LIC questions Cairn's $1.25-bn loan to parent

FDs can fetch 9-9.5% interest versus 3.5% to be received by Cairn, say institutions

The Life Insurance Corporation (LIC) of India, the second largest shareholder in oil and gas producer Cairn India after the Vedanta group, has sought more information on the $1.25-billion (Rs 7,500-crore) loan given by the company to its parent Sesa Sterlite for two years. LIC thinks the related party transaction is not in the interest of minority shareholders.

LIC, which owns 9.09 per cent shares worth Rs 5,382 crore as of last Friday, is not happy with the company's move to give the loan at a time when Cairn requires money for its own expansion. "The loan has been given at very attractive terms for Sesa Sterlite and we would like to know how it benefits other shareholders of Cairn India," an institutional source said. A two-year fixed deposit in India would have fetched close to 9-9.5 per cent interest rate as compared to the 3.5 per cent to be received by Cairn, he said.

The loan to Sesa Sterlite was revealed for the first time in the June quarter results of fiscal 2015, which led to many institutional investors selling Cairn's shares. The Cairn India stock has lost 9.5 per cent of its value since the loan was first revealed to analysts on July 23 this year - hitting LIC hard.

An email seeking a comment from the Vedanta group did not elicit any response but in the post news conference analyst call, Cairn had pointed out that the Libor plus 300 basis points rate was accretive relative to existing alternatives. But investors have not bought the theory. As the company has already disbursed $800 million of the loan to Sesa Sterlite and will disburse the rest in the next few weeks, LIC is planning to seek more clarifications from the management. LIC does not have any representation on Cairn India's board, which makes it difficult for the corporation to object to the loan.

The state-owned LIC, one of India's largest investors in corporate equity and debt, does not have a track record of shareholder activism. Calling itself a "long-term" investor, LIC is less vocal as compared to global investors. LIC, which sits on Rs 225,000 crore of investments (as of FY 2014), has often emerged as the government's underwriter whenever there is low demand for shares during disinvestment.

Corporate governance advocates say Cairn did not make disclosures to other investors like LIC about such a large related party transaction and that itself was a violation of Sebi norms and warranted an investigation. "This is in complete disregard of the disclosure norms and goes against the interest of LIC. Cairn chose to do it before October 1 when, according to the new company law, a majority of small shareholders', like LIC's, approval would be needed to clear such related party transactions," says Shriram Subramanian, founder of InGovern Research Services.

The move also came under attack from analysts. Kotak Securities analysts Tarun Lokhotia, Sanjiv Prasad and Vinay Kumar say they see the related party loan facility as a significant negative. "It warrants concern on effective utilisation of existing cash/equivalents and future cash flows of the company, notwithstanding the near-term economic rationale indicated by the management," they say.