Cairn India shows signs of accepting riders for Vedanta deal

"If the silence is a sign of its acceptance of the preconditions, Cairn India will have to explain at least to the minority shareholders what changed for it to suddenly accept the riders. Can it compromise on minority shareholder interest to facilitate one shareholder to exit," an analyst questioned

New Delhi: In first signs that Cairn India may do a somersault so that its parent Cairn Energy Plc can sell stake to Vedanta Resources, the company has gone silent on the government preconditions that it had so far been bitterly opposing, reports PTI.

Cairn India, whose board had on 10th February passed resolutions opposing change in contract to make the company liable for payment of royalty and cess on oil produced from its showpiece Rajasthan fields, does not mention a word in its annual report on the same being made a precondition by the government for approving Cairn-Vedanta deal.

The company has so far maintained that Oil and Natural Gas Corporation (ONGC) which got 30% stake in the prolific Rajasthan oil fields for free, is contractually liable to pay royalty and cess on the entire production.

Besides the board resolution, Cairn India had since its parent Cairn Energy announced sale of 40% interest in the company to Vedanta in August last year, written letters opposing it being asked to pay Rs2,500 per tonne cess and making royalty cost recoverable.

But now that the Cabinet Committee on Economic Affairs (CCEA) has actually made cost recovery of royalty and payment of cess as preconditions for approval of the $9-billion deal, Cairn India managing director and CEO Rahul Dhir in the annual report for 2010-11 did not mention a word on it.

"What ought to have been a straightforward transaction subject to shareholder approval has now been drawn into the government's decision-making ambit," he said, adding Cairn India has not been informed of CCEA decision till now.

Analysts tracking the deal said it was strange for a company, which was 'out-of-turn' so vocal, to have suddenly gone silent.

"Acceptance of the preconditions was for the current owner (Cairn Energy) and the new owner (Vedanta) to decide.

Yet Cairn India out-of-turn passed board resolution opposing it saying they were not in the interest of the company and its shareholders," an analyst said.

"If the silence is a sign of its acceptance of the preconditions, Cairn India will have to explain at least to the minority shareholders what changed for it to suddenly accept the riders. Can it compromise on minority shareholder interest to facilitate one shareholder to exit," another analyst asked.

The CCEA decision imposing preconditions was announced by the oil minister S Jaipal Reddy at a press conference.

Mr Dhir in the annual report said, "The long hiatus starting from mid-August 2010, when the deal was announced, has caused delays and uncertainty in managing a business that necessarily has to deal with the government and the Rajasthan joint venture partner, ONGC."

Though Mr Dhir did not elaborate on the 'hiatus' in decision making, he may have made an apparent reference to delay in government approval for raising output from Mangala oilfield in the Rajasthan block to 150,000 barrels per day (bpd) from current 125,000 bpd.

In the section 'Management Decision & Analysis', Cairn India said it in 2010-11 fiscal "faced considerable uncertainty arising out of the proposed transaction between Cairn Energy PLC and the Vedanta Resources Plc."

"Unfortunately, the transaction has been dogged by serious delays, objections by ONGC and major interventions by the ministry of petroleum and natural gas. These have been escalated to the level of the CCEA, which then sought the views of a Group of Ministers (GoM) of the Government of India (GoI)," it said.

Even before Vedanta made its move, ONGC had demanded that royalties it pays on its and Cairn India's share in the Rajasthan fields 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 month overruled objections to ONGC's demand by Cairn/Vedanta and held these will have to be met before the approval is granted.

It on 30th June 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 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.

Accepting the royalty condition alone would mean about $900 million dent in revenues of Cairn India annually.

"At the time of writing this Management Discussion and Analysis, neither Cairn India nor its board of directors know what decisions might have been taken by the GoM, which are expected to subsequently flow to the Company as a note from the MoPNG via the CCEA. Whatever the outcome, the fact is that it has created considerable uncertainties," the report said.

"Since the company has not yet received a letter from the MoPNG containing the CCEA's decisions, it is inappropriate to comment on its unsubstantiated contents," it added.

Cairn said the Rajasthan block has a potential to produce 240,000 bpd of crude, subject to approval of the regulatory authorities and partner, ONGC.

Under Business Risk section, Cairn India said it "is and may become, involved in proceedings in relation to payment of royalty and cess for the production of crude oil from the Mangala field in Rajasthan."

Cairn India has a participating interest of 70% in the Rajasthan block (RJ-ON-90/1) and is also the operator. ONGC holds the remaining 30% stake.

"Under the Production Sharing Contract executed for this block, in the view of Cairn India, royalty and cess are payable by ONGC as the licencee and these are not part of the contract cost for the purpose of cost recovery," it said.

ONGC has been paying royalty to the Rajasthan government for the crude production every month. However, ONGC has contended that the royalty payable under this PSC should be considered as a contract cost for cost recovery purposes.

"However, to date, Cairn India has no formal intimation from Government of India or ONGC of any dispute, demand or allegation of royalty being part of contract cost for cost recovery purpose. Cairn India has secured legal opinions in its favour and believes that it has a strong case," the report said.

Cairn India has initiated arbitration proceedings against the government and ONGC pursuant to a claim notice seeking Cairn India to pay cess on oil produced from the Rajasthan block to the extent of the company's participating interest in the block.

"In the event that royalty is considered to be part of contract cost for cost recovery or Cairn India is held liable to pay its 70% share of cess, there would be a material adverse effect on its business, financial condition and results of operations," the annual report added.


Govt lowers FY11-12 GDP growth projection to 8.6%

While annual indicators of real GDP growth remained positive in 2010-11, there was a 'perceptible slowdown' in terms of quarterly growth rates in the last two quarters. The economy grew by just 8.3% in the third quarter last fiscal and 7.8% in the January-March period, the lowest in five quarters

New Delhi: Amid a likely moderation in industrial output, the government today lowered its gross domestic product (GDP) growth projection for 2011-12 to 8.6% from the earlier estimate of about 9%, reports PTI.

"Growth is estimated to be marginally higher at 8.6% this year over 2010-11 levels of 8.5%," the finance ministry said today.

The ministry added that as the first quarter growth figures for the current fiscal are still to be released, the outlook for 2011-12 has to be inferred from movements of past data, as well as higher frequency proxy economic indicators.

While annual indicators of real GDP growth remained positive in 2010-11, there was a 'perceptible slowdown' in terms of quarterly growth rates in the last two quarters.

The economy grew by just 8.3% in the third quarter last fiscal and 7.8% in the January-March period, the lowest in five quarters.

"This apparent slowdown in headline year-on-year growth rates on a quarterly basis, plus of movement in other higher frequency indicators... and slowing automobile sales, suggested that growth outlook for 2011-12 may be lower," it added.

While the Economic Survey had projected GDP expansion in FY11-12 at 9% (plus, minus 0.25%), the Reserve Bank of India (RBI) later lowered it to 8%.

The Indian economy is estimated to have expanded by 8.5% in the last fiscal.

The ministry said there is a slowdown in corporate investment and their profits have been affected due to cost escalation of input items and raw material.

"Industry will probably slow, given trends in high frequency proxy indicators like Purchase Managers Index (PMI) and Index of Industrial Production (IIP) for the current fiscal (up to June, 2011)...," it said.

However, it hoped the industrial slowdown may reverse once the base effect wears off.

The industrial output growth rate dipped to a nine-month low of 5.6% in May due to a poor showing by the manufacturing and mining sectors and lower offtake of capital goods.

On the agriculture front, the government expects that even though expansion would be 'strong', the high base effect of last year would have an impact on the overall numbers.

As per the ministry, the agricultural growth rate may moderate to 3%-4% this fiscal from 5% in 2010-11.

It further said barring finance, insurance, real estate and business services, the services sector is expected to witness strong quarterly growth.


Maximum growth for branded gold jewellery retailers expected to come from smaller cities, towns

Crisil Ratings says stagnant growth in metros is leading jewellery retailers to push expansion in Tier-II and Tier-III centres. This is expected to put pressure on funding

Branded gold jewellery retailers are increasingly getting into small cities and towns to expand their business, which has stagnated somewhat for many players in the face of intense competition in the larger cities. According to a Crisil Ratings study, this expansion will drive growth for these branded gold jewellery retailers over the medium term.

The ratings agency estimates that about two-thirds of the new outlets that these retailers set up over the next few years, will be in these small cities and towns, from where they are expected to derive over half of their revenues by 2012-13. That's up from about 40% in 2009-10.

This expansion will strengthen the business profile of these players, but it will also required larger funding to support inventory which is the bulk of costs.

"Intensifying competition in the large cities has led to stagnation in growth for players. The branded jewellers are, therefore, now increasingly pursuing opportunities that expansion into Tier-II and Tier-III centres can offer," said Gurpreet Chhatwal, director, Crisil Ratings.

Crisil has made these observations from a study it undertook recently of 63 gold jewellery retailers that is has rated. These retailers accounted for about a fifth of the gold jewellery business in the country in 2010-11.

The demand for gold jewellery in these centres is strong and growing, buoyed by increasing affluence and preference for branded jewellery, the ratings agency said. Buyers are not in search of a humble goldsmith these days. And the rising disposable income in households, increasing number of young customers, and growing consumer preference for branded jewellery are factors that will buttress the retailers' expansion plans.

"The wide variety of designs, aggressive marketing and promotional strategies, including hallmarking, and innovative offers such as gold deposit and buy-back schemes, will also bolster the growth of branded players' in these towns," Mr Chhatwal said.

This expansion into smaller cities and towns is expected to strengthen the business risk profiles of players through increased scale of operations, enhanced geographical diversity and improved cost efficiencies. But this will also require larger working capital to essentially support inventory, which accounted for 86% of the current assets of players in the three years through 2010-11. Crisil points out that excessive reliance on external borrowings would stretch the capital structure.

In the decade through 2010-11, some of the rated players have grown from being one- or two-outlet retailers, to expand significantly in the metros and Tier-I cities. In the process, they have established a distinct identity through brand-building initiatives that have fuelled their growth.

According to R Vasudevan, head of CRISIL Ratings, "The average gearing of Crisil-rated players will remain high at 2 to 2.25 times over the medium term, on account of expected increase in external debt to fund inventory. Nevertheless, the cash-sale model and liquid nature of gold will continue to support the financial risk profiles of gold retailers. Branded jewellers, who efficiently manage their working capital requirements, and successfully ramp up operations in the Tier-II and Tier-III outlets early, will witness rating upgrades in the next 12-18 months."


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