LIC takes to shareholder activism, voices concern over Cairn loan to parent Vedanta
Cairn India's $1.25 billion loan to parent Vedanta Resources has not gone down well with investors as it raises doubts on utilisation of cash reserves and several investors feel the move is not in the interest of minority investors.<br />
Cairn India's $1.25 billion loan to parent Vedanta Resources has not gone down well with investors as it raises doubts on utilisation of cash reserves and several investors feel the move is not in the interest of minority investors, with even the normally silent Life Insurance Corporation reportedly demanding an explanation for it.
On 24 July, 2014, Cairn in an an analyst call disclosed that it has agreed to extend a loan of $ 1.25 billion (nearly Rs 7,500 crore) to its parent Vedanta for a two-year period as a part of the former's treasury operations. The company has already disbursed $800 million during the April - June quarter while the balance ($450 million) would be disbursed in the coming quarters.
Life Insurance Corporation, the second largest shareholder with a 9.09 percent stake in Cairn India, is not happy with the company's move to give the loan to Vedanta at a time when Cairn requires money for its own expansion.
According to a report in theBusiness Standard, LIC is planning to seek clarification from the management as Cairn has already disbursed $800 million of the loan to Sesa Sterlite and will disburse the rest in the next few weeks.
The move is significant because LIC does not have a track record of shareholder activism and given the fact that it does not have any representation on the board, it is difficult for the insurance company to actually object to the loan.
Apart from LIC, proxy firm Investor Advisory Services India has also objected to the loan.
"The transaction has taken place without shareholders knowing it, is a concern," Hetal Dalal, COO of proxy firm Investor Advisory Services India Ltd (IiAS) told CNBC-TV18.
Dalal has advised shareholders to raise the issue of disclosure quality with the management and should find out what is the usage of these funds. "Why do you need to lend to Vedanta, does Vedanta need money to refinance its own debt? What would Vedanta do with that and isn't that disclosure that shareholders should actually have because this is a sizeable amount of money," she asked.
According to the loan agreement, Cairn India will get interest of 300 basis points above the benchmark London Interbank Offered Rate. While the company management justifies it as just a treasury operation given a relatively higher yield (Libor + 300bps), such related?party transactions typically raise market concerns about conflict of interest on the most shareholder?friendly way of deploying surplus cash.
One brokerage has said the move will affect dividend payout.
" While the rate of interest earned is higher than currently earned rate of 2-2.5% on these funds and boost the overall yield on treasury, we expect a possible de-rating due to increase in inter-group transaction and lower dividend payout of 20%," said brokerage Phillip Capital in a note.
The new Companies Act, which came into effect from 1 April, mandates companies need to take shareholder nod for related-party transactions. However, Cairn only made the disclosure during an earnings call, which shows a disregard for fair disclosure and goes against market regulator Sebi's norms.
"While management justified it as just a treasury operation given a relatively higher yield (LIBOR + 300bps), we believe returning surplus cash to investors through a dividend payout or buy-back would have been a better utilization," brokerage Jefferies said in a note.
According to brokerage CLSA, the related party loan will create doubts in minds of investors on reinvestment of cash and raise fears on leakage of cash out of the core oil & gas business'.
Vedanta Resources has attempted to play down the issue, saying the move is a win-win for both the firms and was done following existing rules and regulations.
"This was a very cordial transaction consistent with all of the rules and regulations including effectively giving the Cairn shareholders the higher returns for their investment and it was done in a way which was in compliance with all forms of governance and ethics," Vedanta Resources CEO Tom Albanese told PTI.
Vedanta Group holds 59.90 per cent stake in Cairn India.
Albanese said Cairn India's recent success in exploration, particularly with gas, and the amount of cash required for its future operations were well serviced by its existing balance sheet.
"So, there will be a component to its balance sheet, which basically was not getting good returns on its investments," he said, adding that Cairn India would not have got better returns anywhere else on similar terms with the funds.
Likewise for Sesa Sterlite, it was a good deal since it would not get an "equivalent" amount of debt at "such a competitive rate" externally, he added.
In its earnings statement, Sesa Sterlite said its wholly owned subsidiary, which got $ 800 million loan disbursement till June 30, has repaid all of the accrued interest and a part of the principal of the inter-company debt extended from Vedanta Resources to Sesa Sterlite.
However, as Menaka Doshi, Executive Editor, CNBC TV18 pointed out, "Company law prescribes limits for such inter corporate funding, to safeguard companies from over-lending. But it does, or rather has done, little to tackle the governance issues arising from such transactions."
Meanwhile, shares of Cairn India have tanked 9.47 percent ever since the company revealed its plan to lend Rs 7,500-crore to Vedanta.
LIC shares listed at a discount even as the benchmark BSE Sensex opened with gains later soared over 2 per cent
LIC had last month reduced its IPO size to 3.5 per cent from 5 per cent decided earlier due to the prevailing choppy market conditions
The IPO was open from 4 May to 9 May for the subscription. While the allotments are expected to be done today, shares will likely be credited to Demat accounts on 16 May