JM Financial Consultants Private Limited
141, Makers Chambers-III Mumbai
Dated:20th September 2010
By Email : Adithya.Anand@jmfinancial.in
Sub: Open Offer for acquisition of upto 20% of the emerging voting rcaiptal of Cairn India Limited by Vedanta Resources PLC and Twin Star Energy Holdings Ltd collectively(Acquirers) along with Sesa Goa Limited and VC Dempo & Co Ltd.
Ref: SEBI Letter dated September9,2010(Reference No.CFD/DCR/TO/SS/OW-19330/10
Thank you for your email and attachment of 15th September 2010 wherein you on behalf of Vedanta PLC outlined the legitimacy and basis of payment of non-compete fee under the Takeover regulations and also the Indian contract act.
It is my contention that
1. The decision to catalog the premium of Rs.50/- being paid to Cairn Energy “CE” as Non-Compete Fee “NCF” is without any merit as CE is no position to compete with the acquirer, and as it was rightly pointed out by Hon’ble SAT in the Tata Tea case(2009) “Supposing the fee is paid to a person who cannot compete, the Board(SEBI) may be entitled to say that it is only a device to reduce offer price”, it is my submission for various reasons outlined below that CE is not in a position to compete with the acquirer and thus no payment of NCF is justified.
2. Despite my submissions put forward in this letter that the purpose of NCF in the present transaction is merely to reduce the cost of acquisition, in the event both SEBI and the Acquirers determine that CE can be paid NCF, at the cost of the Minority shareholders then it is my contention that:
a. S.27 of the Indian Contract act which is an act of Parliament disallows NCF payment unless such payment falls within the ambit of the exception, it is clear that that a regulation by SEBI cannot possibly allow it and thus be a basis of discriminating between shareholders.
b. Section 3 of the anticompetitive agreement also needs to be considered, given the facts involved in this particular transaction as it causes or is likely to cause an appreciable adverse effect on competition in
Before I even set out to provide a detailed response to the arguments put forward in your email of 15th September 2010, Can I put it to Acquirers that this particular acquisition kind of reeks of bad corporate governance in that the acquirer while distinguishing between minority shareholders’ and promoters has shortchanged minority investors, Why should some shareholders get extra consideration in an M&A? Or to paraphrase George Orwell: "All shareholders are equal. But are some more equal than others?" Why shouldn’t
follow the “all holders rule” which places all shareholders in the same position? India
Vedanta has without doubt not only upset the minority shareholders which includes behemoths like LIC and various mutual funds but also the analysts which eventually has consequences for a company's future capital-raising plans particularly when Mr.Anil Agrawal paints a very aggressive picture for Cairn India.
I strongly believe which I will support with cogent reasons that the agreement to pay NCF to the majority shareholders alone is not justified, as it is my contention that NCF is merely being used as a route to reduce the cost of acquisition of Cairn
through a public offer. India
Basis for Paying Non-Compete Fee
A. Point No.1 and 1.a does not warrant a response as they may be mere facts and statements.
B. In relation to 1.b it is agreed that Cairn Energy “CE” has extensive knowledge and expertise in the oil & gas sector, they may also have access to various seismic surveys, crucial trade information, but such surveys and trade information can only be in relation to all assets being acquired under the Share Purchase Deed dated 15th August 2010 “SPD” and no doubt will form part of the overall acquisition, you would appreciate it that in almost all SPD’s there are restrictive covenants whereby the seller warrants not to use trade secrets/knowledge to the detriment of the acquirer, that being said there is no logic behind the non compete fee for the value of Cairn, for it derives it value from its production fields and exploration blocks which obviously will include all seismic information, drilling operations, which should automatically be transferred to Vedanta as a result of this transaction, Oil & Gas are commodities which is highly regulated by the Governments of various countries mentioned in your email and more particularly in India, Customers buying such commodities cannot be stolen/poached, therefore there is no question of a situation where by CE can use such information to their advantage, while it may be argued that there is a spectre of competition, the threat of competition should be relative to the size of the company being acquired and not every thread of possible competition is to be considered. In as much there is no real and substantial competition payment of NCF to CE alone is not justified.
Furthermore Mr.Bill Gamell, Chairman of CE and Cairn India in his interview to CNBC TV18 (http://www.moneycontrol.com/news/business/not-withdrawingindia-cairn-energy_478457.html) said “What I would like to say is that Cairn Energy PLC could end up having sold only 40% and still be 20% holder or maybe in the 10-20% position. But we are very pleased to have a continuous association, we are not withdrawing from
India”, Mr.Gamell further stated “We have agreed not to compete as a company against Cairn India’s interest in . As a shareholder in Cairn India , we continue to be very much involved and it is an association which we hope to continue over the next coming years” India
The above being on record it is clear that CE does not intend to sell the residual stake in the near future and it is common sense that no shareholder and particularly CE with between 10-20% valued at approximately between $1.5-3 billion depending on the ultimate stake it will hold post the transaction will do anything to jeopardize its own interests or take up a private venture with conflicting interests and, thus there is no possibility of competition to warrant a NCF.
It is also pertinent to note that if CE decides to sell its residual shareholdings at a later stage then it would tantamount to assignment of any participating interests it may have under the Production sharing contract which may inurn prompt cancellation of the Production sharing contract itself or at the least give pre-emptive rights to ONGC. The clause under the PSC entered into by the operating consortium of oil and gas blocks with the government will be triggered when one of the members decides to quit, thus it seems unlikely that CE will quit as that may nullify the very object of the acquisition.
Further more as rightly pointed out by Mr.Bill Gamell in his interview to The Hindu on the 15th September 2010 “Cairn
is about its people and their expertise. The knowledge and expertise resides in these people and not in Cairn Energy Plc” hence for the reasons outlined above NCF is not justified. India
C. I further submit that oil and gas sector in India and all other countries in which Cairn India and associates have interests and being acquired are severely regulated and therefore the scope for competition is as good as non-est. In relation to any future NELP’s it my submission that how much ever knowledge or expertise a prospective company may have, unless it is willing to pay the top dollar exploration blocks are not allotted, further more as outlined in my response to your point B, CE has placed it on record that it does not in the near future intend to sell its residual stake this should be considered in light of the Non-compete period is only for a 3 year period and thus it defies logic when you argue that CE will pose direct competition, surely you would appreciate that even if CE decides to do something as illogical as that then it will have to compete from scratch in the process ensuring that the value of the stake they hold is diminished.
D. My submissions in Pt. B & C clearly outline the reasons on why I believe that CE will not/cannot compete with the Acquirer and this is an apt case where SEBI should as directed by SAT in Tata Tea case(2009) intervene, where SAT held “Supposing the fee is paid to a person who cannot compete, the Board(SEBI) may be entitled to say that it is only a device to reduce offer price”
In light of the above submissions it is most respectfully submitted that the proposed payment of NCF is not justified, if the acquirer still believes that it is in the interest of the minority shareholders then the acquirers should be brave enough to make it a democratic process wherein they should ask all shareholders to vote and express their opinion by a postal ballot.
Legitamacy if Non-Compete payments:
At the outset I wish to clarify that the Takeover Regulations is in direct contravention with an act of Parliament(Indian Contract Act 1872 and S.3 of the Competition act 2002) hence invalid.
Under Indian law, non-compete clauses are not a means to dissuade competition. Section 27 of the Contract Act expressly states that "every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void".
This stringent rule is subject to a single exception:
"One who sells the good-will of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer or any person deriving title to the good-will from him, carries on a like business therein; provided that such limits appear to the court reasonable."
The Indian Contract Act restricts the enforceability of non-compete covenants unless the seller is selling the entire business along with goodwill. As per case law, it is questionable, if a share purchase transaction can be categorized as a sale of business. It is my submission that non-competes are not allowed under the Indian Contract act and therefore do not stand up in any court of law and hence they should not be allowed at all. While it is an accepted norm under the Takeover Regulations to provide non-compete fees, the position today has to be looked at little differently in light of the Indian Contract act and also the Competition Act 2002.
The Indian law against restraint of trade and profession is peculiar in that it is deliberately absolute unlike many other jurisdictions like the
which allows a reasonable restraint of trade and profession. UK
Although SAT overruled SEBI in Tata Tea Case(2009), quoting section 27 of the Act, but instead of relying on the Indian commentary, SAT relied on the
The difference in the law/interpretation meant that section 27 was not interpreted properly. In other words, on a correct interpretation of the Indian Contract Act, the SEBI regulation allowing non-compete payments itself stands on weak legs. If the law made by Parliament disallows non-compete payments, it is clear that a regulation by SEBI cannot possibly allow it and be the basis of discriminating between shareholders, and furthermore the present acquisition is a mere change of shares at the corporate level and is not akin to a sale of business and goodwill and thus does not fall within the purview of the exception to S.27, and whether the exception will apply when the seller does not completely exit the Company i.e; continues to retain stake is a matter that introduces greater complexity as it definitely does not evidence that there has been a sale of goodwill at all in order for the exception to S.27 to apply.
Further more Section 3 of the Anti-Competition Act,2002 prohibits agreements which restrict the production, supply, distribution, acquisition or control of goods or provision of services, which cause or are likely to cause an appreciable adverse effect on competition within
When Mr.Gamell Chairman of CE and Cairn
India himself states that “Cairn is about its people and their expertise. The knowledge and expertise resides in these people and not in Cairn Energy Plc," when asked if Vedanta's lack of experience in Oil and Gas business may become a stumbling block to obtain regulatory approvals and when the Indian Contract act which is an act of Parliament expressly prohibits any NCF payments then I fail to understand the rationale for accepting and agreeing to make the NCF by the Parties to the acquisition. India
In View of the above, it is contended that the offer price and the non-compete amount payable are not in compliance with the Indian Contract Act and Anti-competition act and it is also submitted that in as much as the Takeover regulations are in contravention with an act of Parliament the same itself stands on weak legs thus SEBI cannot possibly allow it and be the basis of discriminating between shareholders.
1. SEBI -- Sebi@sebi.gov.in
2. Lakshmi Lakshmanan-- Lakshmi.Lakshmanan@jmfinancial.in