Rollover of $1.25 billion loans? Cairn India’s stock buzzing on hopes of 20-30% upside

ET Intelligence Group: Traders’ interest has increased in Cairn India’s stock due to probable 20-30% upside owing to the ambiguity related to the rollover of $1.25 billion loans given to Vedanta Resources two years ago.

They are betting that rollover of loans to Vedanta will require minority shareholders’ nod as it is a related party transaction under clause 49 of the SEBI’s listing agreement.

With no such precedence in the past and law open for interpretation, it adds uncertainty. The open interest in Cairn India futures increased 47% to 1.22 crore shares on May 2 as compared with 0.83 crore on April 27.

The tenure of the loans end in July 2016. Some observers believe that shareholders voting is not required since credit given to Vedanta subsidiary was through Cairn India holding, a wholly- owned foreign subsidiary of Cairn India. The status of ‘company’ in related party is limited to only the standalone entity and foreign subsidiaries do not comply.

But what may trigger shareholders’ approval is the amount of the loan. According to the law, loan less than 10% of consolidated revenue of Cairn, which works out to be $130 million, does not need an approval of shareholders. Since the loan given by Cairn exceeds this threshold, it calls for an approval.

In addition, according to the listing agreement, any subsidiary contributing more than 20% of consolidated revenue is considered as a material subsidiary. Cairn India Holding is a material subsidiary of Cairn India.

Together with another subsidiary called Cairn India Hydrocarbon, it contributes 40% to the total consolidated net profit of Cairn India. Further, if such a material subsidiary leases 20% of the total assets, it needs the approval of 75% of shareholders.

Those who believe that voting will not be required point out that surplus cash tendered as a loan should not be deemed as an asset.