Mumbai: Oil and gas company Cairn India Ltd will set up a committee of independent directors that will advise the management on how best to proceed with the sale of as much as 51% of the company to Vedanta Resources Plc, a plan that has been facing hurdles ever since it was announced a month ago.
Positive outlook: A file photo of Cairn India CEO Bill Gammell. Ankit Agrawal / Mint
The two-member panel will base its recommendations on feedback received from retail shareholders of the firm as it seeks to generate a consensus on the transaction. The committee will focus on the much-debated non-compete fees to be paid by Vedanta for acquiring a controlling stake in Cairn India from its existing promoters, the UK-based Cairn Energy Plc.
“Most directors on Cairn India board may have a conflict of interest by virtue of being also on the boards of either Cairn Energy or Vedanta,” Bill Gammell, chief executive of Cairn Energy, said at the company’s annual general meeting in Mumbai on Wednesday. “We felt it is important to have an independent committee to which shareholders can talk to on all aspects of the deal, including the issue of non-compete fees.” The committee will consist of Omkar Goswami and Edward Story, directors on the board of Cairn India.
On 16 August, Cairn Energy announced that it would sell 40-51% in Cairn India to Vedanta for a maximum consideration of $9.6 billion (Rs 44,544 crore today). Its offer of Rs 405 per share included non-compete fees of Rs 50. The stake sale will be followed by an open offer for up to 20% more of Cairn India’s equity at a price of Rs 355 per share. The UK firm holds 62.36% of Cairn India.
The move is in line with the recommendations by the Takeover Regulations Advisory Committee appointed by stock market regulator Securities and Exchange Board of India, or Sebi. It has said that a takeover target should form a committee of independent directors to consider and give its “reasoned recommendations” on an open offer.
The recommendations of the committee should be published by the target company before the offer begins, according to the report. Sebi is yet to finalize the draft recommendations of the panel.
Some analysts had criticized the valuation of the deal, saying that it may put retail investors in Cairn India at a disadvantage.
There was “limited rationale” in paying a non-compete fee for a commoditized business and the brokerage believed that the deal was unfavourable from a minority shareholder’s point of view, Saeed Jaffery, an analyst with Ambit Capital Pvt Ltd, said in a 17 August note.
Analysts had said retail shareholders could lose out on as much as Rs 3,570 crore if the non-compete premium is not extended to them as well.
The independent committee’s recommendations should be made binding, experts said. It wasn’t immediately known whether the views of the committee will be binding.
“That they have appointed a committee of independent directors to look into these issues is a good thing,” said a corporate governance expert with an international audit and consulting firm. He did not want to be identified. “However, the measure can only be effective if their views are binding upon the board and not mere recommendations.” According to him, the committee should be allowed to function on the lines of a company’s audit committee.
On Wednesday, Cairn India’s shares gained 1.39% on the Bombay Stock Exchange to close at Rs 331.20, while the Sensex, the bourse’s benchmark index, rose 0.8%. Vedanta’s shares were trading at GBP 2145 on the London Stock Exchange at press time, up 0.8% from its previous close.
Since the announcement of the deal, Cairn India’s shares have lost 0.5%, while the Sensex has gained 8.04%.
Defending the non-compete fee, Gammell said that the issue was for Indian stock market regulator to examine. Cairn Energy’s commitment not to enter India and neighbouring markets independently for the next three years entailed a “huge issue of value” that it could have created by exploring other opportunities in the region, Gammell said.
Cairn Energy had said it would seek the approval of the government before going ahead with the stake sale. The deal is yet to be ratified by the government.
Also unresolved is the issue of Cairn’s Indian partner, state-owned Oil and Natural Gas Corp., having pre-emption rights with respect to the transfer of ownership of assets in which it shares a participating interest.
Despite these hurdles, Gammell said he was hopeful of closing the deal by the end of the year and said discussions with ONGC were going on.
“We have an excellent relationship with ONGC and will continue to talk to them,” Gammell said, though he didn’t divulge any details of its discussion with its Indian partner.
Asked whether it would have been better to take the government into confidence before announcing the deal, Gammell said Cairn Energy always intended to inform the government first but news of the deal leaked before it could do so.
“The most difficult part of a corporate transaction is to get a variety of stakeholders on board at the right time. Though the deal was secret, news about it leaked even before we could speak to the Indian government. It would have been better if we could have briefed the government before that,” Gammell admitted.