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Monday, 11 October 2010

Counter Response emailed to JM Financials Re:Cairn India's open offer

Attention of:
Lakshmi Lakshmanan
Senior Analyst - Investor Relation
JM Financial

By Email:
Dear Lakshmanan

Sub: Cairn India Limited(“Target”) Open Offer(“Offer”)
Ref: Your Letter dated October 08, 2010
This is in reference to your captioned letter( “Letter”)

At the outset, before dealing with the contents of your letter I wish to repeat, reiterate and rely on the contents of my earlier letter dated 20th September 2010 wherein I made submissions that the purpose of non-compete fee (NCF) in the present transaction is merely to reduce the cost of acquisition as Cairn Energy(CE) is not capable of “competing” with Vedanta(PAC), and also that any payment of non-compete fee is void and impermissible under S.27 of the Indian Contract Act,1872 and thus not justified, furthermore as this particular transaction causes or is likely to cause an appreciable adverse effect on competition in India it is in breach of Anti-Competitive laws. Please note that none of the statement or contentions contained in your letter are deemed to be admitted by me for want of express denials or otherwise.

The present transaction derives its value from its production fields and exploration blocks which obviously will include all seismic information, drilling operations, which should automatically be transferred to PAC as a result of this transaction, Oil & Gas are commodities which is highly regulated by the Governments of various countries 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.

It is my contention that in as much as CE through their Chairman “Mr.Bill Gammell” is on record indicating that they would continue to be invested in Cairn India (Target) as a shareholder belies its claim of negotiating and agreed to receive non-compete fee from PAC and this points towards a nexus between PAC and CE in that CE is only making life that much easier for the PAC by playing footsie with it.

In so far as your contention that CE continuing to retain a 10-20% interest in the Target and the imposition of the non-compete restrictions are unconnected and unrelated does not hold water, the bottom line is non-compete fee and continued interest in the business is an incompatible phenomena in the business world.

When the issue arose as to whether the non-compete was justified given the continuing association of the outgoing promoter with the target company, In “Tata Tea Case’” Hon’ble SAT observed that there was nothing on record to suggest that the continuing association cannot be terminated. Thus, the association should not bar the non-compete, which is otherwise justified”

In the present case CE is on record indicating that they do not intend to sell the residual stake in the next coming years, this is of particular relevance when the agreed non-compete period is only for 3 years. Furthermore if CE decides to sell its residual shareholdings at a later stage and exit completely then it would tantamount to assignment of any participating interests it may have under the Production sharing contract which may in turn 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 (Cairn Energy’s Legal and Commercial Director Simon Thomson wrote to ONGC, thus it seems unlikely that CE will quit as that may nullify the very object of the acquisition. ONGC would have had the right to buy Cairn’s stake (called the pre-emption or the right of first refusal) in case Cairn intends to exit, but in the Cairn-Vedanta deal, Cairn India will continue to hold the stake and operate the Rajasthan oilfields but as and when CE decides to sell all of its stake the re-emption rights will apply. While you are well within your rights to contend that the above argument as not  being valid and warranted, I believe that the above argument is one with merits and in fact could be the game changer should we have a deadlock and embark our journey to the courts.

To counter your contention that CE may have the relevant experience/knowledge and is also in possession of important crucial trade information, It is my submission that such information could only be limited to the acreage allocated to CE or the Target due to national security issues, I believe that an exploration company may not have been allowed to randomly conduct/acquire seismic survey or map any area of its choice in any part of the country drifting away from its allocated acreage.

I am at loss to understand on how CE will be in a position to compete using the information it may have about the allocated acreages which are being acquired under the Sale Purchase Agreement(SDP) of 8th August 2010. If the assets (Acreage/Land) are owned by the PAC, how can CE compete despite being armed with the best of the information? 

PAC has failed to explain in both their previous responses on how possessing knowledge ,experience, or for that matter continuing to operate in the Oil and gas sector and being in possession of sessimic survey etc, can cause irreparable damage particularly in light of the fact that all underlying assets of the Target will be part of the SDP. It is my submission that in as much as all assets are being acquired, the information and knowledge will be no good as such information and knowledge was in respect of the underlying assets, in so far as the argument of CE re-entering as competition as I submitted previously 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, for it is subject to abuse by the Acquirers and the Vendors who may collude to reduce the cost of the acquisition by short changing the minority investors which unfortunately seems to be the issue at hand.

In the present instance, PAC contends that there is real threat of competition from CE, which if not nipped in the bud by paying the non-compete fee will cause irreparable damage to the business being acquired, sadly though there is nothing on record identifying/detailing how CE may be able to “Effectively compete” with the PAC and the Target, In as much there is no real and effective threat of competition, payment of non-compete fee is a mere hogwash and thus is not justified. I further submit that oil and gas sector in India and all other countries in which the Target and its associates have interests and are being acquired are severely regulated and therefore the scope for competition is as good as non-est.

Furthermore paying consideration to stifle competition is a non-competitive practice which is expressly prohibited both by the Indian Contract Act and also the Anti-Competitive Act.

I note in your response dated October 08, 2010 that you rely on the comments made by Mr.Bill Gammell to support your response at Para 4, my interpretation is that it is in total contradiction to what you are trying to ascribe, Mr.Gammell said when asked if Vedanta’s lack of experience in oil business may become a stumbling block to obtain regulator approvals as follows “. Cairn India is about its people and the knowledge resides in these people and not in Cairn Energy Plc,”. Your mention of an eventuality in para 4 has no correlation or relevance, surely you would appreciate it that Mr.Gammell is negating the idea of CE having any additional knowledge than what is already in the domain with the people(staff) and the Target.

The additional submissions in this email coupled with my submissions of 20th September 2010, 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” and thus no payment of NCF is justified.

Legitamacy of Non-Compete payments:

At the outset I wish to contend 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. As per the current case law it is doubtful 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.

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.

You contended that the Takeover provisions are essential for an acquirer to protect his business from competition and also that both the business and legal community supports the PAC in that regard, unfortunately this does not seem to be the consensus, in fact the Takeover Regulations Advisory Committee headed by C Achuthan submitted its report on Takeover Regulations recommending that “The consideration paid for the shares in any form to the selling shareholders and his affiliates, concurrent with the purchase of shares, whether termed as ‘control premium’ or ‘non-compete fees’ or otherwise must be added to the negotiated price per share for the purpose of determining open offer pricing”. Accordingly, the exclusion of non-compete fees from offer price has been proposed to be done away with.

The panel has rightly put its foot down and recommended abolition of room for chicanery that consists in camouflaging 20 per cent of the negotiated price with the promoter (Cairns Energy UK) as non-compete fee which has nothing whatsoever to do with cost of acquisition of controlling interest.

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.

Kind Regards


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