Cairn's $1.25-bn loan to Sesa Sterlite arm: Fund houses may look the other way

Written by fe Bureau | Mumbai | Updated: Aug 7 2014, 15:30pm hrs
Sesa SterliteCairn is giving a loan of $1.25 billion to a group company, a foreign subsidiary of Sesa Sterlite, at Libor plus 300 bps for a two-year period.
Mutual fund houses, with investments of over Rs 300 crore in oil & gas producer Cairn India, may shy away from taking the fight to the company with regard to its $1.25-billion loan to a subsidiary of Sesa Sterlite Ltd which is widely seen as going against good corporate governance practices.

We have not yet studied the matter in detail or debated the issue because the percentage of our holding in the company is small, said the fund manager of a fund house that has investments in the company.

Said the fund manager of another fund house: The company can justify its actions, but why is it lending at all The money could have been given back to shareholders. He added that it was up to LIC to take up the matter.

LIC, the second largest shareholder in Cairn India, has reportedly sought more information on the issue. An LIC official that FE spoke to, however, denied knowledge of the matter and declined to speak about the issue. Among DIIs, LIC owned a 9.09% stake in Cairn India, amounting to over R6,000 crore, for the three months to June. Among MFs, ICICI Prudential MF and UTI Asset Management held 0.16% and 0.15%, respectively.

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MF investment in Cairn India fell to Rs 316 crore in the three months to June from R475 crore in the previous quarter. ICICI Prudential MF and UTI MF's investment together constituted around Rs 209 crore. Birla Sun Life MF is the only other fund house to have a meaningful investment in the company (R29 crore).

Corporates lawyers believe that minority shareholders are on a weak legal footing on the issue. In my view, the shareholders expectation appears more aggressive than the regulator that has offered a transition period up to September 30. Shareholders perception of the companys priorities is not necessarily binding on the board. Interestingly, the board is free to take conscious and compliant judgement calls, but within fiduciary norms. The shareholders, however, do not hold any fiduciary responsibility, said the corporate lawyer of a top-tier law firm, on condition of anonymity.

Lawyers believe institutional shareholders could approach Sebi regarding the issue, but a penal action is unlikely. It would be within Sebis powers to seek more information. However, a penal action against the company can be taken only if the regulator finds breach of a regulation or statutory duty, said the lawyer quoted above.

At the same time, experts believe that minority shareholders are gaining clout and companies will no longer be able to sidestep them easily. Earlier, investors with stakes as low as 1% or 1.5% were apprehensive about being heard by the company. But that mindset is changing, said Amit Tandon, MD, IiAS, a proxy advisory firm. Going forward, with the new Companies Act as well as Sebi's amended Clause 49 coming into play, the minorities will be the new majority when it comes to determining the outcome of company resolutions.

Cairn is giving a loan of $1.25 billion to a group company, a foreign subsidiary of Sesa Sterlite, at Libor plus 300 bps for a two-year period. The company disbursed $800 million before informing the shareholders. The inter-corporate loan to a promoter group company is a related-party transaction that comes under the ambit of the new corporate governance norms in Clause 49 of the listing agreement, effective October 1, 2014. The new norms mandate shareholder approval to be sought through a special resolution.

That the company chooses to disclose the related-party transaction at an earnings call shows disregard for fair disclosure on the company, and merits a full-fledged investigation by Sebi. The company has not made a formal disclosure of this related-party transaction to stock exchanges, said a recent report by proxy advisory firm InGovern.