Accepting the royalty condition alone would mean about $900 million dent in revenues of Cairn India annually. Also, Cairn Energy will have to convince the Cairn India board into accepting the conditions or Vedanta when it takes over the company overrule the board
New Delhi: UK's Cairn Energy or its successor Vedanta Resources may have to bulldoze Cairn India board if they were to accept conditions set by the Indian government to clear their $9 billion deal, reports PTI.
The Cairn India's (CIL) board has on two occasions rejected the oil ministry conditions that royalties paid by ONGC on its all important north-western Indian state Rajasthan oilfields, be cost recoverable from oil sales saying this was against contractual provisions and not in the interest of the company and its shareholders.
Also, CIL is against the Rs2,500 per tonne cess being imposed on it saying contractually ONGC, like in case of royalty, is responsible for payment of the levy. Cost recovery of royalty and payment of cess are the preconditions Cabinet set last week for approving Cairn Energy selling sake in CIL to Vedanta.
But now if its parent (Cairn Energy) or Vedanta were to accept these conditions, a serious corporate governance issue will arise for CIL, analysts tracking the deal said.
"Can CIL compromise other shareholders' interest just because one shareholder (Cairn Energy) is selling its stake to the other (Vedanta)," one of them asked.
"I think there is a larger corporate governance issue involved. It is true that it is a corporate transaction involving share transfer between two entities. But can someone sell a majority stake in a company without taking that company into confidence," another person asked.
Accepting the royalty condition alone would mean about $900 million dent in revenues of Cairn India annually, they said, adding either Cairn Energy will have to convince CIL board into accepting the conditions or Vedanta when it takes over the company overrule the board.
Cairn Energy had publicly voiced concern over both the preconditions and Vedanta opposed them in a 28th January letter to the then oil secretary S Sundareshan.
Stating that acceptance of the conditions could be challenged by CIL's minority shareholders under provisions of the Companies Act, Vedanta CEO MS Mehta wrote Vedanta would become just a shareholder of CIL after completion of the deal.
"CIL and its subsidiaries are the signatories to and counterparties to the various Production Sharing Contracts (PSCs) entered into with the government of India. As Vedanta would not be a party to any of these contracts, and would be merely a shareholder of CIL, it would be neither possible nor appropriate for Vedanta to agree to any conditions which directly impacts their terms-particularly as these impacts the rights of minority shareholders," he wrote.
Emphasising that CIL was an independently-run listed entity with an independent board that was duty bound to act in the interests of all shareholders, he said the riders "would involve a significant departure from the terms of the existing contracts entered into by CIL and government."
"We also understand that these (conditions) would have a material adverse impact on CIL's value and thus negatively impact the interests of all shareholders, including the minority shareholders. Acceptance of any of these proposals is likely to be challenged by CIL's minority shareholders under the provisions of the Companies Act. As such, you will kindly appreciate that we are not in a position to accept these," Vedanta Resources CEO MS Mehta wrote in the two-page letter.
Analysts said if Vedanta accepts the government preconditions, then it will have to overrule the board of Cairn India and make it do a U-turn into accepting them.
While an e-mail sent to Vedanta remained unanswered, Cairn India spokesperson was unavailable for comments.
Cairn Energy has always maintained that it is just a shareholder in CIL and the expertise, skills and management vests in Cairn India. So can the UK firm or its successor impose conditions which are detrimental to Cairn India's interest, an analyst asked.
Another analyst said minority shareholders can take the board of directors of Cairn India to court for jeopardising their interest by compromising on their interest.
Of the four independent directors on Cairn India, two of them have conflict of interest (they are also on the board of Vedanta Resources). It is now the job of the independent directors to protect minority shareholders' interest.
The Cabinet Committee on Economic Affairs (CCEA) had last week decided to give approval to the $9-billion deal subject to Cairn/Vedanta allowing royalties from Cairn India's prize Rajasthan oil fields to be added to project costs and recovered from sales. Also, it has to end arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70% share of oil from the fields.
Third, the deal has to be approved by state Oil and Natural Gas Corporation (ONGC), which has a stake in all three of Cairn India's producing assets and five of its seven exploration assets, waiving its pre-emption rights. And finally, the acquisition needs security clearance.
Cairn Energy is selling 40% stake in Cairn India to Vedanta.
Sources said while Cairn India will not have to pay any royalty and state-owned ONGC will continue to pay royalty on its behalf to the state government but the levy will be added to project costs that are first deducted from oil sale revenues before profits are split between partners and the government.
Acceptance of this condition by Edinburgh-based Cairn Energy or its successor London-listed miner Vedanta will lower Cairn India's profit over the approved life of the life lasting 2020 from $7.43 billion to $5.75 billion.
Sources said the lower profits have been calculated at approved peak output of 175,000 barrels a day and considering a crude oil price of $70 per barrel.
Cairn also has to agree to ending arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70% share of oil from the Rajasthan fields. Cairn India currently pays Rs2,626.5 per tonne cess under protest but unlike royalty, treats it as a cost recoverable item.
The government's take from the RJ-ON-90/1 block will come down to $3.6 billion from $5.188 billion as a result of royalty being made cost recoverable, sources said.
Also, the deal has to be approved by ONGC, which has a stake in all three of Cairn India's producing assets and five of its seven exploration assets, waiving its pre-emption rights. And finally, the acquisition will need security clearance.
ONGC pays royalty on its 30% share of oil from Rajasthan fields as well as on operator Cairn India's 70% take. It will contractually continue to pay royalty on all the oil produced from Rajasthan but this will be added to project cost, which is first deducted from revenues earned from sale of oil before profits are split between partners.
Cairn last week cut the price it was demanding from Vedanta and removed a non-compete condition. Vedanta will now pay $6.02 billion for a 40% stake in Cairn India at a reduced price of Rs355 per share, down from the original $6.84 billion.
Last August, London-listed, India-focused miner Vedanta proposed to buy 51% to 60% of oil and gas explorer Cairn India for up to $9.6 billion in cash, but the deal has been delayed due to a lack of government and regulatory approvals.
Even before Vedanta made its move, ONGC had demanded that royalties be added to costs and recouped through sales, citing provisions in its contract. After the deal was announced, it maintained it had pre-emption rights and that the acquisition could not go ahead without its agreement.
The CCEA last week overruled objections to ONGC's demand by Cairn/Vedanta and held these will have to be met before the approval is granted.
Both Cairn and Vedanta disputed royalty being made cost recoverable as it would dent Cairn India profits. They also opposed the need for partner consent for the transaction.
Vedanta has steadily built a position in Cairn Energy this year by acquiring a 10.4% stake from Malaysia's Petroliam Nasional Berhad, or Petronas for $1.47 billion (Rs331 a share). It also bought 8.1% stake through Sesa Goa's open offer to shareholders, which closed on 30th April, for $1.2 billion. The open offer was made at Rs355 per share (original acquisition price of Rs405 minus Rs50 per share non-compete fee).
Indiabulls Blue Fund will invest in blue-chip, large-caps; but very little is known about past performance of the fund managers
Indiabulls Mutual Fund has filed an offer document with the Securities and Exchange Board of India (SEBI) to launch Indiabulls Blue Fund, an open-ended equity scheme. The new fund offer price will be Rs10 per unit. The fund will invest predominantly in blue-chip, large-cap companies. Indiabull has defined large-cap as the top 125 companies by market capitalisation in the BSE 500 index.
Indiabulls is launching a fund with fund managers whose past performance could hardly be tracked. The scheme will be managed by Aviral Gupta and Amarjeet Singh. Mr Gupta managed proprietary investments for HB Stockholding Ltd. He has been associated with FIIs like Venus Capital Management, Boston, and Dundee MF and Escorts MF. There is very little information about Amarjeet Singh. The only piece of information we get from the offer document is that he had worked in the Department of Central Excise and Customs, of the Ministry of Finance, for more than two decades.
The S&P CNX Nifty will be the benchmark index for the scheme. The exit load will be 1% if redeemed / switched out within the first year and 0.5% if redeemed/switched out in the second year. The minimum application amount is Rs5,000.
The scheme will invest 65% to 100% of assets in equity and equity-related securities, of which up to 35% of assets would be allocated in equity and equity-related securities of companies with a high-risk profile. Up to 35% of assets would be invested in debt and money market securities/instruments with low- to medium-risk profile.
According to an interaction Motilal Oswal Securities analysts had with real estate agents, sales volumes in Mumbai are weak and they are plummeting in the NCR. However, they are largely stable in Bengaluru and Chennai, with a limited impact on increasing mortgage rates
The real estate sector is going through a rough phase with a decline in demand, and an increase in inventory and interest rates, which has affected the sales volume. However, according to a brokerage, while sales volumes are declining in the western and northern regions of the country, it has remained steady in the southern market, especially in the metros.
From an interaction Motilal Oswal Securities (MOSL) analysts had with real estate agents, they found that sales volumes in Mumbai are weak and plummeting in the National Capital Region, but they are largely stable in Bengaluru and Chennai, with a limited impact on the increasing mortgage rates.
The brokerage said in a report that although prices have not appreciated in Mumbai, there is no meaningful sign of rationalisation either. "Residential sales volumes in Mumbai continue to be weak and have declined 20%-25% year-on-year (y-o-y). A sharp price appreciation after the 2008 peak has taken a toll on volumes. Prices have stayed flat over the past six months, with no meaningful sign of rationalisation," the brokerage said.
Delays in obtaining approvals, slow execution and low investor demand have impacted absolute volumes in Mumbai. "Ongoing price-volume dynamics in all Mumbai's micro-markets are similar, with four primary characteristics such as a slowdown in transactions and piling up of inventory, cautious investor activity, tightening lending rates and no real sign of broad-based price rationalisation," the report said.
MOSL said real estate agents did not expect broad-based price moderation in Mumbai, although they felt an 8% to 10% correction was possible in specific micro-markets. Specific developers, facing a tight cash flow situation, may be willing to offer certain price discounts, it said.
On the trend in Mumbai's real estate market over the next six months, MOSL said, "While sales are likely to be muted in the immediate six months, volumes should improve with de-freezing of approval delays and traction in launches. Affordable housing projects on the outskirts of Mumbai would gain momentum, with a trend-reversal in mortgage rates. Improving macro factors, salary increases and better liquidity could slowly accelerate demand in the city."
The brokerage said that over the past couple of months, sales volumes in the National Capital Region (NCR) have been hit by lower drive from investors, worsening affordability and expectations of price moderation. Strong demand had resulted in a steady 30%-60% price appreciation across properties in Gurgaon. However, a huge supply pipeline had kept prices relatively flat in Noida, the brokerage said.
"Our interaction suggests a possible price moderation of 5%-10% over the next six-nine months in Gurgaon and prices in Noida are likely to remain flat. In the NCR, demand is likely to be steady for under construction and ready property over the next couple of quarters along with a natural uptick in capital values," MOSL said.
For commercial properties in the NCR, leasing has been showing steady signs of recovery and rental value has remained stable. The demand has been led mainly by IT/ITES and banking, financial services and insurance (BFSI), followed by other sectors, the brokerage said.
Bengaluru residential market, however, has been steady. Over the past 12 months, sales volumes in Bengaluru grew 50% to 70% y-o-y due to traction in new launches and affordable pricing. According to MOSL, market stability in Bengaluru is also attributable to higher demand contribution of about 60% to 70% from end-users and around 15% to 20% from long-term investors, while participation by speculators was minimal at about 5%.
Rising mortgage rates have had minor impact on recent volumes in Bengaluru. However, better affordability would ensure momentum in mid-income projects and city-centric luxury projects are expected to witness continued response. In the backdrop of new launches, sales volumes in the metro are likely to grow by 30% over the next 12 months. "While robust supply could put pressure on pricing, our real estate agents expect 10%-15% appreciation as prices are still below their peaks," MOSL said.
Further south, the Chennai realty market also witnessed a seasonal decline in sales volumes over the past two months. MOSL said, "The agents we interacted with attribute this mainly to the holiday season (people going for vacations) rather than an ongoing macro concern. Tightening interest rates could be the secondary factor. The overall supply scenario in Chennai is under control and below the prevailing demand level."
To achieve greater customer attention and faster monetization, the brokerage said it expected real estate developers to sharpen focus on product positioning, unit cost affordability and execution certainty, and that Bengaluru-based projects are likely to derive benefits of a stable market, with steady volumes.
"Developers with a strong execution track record and superior product positioning would continue to draw end-users. With several operational and legal headwinds impacting the execution of projects, we expect qualitative factors such as a hassle-free land bank, approvals being in place, readily executable projects and developers' goodwill of on-time delivery to play a significant role," MOSL added.
Anuj Puri, chairman and country head, Jones Lang LaSalle India, argues that "Purchasing activity has already dropped visibly during the last tranche of interest rate hikes, and we will see a further drop in buyer interest now. As for developers coming down on their prices to counter the negative effects of this hike, a lot will depend on the financial ability of individual developers to hold on to their current pricing and risk losing sales till the situation improves. Developers with enough capital base are less likely to relent on their pricing, than smaller developers with an urgent need to sell their stock."