Cairn-Vedanta deal gets SEBI nod

After seeking numerous clarifications on the deal from the acquirer over the past seven months, SEBI has issued its final observations on the mandatory open offer to be made to the public shareholders as part of the deal

New Delhi: Market regulator Securities and Exchange Board of India (SEBI) has cleared the acquisition of Cairn India by NRI billionaire Anil Agarwal-led Vedanta Resources, removing a major hurdle for the $9.6 billion dollar deal announced about seven months ago, reports PTI.

The deal was announced in August 2010 and has since then been awaiting approvals from SEBI and the government.

The government is yet to approve the deal, wherein British energy giant Cairn Energy agreed to sell its majority stake in Cairn India to Vedanta group.

After seeking numerous clarifications on the deal from the acquirer over the past seven months, SEBI has issued its final observations on the mandatory open offer to be made to the public shareholders as part of the deal.

Any deal involving acquisition of 15% or more stake in a listed company requires the acquirer to make an open offer for 20% stake purchase from public shareholders and this offer needs to be approved by SEBI.

Soon after announcing the deal to acquire up to 51% stake in Cairn India, the Vedanta group had sought SEBI's approval for the mandatory open offer to be made to the public shareholders of the target company.

In the public offer announced on 17th August, the Vedanta group had offered to acquire up to 20% stake from public shareholders for a price of Rs355 per share.

The Rs13,631 crore open offer was first scheduled to open on 11th October and close on 30th October, but the delay in SEBI's approval for the same led to the open offer being deferred.

The company will now have to announce a fresh schedule for the open offer, where it may have to incorporate various clarifications sought by SEBI during the course of its due diligence on the proposed transaction.

The deal is currently awaiting an approval from the Cabinet Committee on Economic Affairs (CCEA). The oil ministry last month circulated a draft note for the CCEA approval, but comments on the same have not been received from all the ministries.

The oil ministry will move Cabinet Committee on Economic Affairs (CCEA) once comments from ministries of finance, law, home, environment and corporate affairs are received.

In all probability, the CCEA is likely to give an in-principle nod to the deal where London-based mining group Vedanta, which has no prior experience in oil sector, is buying up to 51% stake of UK's Cairn Energy Plc.

The oil ministry has watered down its pre-conditions and has almost withdrawn its condition that Rs21,802 crore in royalty and cess paid by Oil and Natural Gas Corporation (ONGC) on behalf of Cairn India from the Rajasthan oilfields should be equitably shared.

One of the conditions for government approval to the deal involves Cairn India being asked to obtain no objection certificate (NOC) from its partner ONGC. The latter holds a stake in eight out of 10 properties held by Cairn India.

The ministry is of the view that the change of control of Cairn India amounts to an indirect assignment or transfer of participating interest in the blocks. Therefore the need for government as well as partner's nod.

ONGC owns a 30% stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields.

Over the life of the field, the royalty burden works out to Rs18,000 crore, of which ONGC has to also bear Cairn's share of about Rs12,600 crore.

Cairn has also disputed any liability of payment of Rs2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals Rs9,202 crore for ONGC over the life of the field.

Sources said ONGC wants royalty and cess to be cost-recoverable, like capital and operating expenses.

Under the Production Sharing Contract (PSC), capital and operating expenses are first deducted from the sale of oil and profits are shared among the stakeholders, including the government, thereafter.

Cairn and Vedanta are opposed to the move as it would lower Cairn India's profitability.

Sources said all the oil ministry now wants is for Vedanta to make appropriate disclosures to market regulator SEBI when it makes an open offer for acquiring an additional 20% stake in Cairn India, as per takeover rules.

Comments on the note are likely to be received by next week and the matter may go to the Cabinet in the following week for consideration.

Though Cairn Energy and Vedanta have a timeline of 15th April to close the transaction, the deal will go through even if Cabinet was to give its nod by the month-end.

Once the government's nod is obtained, the two firms can approach their shareholders seeking an extension of the 15th April deadline, saying the conclusion now remains a mere formality. Sources said that in all likelihood, the deal can be closed by May-end.

The note states that Vedanta Resources had only "very recently" informed the ministry through a letter dated 28th January that the transaction needs to be closed by 15th April.

Cairn India shares today closed 1.5% higher at Rs346.20 on the Bombay Stock Exchange.

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