The company disclosed on Wednesday that it had entered into a facility for extending a loan of $1.25 billion to Vedanta Group companies of which $800 million has been disbursed during the June quarter to a subsidiary of Sesa Sterlite, at an interest rate of 3% above LIBOR for a period of two years.
We see the related-party loan facility of $1.25 billion extended by Cairn India to a subsidiary of Sesa Sterlite as a significant negative, as it warrants concern on effective utilisation of existing cash/equivalents and future cashflows of the company, notwithstanding the near-term economic rationale indicated by the management, Kotak Institutional Equities said in its results review report.
Amit Tandon, founder and managing director of proxy advisory firm IiAS, says that though the transaction meets the latest Companies Act guidelines, the deal raises concern related to corporate governance.
The related party transaction with respect to giving loans doesnt need shareholders approval, but given the magnitude of the loan and Vedanta being a global firm, the company should have made a disclosure at the time of entering into loan agreement, said Tandon.
The spokesperson at Cairn India said, This loan has been extended purely as an investment yielding better returns compared to fixed deposits where such sums were earlier invested at a return of around 2-2.5% p.a. The investment has been done at a return of 3% over and above the ongoing LIBOR rates. This return is much higher than the bank deposits for similar tenure and commensurate to a margin linked to a BB rated investment option.
Analysts at Jefferies in a report on Thursday however believe returning surplus cash to investors through a dividend payout or buy-back would have been a better utilization.
As per Cairn Indias latest presentation, its cash and cash equivalents stood at Rs 13,561 crore in rupee funds and nearly $922 million in dollar funds.
JN Gupta, MD at SES Governance, however, believes that Cairn India by entering into loan agreement with subsidiary of Sesa Sterlite has compromised on its own liquidity.
The loan entered with its group company is being invested in business and is neither liquid nor rated one. The independent directors should have objected to the move, said Gupta. The company, on its part, maintains that prior approval of the audit committee was taken and the arms length principle has also been duly adhered to. Cairn India shares closed down 6.67% at R322.65 on BSE.