Cairn India may escape Sebi penalty despite failing to meet new buyback regulations

Written by fe Bureau | Updated: Jul 24 2014, 08:16am hrs
Cairn India, which managed to repurchase a meagre 21.47% of the total shares targeted from the R5,725-crore buyback, may seek Securities and Exchange Board of Indias (Sebi) exemption for non-compliance of buyback regulations, said three people familiar with the deal and the regulations associated with it.

The oil & gas exploration company, controlled by Anil Agarwal-led Sesa Sterlite, bought back 3.67 crore shares from investors of the total 17.09 crore it was looking to acquire, showed stock exchange data. Sebis new norms released in June last year require companies to acquire at least 50% of the funds earmarked for buybacks.

While the exact amount of buyback price was not publicly available, the company is believed to have spent about R1,230 crore based on the maximum buyback price of R335 per share. Moreover, Cairn Indias last buyback transaction took place on May 9, two-and-a-half months before the date of closure.

While the failure to achieve a minimum 50% repurchase could attract a penalty under the revised norms, Cairn India could get an exemption, said industry observers. This is because the company missed its target after Cairn Energy decided to withdraw its participation, pending the resolution of a tax dispute with the Indian income-tax department.

Non-compliance of buyback norms may attract a penalty, but the company may get an exemption from it. Technically, Sebi will take a final call, said a person familiar with the matter, on conditions of anonymity.

The tax authorities restricted the Edinburgh-headquartered company from selling its stake in Cairn India until the completion of assessment of the companys finances for the year ended March 2007 in relation to Vedanta Resources acquisition of Cairn Energys stake in the Indian subsidiary.

Lalit Kumar, partner at law firm J. Sagar Associates, also ruled out the possibility of any penalty on Cairn India, citing the paragraphs 15B (8) a,b, and c under the Buy Back of Securities (Amendment) Regulations.

If a company, which proposes to buy back its shares, is willing to buy back but a shareholder is unable to sell the shares on account of an order prohibiting the shareholder from disposing the shares, like if there is an order of income-tax authority during the pendency of any case, then in my opinion, the non-compliance should not affect the company or attract any penalty on the company, Kumar said. Also, Cairn India may not feel the need to seek Sebis exemption if the merchant bankers can certify the non-compliance as exceptions provided in the regulations, Kumar added.

A Sebi official declined to comment. A separate query sent to Cairn Indias spokesperson did not yield any response at the time of going to print.

The market regulator strengthened buyback regulations last year, making it mandatory for companies to buy back 50% of the earmarked funds from 25% earlier. It increased the cooling-off period between two buybacks of a company to one year from six months and, separately, asked companies to create an escrow account towards security for performance equivalent to at least 25% of the amount earmarked for buyback.

If they fail to do so, the amount in the escrow account will be forfeited, subject to a maximum of 2.5% of the total amount earmarked, said a Sebi release on buybacks last June.

Sebi norms grant relief in the event of non-compliance where: a) volume weighted average market price of shares during the buyback period was higher than the buyback price, b) inadequate sell orders despite the buy orders placed by the company as certified by the merchant banker, and c) where circumstances were beyond the control of the company and in the opinion of the Sebi merit consideration.