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Posted: Wed, Sep 15 2 010. 10:51 PM IST
Aveek Datta
Cairn India forms panelon Vedanta deal priceIndependent committee to seek feedback from retail
shareholders as firm looks to generate a consensus
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Positive outlook: A file photo of Cairn India CEO
Bill Gammell. Ankit Agrawal / Mint
Mumbai: Oil and gas company Ca irn India Ltd will set up a committee o f
independent directors that w ill advise the management on how best to
proceed with the sa le of as much as 51% of the company to Vedanta
Resources P lc, a plan that has bee n facing hurdles ever since it was
announced a month ago.
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 stakein Cairn India from its
existing promoters, the UK-
based Cairn Energy Plc.
“Most directors on Ca irn India board may have a conflict of interest by virtue
of being also on the boa rds of either Ca irn 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 dea l, including the issue of non-compete fees .” The committee w ill 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 (R 44,544 crore
today). Its offer of R 405 per share included non-compete fees of R 50. The
stake sale will be followed by an open offer for up to 20% more of CairnIndia’s equity at a price of R 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 appo inted 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 befo re the o ffer begins, according to the report. Sebi is yet to
finalize the draft recommendations of the panel.
Some analysts had criticized the valuation of the dea l, saying tha t it may put
retail investors in Cairn India at a disadvantage.
The Mint Report for 15 September 2010
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There was “limited rationale” in paying a non-compete fee for a
commoditized business and the brokerage be lieved that the dea l 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 sa id retail shareholders could lose out on as much as R 3,570
crore if the non-compete premium is not extended to them as w ell.
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 aninternational 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 boa rd and no t 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 sha res gained 1.39% on the Bombay Stock
Exchange to close a t R 331.20, while the Sensex, the bourse’s benchmark
index, rose 0.8%. Vedanta’s sha res we re trading at GBP 2145 on the London
Stock Exchange at pres s time, up 0.8% from its previous close.
Since the announcement of the dea l, Cairn India’s shares have lost 0.5%,
while the Sensex has ga ined 8.04%.
Defending the non-compete fee, Gammell said that the issue was for Indian
stock market regula tor to examine. Cairn Energy’s commitment not to ente r
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 w ith 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 asse ts in which it shares a participating interest.
Despite these hurdles, Gammell said he was hopeful of closing the deal by
the end of the yea r and said discussions w ith ONGC were going on.
“We have an excellent relationship with ONGC and w ill continue to talk to
them,” Gammell said, though he didn’t d ivulge any deta ils of its discussion
with its Indian pa rtner.
Asked whether it would have bee n 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 be en bette r if we could have briefed the government before
that,” Gammell admitted.
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