary Twin Star Holdings, a holding company incorporated in Mauritius.

Cairn Energy decided to sell its stake to Vedanta Resources and Twin Star Holding. Due to its PACs with the government and the involvement of ONGC in its Gujarat project, it had to take permission from the government before going through such a deal. The government has put five pre-conditions to sanction the deal. One of the conditions is that the arbitration, which is on-going between Cairn India and the ministry of petroleum in the UK (Cess Arbitration) is to be withdrawn by Cairn India, and Cairn India has to agree to pay the entire cess tax, which annually is around Rs 250 crore. Cairn India has been paying the same, but claims that ONGC should bear equal burden. The second condition is to concede to ONGCs stand that the royalty to be paid for the Gujarat project should be equally borne by Cairn India (Royalty Argument). This may further increase the burden by Rs1,400 crore. Possible Claims Against India Article 3 of the India-UK BIPA requires India to give a fair and equitable treatment to all foreign investments by the UK nationals and companies. Article 7 also provides for easy transferability of investment. Indias rigid pre-conditions and delay in giving approval to the transaction may be a potential violation of these Articles in letter and spirit. Although Vedanta Resources has not yet made investments here, as defined under the India-UK BIPA, it can claim protection under Article 3(1) of Indian-UK BIT claiming failure to provide favourable conditions to make investment. Twin Star holding being legally a separate entity and a corporation under the Mauritian law can make a similar but independent claim under the India-Mauritian BIPA. By asking Cairn India to drop Cess Arbitration and accept the Royalty Argument, India has invited several legal hiccups on its shore. For example, Cairn Energy may bring a claim of denial of justice, which is well-protected by India-UK BIPA. Also, if the pre-conditions are agreed, it will, in turn, amount to an increase in annual burden of about Rs 16,500 crore on Cairn Indias profit post takeover by Vedanta Resources. It may, in turn, lead to depreciation in offer price by Vedanta to buy the Cairn Energy stake. It can be argued by Cairn Energy that this may amount to a loss of profit, leading to a possible claim of indirect expropriation against India. Another important aspect is that further delay may lead to Vedanta Resources calling off the deal, which may be a situation where Cairn Energy can make claims against India under the India-UK BIPA.

One more issue which seems crucial, although conceded by the parties, is the direction of SEBI to remove the call option from the agreement. Call options are a common practice and have successfully been exercised by many foreign investors previously. This can lead to claims of breach of legitimate expectation and differential treatment on behalf of Cairn Energy. Remarks Overall, the situation is graver than one can imagine and India Inc. is sitting on a potential powder keg due to delays in decisions and imposition of unreasonable conditions on the entry and exit of foreign investment.

MUMBAI: Minority shareholders of Cairn India used the occasion of the company's annual general meeting, on Thursday, to express deep skepticism about the final terms of the $6.4-billion transaction for which it is being acquired by mining giant, Vedanta, from its parent company, Cairn Energy Plc, a British company.

They were expressing disappointment on the decision of the two major shareholders - Cairn Energy Plc and Vedanta Resources - agreeing to government terms that Cairn India pay taxes in proportion to its 70% holding in a key oilfield in Rajasthan. Independent directors expressed sympathy for the sentiments of minority shareholders but said that the government was adamant that the deal would not go through if its terms were not met. Further the day-to-day functioning of the company was becoming difficult.

"If we had not accepted the royalty sharing burden it is almost a certainty that no permissions from the government would be forthcoming for our projects, we agreed to the royalty burden because functioning in the existing environment was getting tough," said Omkar Goswami an independent director on the Cairn India board. "We were not getting approvals for our field development plans for several months, so we could not stagnate and had to ramp up and thus had to accept the conditions imposed by the government."

"What do you expectaof course the mood of most shareholders at the AGM was lowa we had already decided and told them the details of the entire voting pattern including how many promoter

shareholder votes and how many minority shareholder votes will be submitted for everyone to see on September 14. We cannot express our view on the government's pre-conditions as we are on the company board," Naresh Chandra, non-executive and independent director on Cairn India's board told ET.

NEW DELHI: The government today said its share of revenue from Cairn India's Rajasthan oilfields will fall by Rs 5,032 crore if royalty payments are made cost- recoverable as part of Vedanta Resources' plan to acquire the company.

Cairn India at present does not pay any royalty on its 70 per cent interest in its mainstay Rajasthan oilfields. The royalty is paid by state-owned ONGC, which got a 30 per cent stake in the 6.5 billion barrel field for free.

Minister of State for Petroleum and Natural Gas R P N Singh said the government has approved UK's Cairn Energy Plc selling 40 per cent stake in its Indian unit to Vedanta Resources subject to the buyer/seller agreeing to treat royalty paid by ONGC as cost recoverable.

Cairn is allowed to recover all project cost (capital, operating expenditure and taxes) from revenues earned from selling oil before splitting the profits with the government. Making royalty cost recoverable means it will be considered as project cost and subsequent revenues left for splitting between Cairn India, ONGC and the government will be lower.

"As per projections made on the basis of assumptions on production, crude oil price, exchange rate etc, in Net Present Value (NPV) terms, the Government of India's share of profit petroleum is reduced by Rs 5,032 crore, that of Cairn India's by Rs 6,272 crore and ONGC by Rs 2,688 crore over the life of the project ie till 2020," Singh said.

"However, in this situation, ONGC would recover the cost of royalty paid by them to the state government on behalf of themselves and Cairn, amounting to Rs 13,995 crore in NPV terms, over the life of the project," he said in a written reply to a question in Lok Sabha here today.

He said as per the Production Sharing Contract (PSC), ONGC as licensee has the obligation to bear 100 per cent royalty burden. However, as per the Accounting Procedure prescribed in the PSC, royalty paid is cost recoverable by ONGC as contract cost.

"Government granted consent to the proposed Cairn-Vedanta deal by stipulating a condition that the parties shall agree and give an undertaking t