Decision on nod only after formal application: Govt to Cairn

New Delhi: The oil ministry was today firm that it will consider approval for the $8.48 billion Cairn-Vedanta deal only after UK-based Cairn Energy makes a formal application for transfer of control in all its 10 properties in the country, reports PTI.
Cairn's current application seeking government nod for the deal has left out the three producing properties, including the giant Rajasthan oilfields.

The government's insistence that a formal application must be made for each of the 10 properties, conveyed through a letter to Cairn this month, may delay the approvals till January-February next year.

The ministry had earlier indicated that approvals could come by this year end.

"We wrote to (Cairn Energy and Cairn India) a few days back reminding them of contractual requirement of seeking government consent in all the properties," oil secretary S Sundareshan said today. "We cannot consider their case unless they comply with this contractual requirement."

The Edinburgh-based firm, in its 16th August announcement of sale of its 40% to 51% stake in Cairn India to London-listed Vedanta Resources for as much as $8.48 billion, did not say the deal was conditional on government approvals.

However, on being shown the relevant provisions of the contracts for exploration it has with the government, Cairn Energy about a month later made an application for permission that left out all of its three producing properties including its mainstay 6.5 billion barrels Rajasthan block.

"This position is not acceptable to us. They need to apply for all the blocks," Mr Sundareshan said.

Cairn has so far maintained that it is not contractually bound to seek approval for sale of shareholding in the Indian unit in the Rajasthan block, the Cambay basin gas field and the eastern offshore Ravva oil and gas fields. But the latest missive from the ministry is certain to force Cairn to revise its stand and formal applications are expected sometime next week.

Though the company looks set to concede ground on requirement of prior government consent, Cairn is unlikely to yield pre-emption rights to state-owned Oil and Natural Gas Corporation (ONGC), which partners its Indian unit in most of its properties including the Rajasthan block.

The pre-emption is a natural extension of the requirement of government consent and the same has been upheld by law ministry and the Solicitor General of India, the nation's second highest law officer, in their separate opinions on the Cairn-Vedanta deal.

Mr Sundareshan indicated that the delay on part of Cairn in seeking formal approval will lead to slippage in the oil ministry's previously stated year end deadline for making up its mind on giving approval for the deal. A decision on the deal may now come as late as in February 2011.

The law ministry in an opinion sent late last month had held that the share sale is nothing but transfer of control (in all of the 10 properties of Cairn India), necessitating government nod in all of them.

Previously, the Solicitor General had held the same view when he was approached for advice by ONGC.

Cairn India is primarily an aggregation of interests that it holds directly or indirectly through its subsidiaries in 11 blocks (in India and Sri Lanka). A transfer of controlling stake in Cairn India amounts to a transfer of the respective participating interests, therefore necessitating government approval, according to legal opinion.

And transfer/sale/assignment of interest to third party will trigger pre-emption rights of state-owned ONGC, which partners Cairn India in most of its properties.

Cairn says the Vedanta deal is only a corporate transaction involving share transfer that does not trigger issues like examination of new owners' technical capability and ONGC's pre-emption rights.

Both, the oil ministry and ONGC, which hold stake in most of Cairn India's properties have contested this view and have got legal opinion backing their claim. They feel the deal is effective transfer of control and so ONGC's pre-emption rights are triggered.

Vedanta was to get shareholder nod for the deal by 30th October but has not yet posted a notice for a shareholders meet. Its mandatory open offer for additional 20% stake in Cairn India, too, missed the October deadline as market regulator Securities and Exchange Board of India (SEBI) is yet to give its approval for the same.


SKS price crash underlines the perils of chasing glamour stocks

It was one of its kind, backed by savvy private equity investors and the seal of approval from Narayana Murthy, no less. But SKS has landed investors in a soup. Glamour stocks like SKS usually disappoint. Here’s why

SKS Microfinance was supposed to be one of its kind—the only listed stock which is into microfinance. It took the catchy management idea of selling to the "bottom of the pyramid" and made a business out of it. It was backed by savvy private equity investors and made an initial public offering (IPO), becoming only the second microfinance company in the world to get publicly listed. Investors felt good buying the stock because it was "doing good". That possibly explains why NR Narayana Murthy invested in the company.

SKS had all the ingredients of a glamour stock. It made a compelling "story", as brokers and fund managers love to say. SKS made an IPO at Rs985, got listed at Rs1,036, went up to Rs1,490 and is now at Rs670. From the peak made on 28th September, the stock is down by 55% in just one and half months. What happened to the glamour stock?

This is really not new. It's the same thing that happened to stocks like NDTV in India, or fashion stocks like Polo Ralph Lauren, Donna Karan International and theme restaurants like Planet Hollywood International in the US. They inflicted massive losses for investors. Glamour stocks dominated the dotcom boom and we know what happened to them.

The reason why glamour stocks do badly after listing is that the "story" seems so compelling that few people have the inclination to scrutinise the business model. SKS Microfinance's business model was always ethically wrong and economically weak. It has now been dealt a body blow to its fragile business model by the legislative changes in Andhra Pradesh. This legislative and political backlash should not have been a surprise, because the model of microfinance institutions (MFIs) is to borrow from banks, lend multiple loans to the same borrowers and apply strong-arm tactics to recover the loans. This wasn't apparent to those who were mesmerised by the SKS "model" of fast growth and high profits. Even if the model were not so bad, the stock would have disappointed. Why is this so? It's about the price. It's about how we deal with what is glamorous and expensive.

Here is a study done on our perception about expensive wines that James Montier refers to in his Value Investing. The subjects were given five wines to taste, and were asked to rate each of the wines. In the first version of the experiment subjects were told the price of each wine. When told the wine was cheap, people really marked the wine down, and when told a wine cost $90 they massively increased the ratings!

"Is it possible that something similar happens when people think about investing? It certainly seems plausible," says Montier. An academic paper examined the characteristics and performance of stocks rated as the most admired, or despised, in terms of their long-term investment value, in Fortune magazine's annual survey of companies between 1982 and 2006. "The despised stocks do significantly better than the admired stocks. This result holds even when returns are adjusted for markets, size, style and momentum!" writes Montier.

SKS's fall from grace was caused by two common drawbacks of investors-whether they are professional investors or retail investors. One, the blind spot caused by a company's glamour quotient which prevents them from probing and, two, a willingness to pay too much for the "story". 




6 years ago

Mr Narayanamurthy seems to have been biiten by greed bug.Why else such an intelligent and smart person invest in a co paying Rs300 per share.SKS is lending to the poor and the ticket size is small.How can such a co generate huge profit unless you adopt unethical practice.It is a very simple logic.NRN must be knowing that.He wanted a return on his investment.That is all.It is better he retires gracefully withour tarnishing his image.He is like our PM honest by himself but allow to do the dirty things by someone.Take the case of Ratan Tata.At the old age also he is greedy enough to engage Radia to bribe tho he says he refused bribe for his airlines.


6 years ago

An excellent write up on the quintessence of the episode.


6 years ago

I do not agree either with the logic or the conclusion arrived at in this posting.

Please note that market behaviours have always been irrational. Numerous text would testify this fact. As the market is irrational, glamour or otherwise we had buyer at 1490 and seller at 639. Where is the wisdom?

After all Narayanmurty is not God so why blame him. It is altogether different matter that he is still sitting on considerable profit on his investment. He did utter in media that his investment has lock in period as such he cannot sell.

For that matter who knew Infosys and Wirpo in as late as 1995 or even 1997. All the hell broke loose for SKS when greedy Gurumani was kicked out. Why on the earth he is asking for 15 cr. From where that money would come. Only from the bottom of pyramid.

Govt. and everybody else all of a sudden became saviour of poor people.

For profit or not-for-profit, poor people need MFI because even our nationalise bank are not there to help them and Govt. provides only lollipop and not money for putting small or micro enterprise.

MFI has been discussed with prestige and respect in higher echelon of financial world for quite sometime now. It has become a bad word all of a sudden just because Gurumani is not satisfied with his severance package.

As far as stock market is concerned MFI is a new business, which would take time even for analyst to arrive at fair valuation. One need to consider growth potential, profitability and risk with every investment decision and same should be the case with SKS.


6 years ago

An interesting eye opnener article on MFI

Neeraj Golchha

6 years ago

Great Respect for Debashis Sir for guiding us about SKS through this article...
I have come to know a lot about the un- ethical practices and background of Gurumani..
But Sir please advise me how is micro-finance bad...
If people who are not enough educated to use the banking system are getting Rs.500 for one week and have to pay back 510 rupees at the send of the week I dont think it is bad. At least he is getting his much needed money. This is the best way to help the poor and to motivate them to take up small jobs to meet their daily needs.
Suppose SKS had worked as a social organisation (non profit organisation)... Do you think Sequoai Capital, or Mr. George Soros or even Mr. Narayan Murthy would have funded them for their micro finance project... NO??
SKS has become so big only after it became a for profit organisation...
There is a lot of media hype that has followed after a successful listing of this microfinance company…
Also I am proud of the INDIAN GOVERNMENT… which takes due care to see that an emerging industry which is making huge money should die very soon… Just go through the AP ordinance.. they have made it sure that the loan seekers need not pay money… What is the need to make the loan recovery process monthly… I don’t see any rational…
Also there has been a lot of sympathy for the people who default???? Why
There is a need to have a better insight of the company.. I am not recommending SKS… but I am in favor of this industry which is helping the poor.. And also we should not forget that the model which SKS has developed to lend the money is also great..

Tony Joseph

6 years ago

It is a question of how the leader builds a company and decides to wash his hands off.
Suresh Gurumani is a man in a hurry. If you check his trail you would know. From StandardChartered to India Bulls to Barclays to SKS all in a span of three years with no notable achievement other than flogging the sales staff to get business. wreckless lending by throwing caution to the winds.
You could show very aggressive sales figures in lending by lending to customers who can never pay back.
Improvised sub prime mess in India!!!

Thats Gurumani's game I guess.


Debashis Basu

In Reply to Tony Joseph 6 years ago

Strange that one should identify SKS with Gurumani and not Akula.


In Reply to Debashis Basu 6 years ago

Suresh Gurumani was the main operative in the lending process. He should and can be held accountable for the major mess that SKS has got into. Naraytan Murthy and others were merely hoodwinked into this.

Most of the bad reputation that has accrued on SKS has been on account of recoveries by collection agents when loans become uncollectible which was the direct responsibility of Suresh Gurumani

Debashis Basu

In Reply to tony 6 years ago

Poor thing, Akula!


6 years ago

Well summed up ! The IPO pricing of the stock was horribly wrong.

Girish Shahapurkar

6 years ago

Do you believe that Coal India is also a similar story? It had all the glamour?


Debashis Basu

In Reply to Girish Shahapurkar 6 years ago

Coal India's business model is not rickety like SKS. But yes, it will disappoint and frustrate investors who enter now. Coal is a commodity and even the best of commodity companies are not long term value creators, especially those owned by the government. It is so easy to get caught up in all the current hype but just a decade ago fund managers were staying a mile away from PSUs for obvious reasons. Those reasons are still there. They will rear their heads nastily at the right time to make a fool of the largest number of people.

Girish Shahapurkar

In Reply to Debashis Basu 6 years ago

Thanks a lot, Sir! This is indeed food for thought!

Debashis Basu

In Reply to Girish Shahapurkar 6 years ago

Just notice the view about public sector banks after the Money Matters scam. Suddenly, PSU banks are bad

R Balakrishnan

6 years ago

The VC investors (pre IPO and post IPO) played the greater fool theory. Smart ones would have cut their losses. Now one number big bail out will happen, with government changing some of its policies. Some banks are going to lose money. Rating agencies will downgrade after the event (they have already collected their fees). AP as a state is a fast breeder of con games . Leasing was one, IT was another and now it is micro finance.


6 years ago

Excellent Analysis .. and great lesson to all who investors..

Why is gold still in demand?

Investors in India, China, Russia and Turkey are hoarding the yellow metal despite the exorbitant prices.

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