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.
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".