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Cairn's $1.2 billion loan to group co draws investor ire

Friday, 25 July 2014 - 6:55am IST | Place: Mumbai | Agency: dna

Shareholders have raised red flag, say loan given before revised clause 49 of listing agreement, which makes shareholder nod for material transactions mandatory, comes into effect on October 1

Cairn India investors and proxy advisory firms are up in arms against the company's recent move to extend $1.25 billion in loan to an unknown group company without making a fair disclosure, and have sought an investigation by stock market regulator, Securities and Exchange Board of India (Sebi).

In its post earnings call on Wednesday, the oil and gas explorer revealed it had extended loan to its parent Vedanta group company for a two-year period as a part of former's treasury operations. Cairn has already disbursed $800 million of this, while remaining $450 million were to be disbursed soon at an interest rate of Libor+300 basis points (around 3.3%).

Cairn India did not reveal the name of the company during an analyst call. However, when an analyst attending the concall persisted, the company mentioned that it was an unlisted, non-operational Sesa Sterlite group company based out of Mauritius.

The analyst told dna that Cairn subsequently told him "not to go much in detail as it did not concern him".

When contacted by dna, a Cairn India spokesperson said he was not aware of the name of beneficiary group company, while Vedanta Group spokesperson said it is a wholly owned subsidiary of Sesa Sterlite, without revealing the names.

On Thursday, Cairn India shares tanked 6.7% on local bourses as investors were apparently irked with they way the company chose to not disclose the transaction in a timely manner, and clubbed it with first quarter earnings.

Proxy firms InGovern and Stakeholders Empowerment Services called for an investigation by Sebi considering the manner in which the company delayed the disclosure by hiding the identity of the entity which has been provided loan.

Shriram Subramanian of InGovern said, "The company choosing to disclose the related party transaction at an earnings call shows disregard for fair disclosure, and merits a full-fledged investigation by Sebi.

Also disclosure has been made post-hoc, that is after the event."

He said that Sebi's revised clause 49 of the listing agreement with Stock Exchanges requires shareholders' approval for all material related party transactions with no exception for transactions in ordinary course of business or at arms-length.

"While this revised clause 49 would be applicable from October 1, 2014, in practice of good governance the company board should have insisted for shareholder approval for such a huge sum. It is clear that the company's independent directors have acted as 'yes man' in this case," he said.

The company in its defence during concall said it was an effective utilisation of cash reserves and that loan would yield higher returns as compared with current investment options. Subramanian stressed that returning surplus cash to investors through a dividend payout or buyback would have been a better utilisation.

J N Gupta, founder and managing director of Stakeholders Empowerment Services, also called for an investigation by Sebi considering the "dubious" manner in which the company has ignored to take shareholders' approval.

Most analysts raised concerned about history of similar transaction at Vedanta Group. "That is a big concern, investors reacted in this way because Vedanta has such a track record. The decision should have been disclosed much before extending the money to group company," Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services India, said.

Investor community seems to have completely ignored the company's announcement of new discovery of 3 billion barrels of oil equivalent hydrocarbons, which would double its in-place reserves at Rajasthan block.

"We believe the concern of cash diversion would downplay the resource upgrade... An additional un-risked prospect inventory potential of 3 billion barrel of oil equivalent identified, to be drilled up in future exploration campaigns, beginning fiscal 2016. However, we have not considered this development in our valuation as the company has not given the recovery rate for the same," Dhaval Joshi, an analyst with Emkay Global Financial, said.

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