A case of missed opportunity for Cairn shareholders?

Minority shareholders of Cairn India who did not tender their shares in Vedanta's open offer for Cairn did lose an opportunity, as the share price of the latter is currently in the Rs 278 range, against the open offer price of Rs 355 a share.

The shareholders currently appear to have an option to ask for a better deal now that Cairn India has put out a postal ballot notification asking for shareholder vote on the government conditions for the sale of Cairn India shares to Vedanta by UK-based Cairn Energy.

One condition is that royalty on its Rajasthan oilfields will be cost-recoverable. Until now the royalty was being entirely paid by ONGC, the licensee of the fields, which owns a 30 per cent stake in them. The other condition is that Cairn will drop the arbitration case against the government of India over payment of cess on the crude it produces.

Fall in Profits

Cairn India's Q1 profits of Rs 2,726 crore would fall by Rs 1,292 crore or almost half if it were to agree to the government's royalty condition. All along it had been Cairn's argument that the minority shareholder would lose out if it were to accept this condition.

Cairn India had even constituted a two-member panel to take care of its minority shareholders' interests in the deal. Its board had opposed the government's conditions at its meeting earlier this year, but the majority shareholder (Cairn Energy) now wants a shareholder vote on the government conditions.

Cairn Energy and Vedanta have reworked their deal and now seem ready to accept the government's conditions.

Ballot, a formality

If Cairn Energy with majority control of 52.11 per cent and Vedanta with 28.75 per cent accept government conditions, then the postal ballot would be a mere formality, as only a simple majority is required for shareholders' approval, said analysts.

“Ideally, in such cases, if there is going to be a ballot, then to be fair the promoters must refrain from voting, as is provided for in the case of delisting,” said Mr Jayant Thakur, corporate lawyer.

Have the minority shareholders been put at an unfair disadvantage in all this, watching the company get into a deal that drags down the value of their holding in the company? The board has not even bothered to explain to shareholders the change of stance by Cairn in the matter, said one broking analyst.

Analysts view

If there was no deal, Cairn could have gone in for a court case or arbitration on the royalty matter. The deal is robbing someone's legitimate right to go in for litigation, said a legal expert.

Analysts are a little divided on the issue. It is not a black and white matter, said one analyst with a large Indian brokerage. Firstly, the shareholder got his chance to sell at Rs 355 a share. He has had his moment, and he should be willing to take whatever ups and downs are in store for him now, said the analyst.

“The postal ballot would be a mere formality. Although the situation is prima facie unfair, if the company went in for litigation there is no saying how long that could have dragged on. That itself would have brought down shareholder value,” said the analyst.

“Also if the case is delayed in court, then the company's production might have become stagnant as they would need so many government approvals which they may not have got.”

Delisting, ideal option

On the other hand, at the time of the open offer, the majority shareholder's decision on royalty was not clear and so the minority shareholder did not have the entire picture when deciding whether to tender his shares or not, said another analyst with a foreign brokerage. Ideally the company should look to delist and provide its shareholders a final opportunity to get a fair price, he said.

There is no culture of investor activism: “Investor forums have to be strong, they cannot run without money. Who will fund them, the investor himself certainly wont,” said Mr Deven Choksey, Managing Director of brokerage KR Choksey Shares and Securities.