During the recent World Economic Forum in Switzerland, India made a concerted effort to present itself as an attractive destination for foreign direct investors. Indeed, on the closing night of the Davos event, the Confederation of Indian Industry hosted a themed “Bollywood Night” for visiting dignitaries and CEOs.
However, the case of Cairn Energy and Vedanta Resources suggests that India is going to have to work a little harder if it is to be perceived as an emerging market that really wants to roll out the red carpet for FDI investors.
All the evidence suggests that elements of the Indian bureaucracy and officialdom are doing everything in their power to thwart plans by Edinburgh-based Cairn Energy to exit India by selling off its 60% stake in its Mumbai-listed subsidiary Cairn India to the London-listed mining group Vedanta Resources.
Economic analysts are concerned. When researching an article on this saga for a UK newspaper, one told me:
“If Cairn ends up having to scrap plans to sell its £5bn stake due to government intransigence, India would be shooting itself in the foot. It wants and needs to attract more FDI, but such an outcome would invite parallels with Hugo Chavez’s Venezuela.”
The story started on August 16, when Cairn Energy announced a deal to sell a $9.6bn (£5bn) stake in Cairn India to the controversial India-based mining firm Vedanta Resources, saying it would use the proceeds to fund exploration in “iceberg alley” off Greenland.
The deal was meant to be completed by December 31 but is already several months behind schedule. As part of an operational update last week, Cairn Energy chief executive Sir Bill Gammell, who is reported to have made eight visits to India since the deal was announced, sought to reassure investors that the deal would be completed by April 15 at latest.
The main obstacles have come from the Indian Ministry of Petroleum and Natural Gas, and from the state-owned oil company ONGC.
The ministry seems determined to impose much tougher conditions on Vedanta, which is listed on the London stock exchange, than currently apply to Cairn Energy in oil and gas 'blocks' where CI and ONGC have production sharing agreements.
These conditions include requiring Vedanta to pay its share of royalties and “cess” payments on the Rajasthan oilfield - a highly productive field that is 70%-owned by Cairn India and 30% by ONGC. Under the existing 1995 contract, written at a time when India was desperate to lure international exploration companies, these costs are entirely born by ONGC.
Analysts claim that if this condition is imposed, the deal would become uneconomic for Vedanta, which would have little choice other than to pull out.
It has also emerged that the oil ministry has laid down 11 pre-conditions which must be fulfilled before it will give the deal its blessing.
These include that Vedanta must guarantee that Cairn India's technical capabilities are unaffected by the transaction; that Vedanta accepts the Indian government's decision on future exploration activities as final; and that Vedanta unconditionally accept the government's position on issues that Cairn has been seeking to contest through the Indian courts.
The state-run ONGC - Cairn’s partner in several exploration and production blocks including the Rajasthan fields - has muddied the waters by claiming "first right of refusal" or "pre-emption rights" (i.e that, as Cairn India's joint venture partner in Indian field, it should have been offered Cairn's 60% stake in CI ahead of the mistrusted Vedanta). Latest reports suggest ONGC is sticking to this view. It has also intervened on the royalty issue.
Cairn Energy is not entirely blameless in the saga either. The Edinburgh-based explorer initially took the stance that, since the deal was a “share transaction”, there was no need for it to seek Indian oil ministry approval.
This was naive. The Rajasthan field (which is CI's main asset) is India's largest onshore oilfield. Even when the ministry said Cairn Energy's stance was misguided since the oilfields concerned are a national asset, Cairn stuck to its guns. The oil ministry, which initially promised a decision by December, has blamed Cairn for the delays (highlighting the Edinburgh explorer's failure to seek oil ministry permission from the outset).
In desperation, Vedanta’s chief executive Anil Agarwal personally pleaded with the Indian prime minister Manmohan Singh to try and rescue the deal from the bureaucratic impasse in which it has got stuck on January 4.
With India’s reputation among overseas investors now said to be on the line, Singh jumped into gear, pressurizing the petroleum ministry to ease a path to the deal’s consummation. Singh also replaced the oil minister, and the new incumbent S Jaipal Reddy last week and promised to "lose no time" in deciding on giving consent.
There were further positive noises about the deal last Thursday when the technical arm of the Indian oil ministry confirmed that Vedanta Resources has sufficient technical capabilities to operate the oil and gas blocks held by Cairn India.
V.N.Balasubramanyam, professor of development economics at
Lancaster University, doubts whether delays to the deal will undermine India’s reputation as an FDI destination.
“First, there is nothing new in all these bureaucratic squabbles; investors are used to it and will take it in their stride. Also the companies involved - Vedanta in particular - know how to cope with these problems and the prime minister is keen on increased FDI and further liberalisation of the economy.
Second, India is a most attractive country to invest in for a variety of reasons including the high growth rate, the institutions in place and her recent outward FDI especially in the developed countries.”
However I'm not so sure. I suspect this deal may well be headed for the scrapheap. Whether that makes investors see India as another Venezuela is a moot point.
Further reading on the Indian economy:
- Fretting about the price of onions: inflationary pressures build in the Indian economy by Ian Fraser [blog post]
- India Today and Tomorrow by Rajiv Dogra
- India and Brazil—Still Winners as the Global Economy Collapses? by Maya Bhandari
Tags: energy , India , Indian economy , Mergers and Acquisitions , oil and gas