Cairn India's USD 1.25-bn loan to Vedanta Group hits scrip

Anil Agarwal-led Cairn India has extended a $1.25-billion intra-corporate loan to the Vedanta Group raising eyebrows and leading to a sharp fall in the price of the company's stock.

Cairn, which has already disbursed $800 million out of the total loan of $1.25 billion, made the loan disclosure after analysts raised doubts on utilisation of the company's cash reserves. Analysts said that if Cairn did not have a better usage of its cash, it should have rewarded its shareholders buy way of bonus, etc.

However, Cairn's spokesperson said that the loan has been extended for two years at floating rate of three per cent plus LIBOR after requisite approvals, which is significantly higher than comparable rates being received on fixed deposits of same tenor.

Cairn refused to disclose when the Board of directors decided to extend the loan or if shareholders' nod was required for doing a related party transaction.

The Vedanta Group holds 59.90-per cent stake in Cairn India. Under the new Companies Act, which came into effect from April 1, companies need to take the approval of shareholders for related party transactions.

Cairn India had on Wednesday held its annual general meeting of shareholders in Mumbai but did not make any disclosures of the loan.

Cairn India shares slumped 6.67 per cent, the most since April 16, 2009, to close at Rs 322.65 on the Bombay Stock Exchange.

Goldman Sachs Global Investment Research said: "Such related party transaction typically raise market concerns about conflict of interest on the most shareholderfriendly way of deploying surplus cash."

Cairn, which had on Wednesday stated that it had cash of Rs 13,561 crore in rupee funds and $922 million in dollar funds as on June 30, had in January announced a share buyback programme that would give Vedanta greater control of the firm.

Cairn bought 36.7 million shares for Rs 1,225 crore and extinguished them resulting in promoter shareholding rising from 58.76 per cent to 59.90 per cent. Vedanta Group shareholding would have gone up to 64.53 per cent had Cairn been able to buy all the 170.9 million share it had intended to buyback for up to Rs 5,725 crore.