Mumbai: Indicating its displeasure at the long wait to get government approval for a deal that will see Vedanta Resources Plc become its new owner, Cairn India Ltd has said the inaction has caused the company delays and uncertainties in managing its business.
“It was the best of times; it was the worst of times,” Cairn India managing director and chief executive officer Rahul Dhir said in his letter to shareholders in the company’s 2010-11 annual report, borrowing the opening phrase of Charles Dickens’ novel A Tale of Two Cities.
Dhir said the firm performed “remarkably well” across fronts during the fiscal year but also suffered on account of “an uncertain regulatory environment that delayed many activities and created significant anxieties”.
The letter, dated 25 June, elaborates on the anxieties, stating that what should have been a straightforward transaction subject to shareholder approval has been drawn into the ambit of government decision making.
“The hiatus starting from mid-August 2010, when the deal was announced, has caused delays and uncertainties in managing a business that necessarily has to deal with the government and the Rajasthan joint venture partner Oil and Natural Gas Corp. Ltd (ONGC),” Dhir said in the letter.
Analysts say hurdles such as the one before the Cairn-Vedanta deal act as disincentives to international and domestic investors, and hold them from going ahead with plans in India.
“There is a concern among investors that the regulatory environment in the country is slow and unpredictable,” said Arvind Mahajan, executive director at audit and consulting firm KPMG. “Hopefully, things will improve in a few months when the situation reaches a crisis point.”
On 16 August, Vedanta, controlled by London-based Indian businessman Anil Agarwal, announced a $9.6 billion (Rs 42,720 crore) deal to acquire up to a 60% stake in Cairn India from its promoter Cairn Energy Plc.
Cairn’s most productive asset in India is an oilfield in Rajasthan, where it holds a 70% interest, with ONGC holding the rest.
Regulatory hurdles began almost immediately, with ONGC insisting that the royalty to be paid on oil production from Rajasthan be considered recoverable, as a part of the cost of exploration and production from the reserve.
Doing that will increase costs and diminish profits for Cairn India, which also has to pay a percentage of the profit to the government, and will have implications on the valuation being paid by Vedanta for its stake.
ONGC’s objection stems from the fact that despite holding a 30% stake in the asset, it bears the royalty burden on the entire production. Cairn had argued it is not liable to pay any royalty as per the terms of the production sharing contract.
Another hurdle was the payment of cess to the Rajasthan government on oil production in the state that Cairn has challenged but is paying under protest.
The fate of the Cairn-Vedanta deal was subsequently deliberated upon by the petroleum ministry, a group of ministers headed by finance minster Pranab Mukherjee, and eventually the cabinet committee on economic affairs (CCEA).
Interestingly, Cairn India in its annual report said it has no formal intimation from the Indian government or ONGC of any dispute, demand or claims of royalty being part of the contract cost for cost recovery purpose.
“Cairn India has secured legal opinion in its favour and believes that it has a strong case,” the company states.
Since the announcement of the deal, Cairn India’s stock price on the Bombay Stock Exchange (BSE) has lost 0.35%, while the bourse’s benchmark index Sensex has risen 2.51%.
On Wednesday, Cairn India shares dropped 1.08% on the BSE to Rs 317.25, while the Sensex fell 0.81% to 18,502.38 points.
CCEA has given a conditional approval to the deal, with petroleum minister Jaipal Reddy saying on 30 June that the committee had endorsed the group of ministers’ view of treating royalty payment as cost recoverable and asking Cairn to withdraw an arbitration?case?on cess payment.
Cairn and Vedanta, however, have not yet received a formal letter from the government on the new terms.
Vedanta holds a 28.5% stake in Cairn India. In June, the two companies tweaked the structure of the proposed deal by scrapping a proposal to pay an additional Rs 50 per share to promoters as a non-compete fee. As a result, the acquisition price stands lowered by around $800 million, which could at least partially offset any impact of the royalty burden falling on Vedanta after acquiring Cairn India.