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Monday, 28 July 2014 08:57
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Shobhana's edit

Related-party concerns over Cairn’s Sesa Sterlite loans

The restructuring of the Vedanta Group’s business, announced in February 2012, was not only expected to result in a cleaner structure that eliminated cross-holdings, it was also intended to make the cash within the group more fungible. Indeed, it was inevitable, analysts had pointed out at the time, that money would move freely across entities given there were some like Cairn India that were spewing cash and others like the loss-making Vedanta Aluminium Ltd that were starved for it. While transfer of cash is usually frowned upon, the easier ‘horizontal’ movement of money without any dividend tax leaking, it was felt, was a more transparent way for the management to use the group’s resources. However, now that Cairn has loaned a large amount of $1.25 billion to a subsidiary of Sesa Sterlite—a related party transaction going by the Companies Act—at Libor plus 3%, the news has not gone down well; that a sum of $800 million has already been disbursed came as a shock to many. To be sure, no laws have been violated—the transaction has been cleared by the audit committee—but shareholders feel they could have been kept in the loop. Since the transaction needn’t be voted on by small shareholders, it can’t be undone, but if there’s a signal to the management, it is in the fact that the stock lost close to 11% in two sessions. The management’s contention that it will earn a better yield on the loan, backed by a corporate guarantee, than that from other investment avenues such as deposits—the loan is a two-year facility—has been treated with some degree of scepticism. Shareholders are concerned about the loan being given at time when Sesa Sterlite’s debt is a fairly large R80,400 crore. Some believe the management could have returned a part of the surplus cash to shareholders in the form of dividends but that has been ruled out since Cairn might need the funds a couple of years down the line for capital expenditure.

 

More than five years ago, after protests by a foreign fund, the Vedanta Group’s management had rolled back its restructuring plan; it had planned to demerge the energy and aluminium businesses from Sterlite and transfer Vedanta’s stake in Konkola Mines to Sterlite. The move would have left shareholders of Sterlite without a direct exposure to the energy and aluminium businesses. Interestingly, earlier this month, Sebi discussed the need for separate corporate governance standards for ‘big and complex business groups’ to ensure that the governance was focused. The regulator’s International Advisory Board felt there was a need to address the gap in what is reported by auditors and what investors, across jurisdictions, expect. The discussions couldn’t have been more timely.

 

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