Unauthenticated media articles suggest that Vedanta is planning to merge Cairn India with itself. A related-party merger will require approval from a majority of minority shareholders and a transfer of petroleum mining rights may also require the approval of the government (and ONGC?). We retain our negative view on Cairn India stock.
Reports indicate that the process is expected to be completed by March 2016. Such a merger, indeed contingent on a share-swap ratio and necessary approvals, will likely be (1) positive for Vedanta’s shareholders, as it may help reduce leverage on the balance sheet and (2) negative for Cairn’s minority shareholders, as it will take away their rights on usage of cash on Cairn’s balance sheet, while adding exposure to the business of other commodities.
A related-party merger between Cairn and Vedanta will require the approval of a majority (greater than 50%) of minority shareholders (for both the listed entities) voting for or against this transaction, as per Sebi’s circular CIR/CFD/DIL/8/2013. A merger will also require an approval from more than 75% of all shareholders, including the promoter group, for statutory clearance by the tribunal, as per Section 230 of the Companies Act, 2013.
A Cairn-Vedanta merger may possibly involve the transfer of petroleum mining rights as well as PSCs for the Rajasthan and other domestic E&P blocks, which will require consent from the government as well as the JV partner, ONGC. We highlight that Vedanta Plc’s acquisition of Cairn India from Cairn Energy in 2011 was given conditional approval by the government, in which Cairn India was mandated to (1) treat royalty as a cost-recoverable item, (2) withdraw all arbitration proceedings and (3) obtain a no-objection certificate from ONGC. Hence, we would not rule out the possibility of another conditional government approval, as and when required, which may possibly entail a resolution on ongoing litigation with income tax department for $3.3 billion of demands pertaining to withholding tax on capital gains accounted during restructuring of Cairn in 2006-07. We also note that a transfer of mining lease may have implications for payment of stamp duty and other associated taxes for Vedanta/Cairn.
We note that a potential merger of Cairn with Vedanta will necessitate a significant discount to $2.7 bn of cash and equivalents and $1.25 bn of related-party loan to the Vedanta group, reported in Cairn’s balance sheet as on March 31, 2015, which is equivalent to R131 per share.