Cairn applies for govt nod for stake sale to Vedanta

New Delhi: More than three weeks after it announced the sale of a majority stake in its Indian arm to Vedanta Resources, UK-based Cairn Energy Plc has formally applied to the government for approvals, saying it will meet all contractual requirements needed to fructify the deal, reports PTI.

The company, on 9th September, wrote separate letters to the oil ministry for specific approvals in respect of seven exploration blocks Cairn India had won under the New Exploration Licensing Policy (NELP) rounds and concurrence in case of three producing properties that were awarded to it prior to NELP, including the giant Rajasthan oilfield.

"We have received letters from Cairn and we are examining them. We will decide (on it) in due course," a senior ministry official said.

Attaching a summary of the deal where Cairn Energy is selling a 40% to 51% stake in its Indian arm to Vedanta Resources Group for up to $8.48 billion, the company’s chief executive officer Bill Gammell, in the covering letter, stated that the proposed transaction was a sale of shares in Cairn India and "there will be no change in the parties holding the participating interests under the Production Sharing Contracts (PSCs)."

Cairn maintained that only NELP blocks required prior government consent for transfer of control, while pre-NELP areas like the Rajasthan oilfield do not have such provisions.

In respect of the seven NELP areas, including gas discovery block, KG-DWN-98/2, which sits next to Reliance Industries' (RIL) prolific KG-D6 field in the Krishna-Godavari Basin (KG), Cairn subsidiaries made applications for approval under Article 28.1 of the PSCs signed with the government.

It said the PSCs for pre-NELP Rajasthan block RJ-ON-90/1, the Ravva oil and gas field in the eastern offshore and the Cambay Basin CB/OS-2 gas fields off Gujarat coast "do not require prior consent" of the government.

"Even if there were to be a contractual requirement for seeking prior permission of the government for the transaction, we submit that the present transaction is one that would merit such consent," Cairn said in letters seeking concurrence of the government on the three pre-NELP blocks.

"PSCs that expressly provide for obtaining prior consent also stipulate that the consent would not be unreasonably withheld," it said. "We have no doubt that in the present case the government should have no hesitation in granting such consent were such consent to be required."

Mr Gammell, in the covering letter, stated that both Cairn Energy Plc and its Indian arm, Cairn India, and its subsidiaries are fully committed to complying in full with all contractual requirements needed to proceed with the deal.

"We believe that the Vedanta Group is of good standing, has the capacity and ability to meet its obligations under the PSCs and is willing to provide an unconditional undertaking as required in Article 28.1(a)," Cairn India's subsidiaries wrote in letters seeking approval in respect of the NELP blocks.

Cairn had previously written to the oil ministry on 26th August introducing Vedanta Group and its financial capabilities.

In a 9th September letter, it said as the proposed sale "is at the shareholder level of Cairn India, there will be no change to the participating interest in any of the PSCs."

"We can also confirm that there are no planned changes in the Cairn India organisation, standards, policies and systems and that the transaction will have no effect upon Cairn India's knowledge and experience as a PSC contractor, operating to accepted international petroleum industry practice," it said.

"We believe that the proposed transaction will not adversely affect the performance or obligations under the PSCs, nor be contrary to the interests of India," the letters stated. "Should it require, we are also happy to satisfy you on the appropriateness of the guarantees contemplated under the PSCs."

The oil ministry had on 31st August written to Cairn Energy asking it to apply for approval in respect of all the properties.


Personal finance Monday

Reliance MF launches Reliance Index Fund-Nifty Plan; Edelweiss MF to transact schemes through online MF platform; Canara Robeco MF declares 10% dividend under FORCE Fund; ICICI Prudential MF declares dividend under ICICI Prudential Quarterly Interval Plan-II; Max New York Life launches two new ULIPs

Reliance MF launches Reliance Index Fund-Nifty Plan

Reliance Mutual Fund has launched Reliance Index Fund-Nifty Plan, an open-ended growth scheme. The investment objective of the scheme is to replicate the composition of the Nifty, with a view to generate returns that are commensurate with the performance of the Nifty, subject to tracking errors. The scheme opened on 9 September 2010 and closes on 23 September 2010. Exit load of 1% will be applicable if the units are redeemed on or before a year from the date of allotment. The new fund offer (NFO) price is Rs10 per unit. Minimum investment amount is Rs5,000. The scheme has two options - growth and dividend. The benchmark index for the scheme is S&P CNX Nifty.

Edelweiss MF to transact schemes through online MF platform

Edelweiss Mutual Fund has said that the units of Edelweiss Diversified Growth Equity Top 100 Fund, Edelweiss Nifty Enhancer Fund and Edelweiss Absolute Return Equity Fund will be available for transaction through BSE StAR MF (BSE Stock Exchange Platform for Allotment and Repurchase of Mutual Funds) and Mutual Fund Service System.

Canara Robeco MF declares 10% dividend under FORCE Fund

Canara Robeco Mutual Fund has announced the declaration of dividend under the dividend option of Canara Robeco FORCE Fund - retail and institutional plan. The record date for dividend has been fixed as 13 September 2010. The quantum of declaration is 10% under Canara Robeco FORCE Fund (retail and institutional plan) The net asset value (NAV) of the fund stands at Rs14.21 per unit under the retail plan and Rs14.23 per unit under the institutional plan as on 9 September 2010. Canara Robeco FORCE Fund (Financial Opportunities, Retail Consumption & Entertainment Fund) is an open-ended scheme. The investment objective is to generate income/capital appreciation by investing in equities or equity related instruments of companies in the finance, retail and entertainment sectors.

ICICI Prudential MF declares dividend under ICICI Prudential Quarterly Interval Plan-II

ICICI Prudential Mutual Fund has announced the declaration of dividend under the dividend option of ICICI Prudential Quarterly Interval Plan-II (retail and institutional plan). The record date for dividend has been fixed as 15 September 2010. The quantum of declaration is 1.365% under retail plan and 1.467% under institutional plan of ICICI Prudential Quarterly Interval Plan-II. The scheme is a debt oriented interval scheme, which has the investment objective to generate optimal returns consistent with moderate levels of risk and liquidity by investing in debt securities and money market securities.

Max New York Life launches two new ULIPs

Max New York Life Insurance Co Ltd has launched two new unit-linked insurance plans (ULIPs)-'Max New York Life Shubh Invest' and 'Max New York Life Shiksha Plus II'. Both these products are compliant with the new Insurance Regulatory and Development Authority (IRDA) regulations and also with the proposed new 'Direct Tax Code' which will be in effect from 2012. The sum assured on both of these products is more than 20 times the premium amount which makes them eligible for tax exemption at maturity. Shubh Invest is a simple plan for first time life insurance buyers. The plan offers safe savings options and combines the twin benefits of wealth and health coverage. Shiksha Plus II is a child plan for over all development of one's child under all uncertain circumstances.


A critique of the government’s performance so far

Could politics topple the proverbial applecart? It is not such an outlandish possibility suggests a CLSA report in a surprisingly sharp critique on the ruling party’s performance, especially about governance, till date...

Brokerages are not known for their sharp and insightful, let alone incisive, political commentary. Therefore, a recent CLSA report, which is quite critical of the UPA government's performance so far - despite the general opinion that a stable government is better than anything else - comes as quite a surprise.

The central theme of the report seems to be an attempt to answer the question "Stable government, but is that enough?". And the answer seems to be an unequivocal, no. As the report says, "Poor governance may yet come to haunt the markets, if something does not change over the next couple of years."

The report admits at the onset that the government has been successful in implementing a few things - this includes transparent auction of 3G spectrum (after the controversy over 2G spectrum allocation with allegations of large-scale corruption); (partial) freeing of petro-product prices, and minority stake-sale in some PSUs.

However, in areas such as implementing the Goods and Service Tax, Direct Tax Code and change of Foreign Direct Investment norms, progress has been slower than expected. It also points out that with quite a few elections ahead, there is very little hope that pending reforms will be pushed through in the next 12-18 months. In short, this is as good as it gets.

There is also a sense of drift within the party. As the report says, "Many times there are conflicting views on major issues or policy matters between different arms of the government or a minister and party leaders. If the government does not reverse this sense of drift soon, India's macro story will be seriously dented."

While this does hold true, it must be said, that drift within a party is much better than a coalition government where different parties' agendas clash and nothing eventually gets done.

Economic failures: Inflation, roads

Although the report does not elaborate much on this point, it does say that one of the biggest failures of the incumbent government has been its dismal failure to contain inflation. Perhaps its recent biggest failure is the 'rotting food grains scandal' where nearly 15 million tonnes of grains were found rotting in different warehouses of the Food Corporation of India. In a country where 37% of the population lives below the poverty line, this issue will come back to haunt the government. The food inflation that has been seen in the last five years is like India has never seen before. From just January 2009, average rice prices are up 23%, fruits and vegetables are up more than 200%, milk is up 28%, sugar is up 27% and edible oils up 12%. This in a country where a sizeable chunk of the population still spends a large part of their earning on food is nothing short of disastrous.

The only reason this issue has not blown up into a civil unrest kind of situation is the government has cleverly put more money into the hands of the poorest sections of society with schemes such as the National Rural Employment Guarantee Scheme. Even so, the government's stress on inclusive growth rings hollow in the face of rampant inflation.

On the economic front, the other biggest failure of the government has been the slowdown in the roads sector, after a good start, with ugly corruption allegations flying around. CLSA estimates that "over 9,000km of orders will have to be placed by March 2011 to meet the FY11 target of 11,800km and there is a shortfall from FY10 of 8,000 km."

This is a big blow after the ambitious targets of 20km of road per day.

Political pitfalls: Naxalites, Kashmir, international relations

On the political front, a monster that the present government has let grow is the Naxalite movement, which has only got stronger under the governance of the present government. As the CLSA report points out, "What in 2006 was confined to about 170-180 districts, now engulfs over 220 of the 640 districts in the country today."

(SOURCE: South Asia Terrorism Portal)

One of CLSA's notes dated 12 April 2010 had summarised the problem, "What the Naxal attack brings to the fore is the inadequate state preparedness to respond to a crisis situation and also the deterioration in governance over decades… The government more often than not seems to be responding in a kneejerk manner. The uncoordinated response was witnessed during the 26th November terror attack on Mumbai. It was witnessed once again during the Telangana crisis in Andhra Pradesh. The Indian state seems to lack any grievance redress mechanism to tackle issues of importance before they reach crisis proportions. The Maoist problem has been simmering for years. As a result, the state often comes across as unsympathetic, uncaring and lacking in any coherent strategy."

The report also points out to the Kashmir issue. "The 2008 elections in Jammu & Kashmir (J&K) were hailed as a victory for Indian democracy, given the reasonably large turnout and defeat of some of the separatists who participated in the elections. However, just two years on, there is an eruption of violence in the state among renewed demands for a separation. These have been met with military action and an almost deafening silence from the government. The report points out to the failed economics of this state - J&K receives 8%-10% of annual grants given to states by the central government when its share of population is only 1%. The tragedy, says the report, is that in spite of the grants, the developmental work is pathetic - hence even more separatist violence.

The UPA government once seemed to have a Midas touch as far as foreign relations were concerned - strategic relations with the USA were taken forward, dialogue was started with Pakistan and there was progress in the bilateral relations with China - however, all three achievements seem to have crumbled. President Obama is noticeably cool towards India, relations with Pakistan have taken a turn for the worse, and China's stance has hardened, the report points out.

CLSA points out a few other things that, although minor in the larger scheme of things, could haunt the present government - no action against people accused of corruption in the 2G telecom issue, talking about a Food Security Act for distribution of free food grains of a minimum quantity to people living BPL (below the poverty line) when there has been no improvement in the public distribution system which is still "steeped in corruption", and the scandal surrounding the Commonwealth Games 2010.

So while the Congress could very well be back for a third term based on Rahul Gandhi's popularity and good economic growth, the silver linings for the party seem to be thinning out. Additionally, with a lax approach to governance, the government could very well hurt India's economic growth, which most have taken for granted will be at 8% for the next many years.

(This article is based on secondary research. The report is for information only. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


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