Oil’s well? Hardly

It is not just minority shareholders who have reason to worry about Cairn India’s proposal to merge with its parent, Vedanta, in a share swap deal. The merger has wider ramifications for the Indian economy and the exchequer too. For the economy, there is the concern about whether Cairn India, under its new owner, will dilute focus on its domestic oil exploration and production business, which has implications for the country’s energy security. Cairn India has been the poster boy for private sector-led exploration efforts in India, and its Rajasthan discovery in 2004 was the country’s largest oil find in two decades. The company has since deployed prodigious amounts of capital and technology to scale up its oil output from the initial 63,000 barrels per day to the current 2.11 lakh barrels, which now accounts for a fourth of the country’s total crude oil output.

Had Cairn India remained a standalone entity, its cash chest of ₹16,867 crore (end-March) and future surpluses would have been deployed to further increase output, reducing India’s external energy dependence. But this is no longer a given, due to Vedanta India’s scattered interests spanning copper, zinc and aluminium, which carry an accumulated debt of ₹77,752 crore. Vedanta has promised that Cairn’s coffers, soon wholly under its control, will be allocated to the highest return-earning businesses. But can we be sure about this? After the takeover by Vedanta, Cairn India has already extended a $1.2 billion low-interest loan to its parent, displayed a patchy production record, and slashed its $1.2 billion capex plan for FY16 by 60 per cent. A scaling down of Cairn’s output would mean lower takings for the exchequer too — the firm paid over ₹19,000 crore by way of profit petroleum, cess and royalties in FY15.

Despite the claims of synergies and diversification, the merger is not a good deal for Cairn India’s minority shareholders. It is badly timed, announced as it was just after the global oil rout and massive asset write-offs that have diminished Cairn’s value. Nor are Cairn shareholders getting a “de-risked” business, as is being claimed, given that Vedanta’s balance sheet is far weaker (and thus riskier) than Cairn’s. This makes this merger a good test case for the newly enacted corporate governance laws, which give a firm’s minority shareholders the right to veto deals which they deem inimical to their interests. Retail investors and domestic institutions (mainly LIC) own 16 per cent of the 40.1 per cent non-promoter shares in Cairn India. In the past, retail investors have usually abstained from ballots and LIC has rarely gone beyond seeking “clarifications” from the management. But maybe the Cairn-Vedanta merger will prove to be the landmark case where this newly empowered set of shareholders choose to flex their muscles.

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