Vedanta sees no tax hitch in merger

Industry: Energy 2016-08-22

Edinburgh-based Cairn Energy will have a five per cent holding in Vedanta Ltd after the latter’s absorption of Cairn India.

Cairn Energy, which has an ongoing tax dispute with the Indian government, will also get four per cent preferential shares in the merged entity under a July 22 scheme announced by the Vedanta promoters. The Anil Agarwal-led Vedanta group is hoping to complete the merger of BSE-listed Vedanta Ltd (former Sesa Sterlite) with its subsidiary, Cairn India, by March 2017.

Sudhir Mathur, acting chief executive officer and finance head at Cairn India, told this newspaper the tax dispute would not have any impact on the merger. For, the dematerialised form in which Cairn India shares are held by Cairn Energy would in a routine manner get changed into Vedanta shares.

The Indian government has demanded Rs 29,047 crores in capital gains tax from the Edinburgh company, on a rearrangement of shares it did at the time of the listing of Cairn India. Mathur said Cairn Energy’s voting rights remains, though the economic value of the shares cannot be realised due to a government freeze on the sale of its holding in Cairn India.

At present, Cairn Energy has about 9.8 per cent stake in Cairn India, attached to the income tax (I-T) department. “While they will enjoy voting rights in the company, economic rights will be frozen until the arbitration is over,” said Tom Albanese, chief executive officer, Vedanta Ltd and Vedanta Resources, in the same interview.

Based on Friday’s trading at the BSE exchange, Cairn Energy’s stake in Cairn India is valued at Rs 3,876 crore. A five per cent stake in Vedanta would be Rs 2,654 crore on the Friday market capitalisation of Rs 53,083 crore. This would, however, change because of the merger and also the prevailing stock price when the merger comes into effect.

In the merged entity, the minority shareholders of Cairn India will hold 20.2 per cent stake, while Vedanta Plc’s ownership will be 50.1 percent and the remaining 29.7 percent will be owned by Vedanta minority shareholders. India Ratings, in a July 22 report, said Vedanta Ltd would have to assume contingent liabilities estimated at Rs 20,500 crore, relating to Cairn India’s tax dispute.

Cairn Energy had in July opted for international arbitration, seeking $5.6 billion in compensation from the Indian government for raising a retrospective tax demand of Rs 29,047 crores on a 10-year-old internal reorganisation of its India unit, Cairn India. The company has sought $1.05 bn in compensation for the loss of value it’s 9.8 per cent shareholding in erstwhile subsidiary Cairn India suffered after the I-T department raising the tax demand in January 2014 and attached its shares. Cairn Energy started its operations in India in 1996.

In 2007, it listed the Indian business under Cairn India Ltd, on the National Stock Exchange and the BSE raising $2 bn and retaining a 69 percent holding. In 2011, it sold 40 percent of its holding in Cairn India to Vedanta Resources Plc for approximately $5.5 bn, retaining a 22 percent holding. In 2012, it sold another 11.5 per cent holding for a net cash consideration of $1.3 bn, retaining only about 10 percent.In January 2014, Cairn got the I-T notice, citing 2012 retrospective legislation, and asking for information relating to the group reorganisation in 2006.

In March 2015, Cairn filed a notice of dispute under the UK-India Bilateral Investment Treaty, after receiving a draft assessment order from the I-T department. The assessment order levies tax of Rs 10,247 crore and Rs 18,800 crore of interest from 2007 on.

“Cairn is currently unable to access the value of its 10 percent residual shareholding in Cairn India, valued at $383 million at June 30, 2016, or accrued dividend payments of $50 mn,” the company said in its half-yearly announcement.

The UK-based company also said Cairn UK Holdings Ltd, a direct subsidiary of Cairn Energy, has total assets worth only $475.2 mn (comprising principally the group’s 9.8 per cent shareholding in CIL) and any recovery by the Indian authorities would be limited to such assets.

The seat of arbitration is The Hague in Netherlands and Cairn has filed its statement of claim, which demonstrates that applying the retrospective amendment to Cairn and seizing $1 bn worth of CIL shares was in breach of the UK-India Investment Treaty obligations of fair and equitable treatment, and its protection against expropriation.

On July 22, Vedanta and Cairn India announced a revised deal under which the former would give minority shareholders of Cairn India one equity share and four redeemable preference shares with a face value of Rs 10 each. The preference shares will carry a coupon of 7.5 per cent and tenure of 18 months.