The Vedanta-Cairn India merger is likely to come under court scrutiny after a civil suit was filed against the latter for extending a $1.25 billion (Rs 8,200 crore) loan, which allegedly violated Section 67(2) of the Companies Act, 2013.
The $1.25 billion inter-company loan is repayable to Cairn India in July 2016. But if the proposed merger of Cairn India and Vedanta India goes through, it would mean that the $1.25 billion loan would be written off. The petitioner has sought payment of the loan before the merger, says the application by minority shareholder Rajotavo Dasgupta.
The case, which was heard by the high court in Mumbai on Wednesday, alleges that Cairn India and its directors, through a series of transactions, funded a part of the debt that Vedanta India took while acquiring a 38.8 per cent stake in Cairn India.
When contacted a Cairn India spokesperson said, “We strongly refute the allegation and like to state that Vedanta Ltd and its subsidiaries including Cairn India follow the laws of the land in all their activities and operations. The proposed merger of Cairn India with Vedanta and the loan transaction mentioned are in line with provisions ofCompanies Act and listing regulations.”
The court has agreed to hear the matter and asked Cairn India and Vedanta India to file their replies by January 5. The petitioner has been asked to file a rejoinder by January 15. Janak Dwarkadas is representing Dasgupta, whereas Aspi Chinoy and Ravi Kadam are representing Cairn and Vedanta, respectively. The case was filed on December 1.
According to the court filing, a copy of which is with Business Standard , the allegation is that Cairn India gave a loan of $1.25 billion which violates section 67 (2) of the Companies Act, where a public company cannot provide financial assistance to buy shares in the company (itself) or its holding company.
In 2011, Vedanta UK acquired a controlling stake in Cairn India from Cairn UK Holdings and from the open market through its various subsidiaries. The various subsidiaries included Vedanta India, Sesa Resources and Twin Star Mauritius Holdings — a special purpose vehicle wholly-owned by Vedanta Resources.
In a presentation made to investors, Vedanta UK admitted that out of the funds for acquisition – $2.8 billion was paid from Vedanta India’s own resources while $5.79 billion was raised by Vedanta UK through bank loans and issuance of bonds.
In August 2013, when the Vedanta group was restructured, Bloom Fountain Ltd (a wholly-owned subsidiary of Vedanta India) acquired Twin Star Energy Holding – the holding company of Twin Star Mauritius Holding and also assumed the debt – $5.9 billion used for acquisition.
After the acquisition of Twin Star Energy Holding, the debt of $5.9 billion started to reflect in the financial statement of Vedanta India as inter-company loan.
On September 9, 2015, London-listed Vedanta Resources, the parent firm of Vedanta Ltd, in a presentation made to investors stated that the $1.25 billion was used to pay $800 million of principal and $450 million for interest on another inter-company loan. The $1.25 billion two-year inter-company loan was extended by Cairn India to “Sesa Sterlite, a wholly-owned overseas subsidiary of Vedanta Ltd in Q1 FY2015 with an annual interest rate of LIBOR+300 basis points”.
According to the court application, since the only debt that is referred as an inter-company loan to Vedanta Resources in the financial statements of Vedanta India is the one that is part of the debt for acquisition, and the grant of this loan is a violation of the Companies Act.
As of March 2015, Vedanta Resources had a debt of $7.7 billion, while Vedanta Ltd had another $4.57 billion debt. Cairn India, on the other hand, had $2.85 billion of cash.