Cairn India will approach all shareholders via postal ballot to consider whether to accept the Government's terms for its bid to sell a majority stake to Vedanta Resources, in a move designed to quell the concerns of minority shareholders.
The move comes as the Government finally communicated the Cabinet's decision to approve the bid.
“The Cairn India Board has noted its obligations under Section 169 of The Companies Act, 1956 and has today, further to the letter from the Government of India, reached a conclusion that it would be appropriate to hold a postal ballot of all the shareholders to consider the conditions imposed by the Government of India,” the company said as it released results for the quarter ending in June.
“It should be noted that if royalty were to be cost recoverable, it would lead to a decline in the revenues and profit after tax for the current quarter by Rs 12,916 million (Rs 1,291 crore, or S$289 million),” the company added.
Cairn India said it had received a requisition from Cairn UK Holdings Ltd to hold an extraordinary general meeting to consider the matter. It came as the company reported that earnings before interest and tax rose to Rs 2,862.1 crore for the first quarter, from Rs 435.9 crore in the year-ago period, as revenues rose to Rs 3,712.7 crore.
“The Mangala reservoir continues to perform as per expectations and production has been maintained at 125,000 barrels of oil per day,” said Managing Director and Chief Executive Officer of Cairn India, Mr Rahul Dhir.
At two previous board meetings, in February and May, the Cairn India board was unanimously against sharing the royalty burden of the Rajasthan oilfields and giving up the right to contest the cess claim. Among the preconditions set by the Government are sharing the royalty payments among all stakeholders and giving up arbitration on the payment of cess.
Cairn India has argued that it is only Oil and Natural Gas Corporation (ONGC), as licensee, that is liable under the production-sharing contract with the Government for the royalty payment and cess for the production of crude oil for the Mangala field in Rajasthan.
ONGC claims that the royalty payable under the contract should be considered as contract costs for cost-recovery purposes. The company contends that as it bears 30 per cent of the development costs and under the production-sharing contract with the Government has to pay 20 per cent as royalty, it would be left with virtually nothing should it not be able to do so.
Little to clarify
The production-sharing contract between the Government and ONGC and the contract for operating the field between Cairn India and ONGC do little to clarify the matter. While the operating contract specifies that the royalty is to be paid by the licensee, a section of the production-sharing contract, which lays down how the accounting for profits is to be carried out, treats royalty as a cost-recoverable element.
In its annual report for the year 2010-2011, Cairn India warns that should the royalty be considered part of the contract cost or the company made liable for a 70 per cent share of cess, “there would be a material adverse effect on the business, financial condition and results of operations”.
Both Cairn Energy and Cairn India could face tough questions from shareholders should the matter of royalty payments be resolved against them. Earlier this month, Cairn Energy sold a 10 per cent stake in Cairn India to Vedanta Resources for $1.3 billion, leaving the Edinburgh-based company with a 52.2 per cent stake. Vedanta Resources has an aggregate 28.5 per cent stake. In June, the two companies revised earlier conditions of the deal, including splitting the sale into two tranches, 10 per cent and 30 per cent stake, and cutting out a non-compete fee, which cuts the price of Cairn India shares to $7.85 from $8.66.