The Controversy Surrounding the Vedanta-Cairn India Merger: Sharing Challenges and Controversies

The proposed merger between Vedanta and Cairn India, announced in 2015, quickly became a hotly debated topic in the Indian stock market. Major players like Indian Life Insurance Co. (LIC) and the Income Tax Department raised numerous concerns over the terms of the merger, leading to significant challenges that threatened to derail the deal. This article delves into the key issues and developments during this period.

Initial Terms and Concerns

In 2015, Vedanta and Cairn India agreed on a merger swap ratio of 1:1. According to this proposal, minority shareholders of Cairn India would receive one equity share in Vedanta for each share held, along with one 7.5% redeemable preference share with Rs 10 face value. However, this initial agreement quickly faced scrutiny and opposition from minority shareholders.

Key Issues

Minority Shareholder Opposition: One major issue was the stance of minority shareholders, particularly Indian Life Insurance Co. (LIC), which owned a significant stake in Cairn India. LIC and other minority shareholders were concerned about the viability and fairness of the merger swap ratio. These concerns were pivotal in the entire negotiation process.

Tax Demands: The Income Tax Department seized a 9.5% stake in Cairn India, stating that the merger could not proceed until the tax issues were resolved. This created a significant roadblock and heighted the urgency for a revised agreement to address these concerns.

Revamped Merger Proposal

In 2016, Vedanta revised the terms to sweeten the deal, aiming to win back support from minority shareholders. The new proposal offered one equity share of Vedanta and four redeemable preference shares of Rs 10 face value and a 7.5% coupon rate, replacing the original one equity share and one preference share offer. This move was a strategic attempt to address the concerns of minority shareholders and ensure the deal's success.

Legal and Financial Implications

Cairn Energy’s Role: Cairn Energy, which had initially sold a majority stake in Cairn India to the Vedanta Group in 2011, still held a minority 9.8% interest. As a result, Cairn India was eventually merged with Vedanta Ltd. Post-merger, Cairn Energy's holding in Vedanta is slightly less than 5%. Cairn Energy’s considerable stake and the subsequent tax demands further complicated the merger process.

Tax Demands from Cairn Energy: Cairn Energy demanded approximately ￡5.6 billion in compensation from the Indian government for the loss of value due to the 9.8% shareholding in its subsidiary, Cairn India. The loss of value took place following an increase in tax demands by the Income Tax Department. This demand underscored the complex nature of the tax implications and the subsequent compensation negotiations.

Successful Merger in 2017

Despite the numerous challenges, Vedanta and Cairn India ultimately succeeded in concluding the merger. On 22nd July 2016, Vedanta announced the revised and final terms of the merger, which were accepted by minority shareholders on 10th September 2016. Cairn India's minority shareholders also approved the merger on 13th September 2016. Following these approvals, the merger was finalized and the companies began their journey towards integration.

While the merger faced significant hurdles, it ultimately proved to be a strategic move for both companies. The final approval in 2017 marked a significant milestone in the Indian stock market and demonstrated the resilience of the companies involved in navigating complex corporate landscapes.

With the merger now integrated, it will be interesting to see how the two companies progress and what future challenges lie ahead. However, the journey so far highlights the importance of addressing stakeholder concerns and navigating through regulatory and tax challenges.