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

Aug 07 2014, 10:00 IST
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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. 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.
SummaryCairn's $1.25-billion loan to Sesa is widely seen as going against good corporate governance practices.

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 company’s 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 Sebi’s powers to seek more information. However, a penal action against the company can be taken only if the regulator finds breach

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