Cairn-Vedanta deal deadline pushed to May

The London-based energy company, which struck a $9.6 billion (aroundRs 42,430 crore) deal to sell a controlling stake in Cairn India Ltd to Agarwal’s Vedanta Resources Plc, said on Thursday that the deadline for completing the deal has been extended to 20 May from 15 April.

The deal has been hobbled by regulatory hurdles ever since it was announced on 16 August. With questions over royalty payments remaining unresolved, it isn’t clear when or if the acquisition, the biggest in India’s oil and gas sector, will be completed.

Also Read | Complete coverage of events in the Cairn-Vedanta deal

Cairn Energy’s chief executive Sir Bill Gammell had said earlier that the original deadline would not be changed and that the company wouldn’t go back to shareholders to ask for an extension.

In August, Vedanta announced its intention of acquiring a 51-60% stake in Cairn India, beginning with a voluntary open offer for 20% of Cairn India’s equity at a price of ₹ 355 per share.

“Cairn and Vedanta have extended the long stop date in the sale agreement, by which all conditions must be completed or waived (where permitted), to 20 May 2011, in order to accommodate the completion of the open offer," Cairn said in a release.

Depending on the level of subscription in the open offer, Cairn Energy would then sell between 40% and 51% to Vedanta to ensure that the latter has majority control.

The existing promoters were to be paid an additional ₹ 50 per share as non-compete fees.

Cairn Energy’s residual stake in Cairn India would be between 10.6% and 21.6%, according to the statement.

The proposed Cairn-Vedanta deal ran into rough weather almost immediately after it was announced. The Indian government’s first argument was that since the corporate transaction entailed transfer of ownership of oil and gas assets, which has been recognized as a national asset, it needed the government’s sanction.

Cairn and Vedanta eventually approached the government for approval in September.

The larger unresolved dispute hovers around the issue of royalty payment to the government from Cairn’s most productive asset, an oilfield in Rajasthan.

State-run Oil and Natural Gas Corp. Ltd (ONGC), which holds a 30% stake in the same oilfield, has time and again voiced its displeasure at having to pay royalty on the entire production from the block. ONGC has been insisting on a resolution to the issue before the Cairn-Vedanta deal is cleared and has pointed out that the contract allows for the deduction of royalty expenses from the oilfield’s revenue before calculating profits.

This method could, however, affect the valuation of Cairn India’s assets.

After passing through various government departments, the cabinet committee on economic affairs on Wednesday referred the proposal to a group of ministers headed by finance minister Pranab Mukherjee for a decision on the royalty payment dispute and eventually clear the deal.

Sesa Goa Ltd, another Vedanta Group company listed on the Bombay Stock Exchange (BSE), on Thursday said it would launch the open offer for Cairn India’s shares on Monday, according to a public announcement. This is despite the fact that the government is yet to clear the deal.

Sesa Goa is the vehicle through which Vedanta plans to acquire Cairn India shares in the open offer. Cairn India lost 2.02% on BSE on Thursday to close at ₹ 344 per share, while Sesa Goa dropped 3.07% to ₹ 315.85. The bourse’s benchmark equity index, the Sensex, fell 0.11% to 19,591.18 points.

Cairn Energy declined 2.3% on the London Stock Exchange and was trading at 445.90 pence (Rs 321.12) at 10pm India time. Vedanta was down 2.64% at 2,431 pence.

“The situation is a funny one," said Arun Kejriwal, director of Mumbai-based investment research firm Kejriwal Research and Investment Services. “Sebi (Securities and Exchange Board of India) has cleared the offer, but the government hasn’t. I am not sure of the legal position, but if the government doesn’t allow the deal to go through and Cairn India’s share prices fall below the open offer price, there could be much confusion."

Kejriwal also pointed out that the extension of the deadline might be to accommodate elections in Indian states in April and May. “The government maybe able to take up this matter only after the polls," he said.

The Cairn statement also says that Vedanta, the India-focused mining company based in the UK, had agreed to conditions imposed by Sebi on its approval for the proposed open offer for Cairn’s shares, which was given on Tuesday.

Sebi, according to the statement, had notified Vedanta that the put and call options exercisable by Cairn and Vedanta respectively, and a pre-emption right exercisable by Vedanta, must be removed from the sale agreement “as they do not comply with certain Indian securities regulations".

Cairn and Vedanta have agreed to drop these clauses from the sale agreement.

The put and call options built into the original transaction could have seen Cairn sell another 10% of its residual stake to Vedanta in two equal tranches, exercisable up to six months after 31 July 2012 and 31 July 2013, at a pre-determined price of ₹ 405 per share.

The pre-emption right granted to Vedanta in the original agreement was with respect to any further sale of shares in Cairn India by Cairn Energy, where such a transaction would entail the intended recipient obtaining more than 20% of Cairn India’s issued share capital.

“With a put-call option and pre-emption rights, the deal assumes the nature of a forward contract transaction, which is not allowed under existing Sebi rules for such takeovers," said a person with direct knowledge of the development. Such forward contracts are usually allowed only in cases of derivative trading.

In the absence of the put and call option, Cairn would have to sell its stake in the open market at market-determined rates. Also, in the absence of any pre-emption rights with any entity, Cairn India is free to sell its stake to any new or existing shareholder of the company who may offer a better price.

Anirudh Laskar contributed to this story.

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