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Cairn: Open market sale makes more sense

Joydeep Ghosh/Mumbai 08 Apr 11 | 12:23 AM

Unless investors want to hold Cairn India as a pure oil play, selling in the open market will be more tax-efficient than
the open offer.

Individual shareholders of Cairn India may be better off selling their shares in the secondary market rather than
participating in the open offer on Monday.

On Wednesday, the Union Cabinet referred Vedanta’s $9.6-billion deal to acquire Cairn India to a group of ministers
(GoM). On the same day, Vedanta-controlled Sesa Goa advertised the open offer for 20 per cent shares in Cairn India.
The offer closes on April 30.

Most market experts are of the view that it makes sense to sell shares in the open market. V K Sharma, business head,
private broking and wealth management of HDFC Securities, says unless an investor wishes to hold on to the shares
because of a pure oil play, they could exit the company by selling in the open market.

Selling directly in the market makes sense for a couple of reasons. “For one, there is no restriction on the sale
quantity. Also, there are tax benefits," added Sharma.

That is, if the investor has held the stock for over a year, there will be zero capital gains tax on booking profits. If they
have held it for less than a year, selling through the stock exchanges will attract a short-term capital gains tax of 15
per cent. On the other hand, if they use the open offer route, the income will be added to the taxpayer’s ‘other income’
and taxed, according to the tax slab. For investors in the highest tax bracket of 30 per cent, the tax liability will
double. So, an investor needs to consider the net amount.

The lack of a guarantee of 100 per cent acceptance is another hitch. In case of partial acceptance, prices may fall post
offer and you may have to sell the residual stocks at a lower rate. So, unless the offer price is revised higher, it makes
sense to sell in the market, according to a report by HDFC Securities.

Recent reports suggest Petronas is looking to exit its position in Cairn and is likely to appoint merchant bankers for
the sale of shares. “If Petronas, which holds 14.92 per cent stake in Cairn India, decides to subscribe to the open
offer, the acceptance ratio for shares tendered by minority shareholders will be 54.65 per cent," said a research
report by Religare Securities.

In other words, the number of shares that will be accepted by Sesa Goa will fall if Petronas uses the open offer route
to exit. However, there are some others who feel investors should participate in the open offer because it provides
them a good opportunity amid the uncertainty. “Retail investors can exit for now and always re-enter the stock when
there is more certainty," said Rajeev Thakkar, CEO, Parag Parikh Financial Services.

At present, the main question is should Vedanta go ahead with the deal even if ONGC’s royalty payment for Cairn’s
share becomes cost-recoverable? According to a report by Religare Securities, ONGC’s royalty payment will
have a big financial implication on the valuation (Rs 33/share).

However, from a long-term investor’s perspective, Cairn will become unattractive if it is asked to pay the royalty for
its share of oil. On the plus side, crude oil (NYMEX) was quoting at a price of $75 a barrel when the offer was
initially given. Thursday, it quotes at $108 -- 44 per cent higher. So, investors who want to own Cairn’s shares can
hold on to them for long-term returns.

In addition, Cairn India is expected to post earnings-per-share of Rs 60 in FY12, with the current stock price
of Rs 344 trading at 5.7 times the FY12 estimated earnings. “From a pure oil play and value perspective, this
could be a good buy," adds Sharma.
Cairn extends Vedanta deal deadline to May 20
Reuters/New Delhi 07 Apr 11 | 11:55 AM

Cairn Energy and Vedanta Resources on Thursday extended the deadline for a $9.6 billion deal for Cairn's India
assets, reflecting optimism the deal will get done a day after the government deferred a decision.

Both companies have extended the date by which all conditions must be completed or waived to 20 May 2011 to
accommodate the completion of the open offer for Cairn India shares, Cairn Energy said in a statement.

The two companies had earlier set an April 15 deadline to seal the long-pending deal, first announced last August.

"Cairn and Vedanta have agreed that the put and call options shall not be enforceable or exercisable. Vedanta has also
agreed that its pre-emption right shall not be enforceable or exercisable," Cairn said, giving in to demands from SEBI.

Cairn Energy has agreed to sell a majority stake in Cairn India to Vedanta, but the deal has been delayed due to a
dispute over royalty payments by Cairn India's partner, state-run Oil and Natural Gas Corp.

ONGC, which has a 30% holding in the Cairn-operated Rajasthan fields in western India, pays 100% of the royalties.

India's oil ministry has been pushing to share the royalty burden between ONGC and Cairn India. Both Cairn and
Vedanta have opposed that move. Any changes in the royalty structure would impact valuations and could jeopardise
the deal, analysts have said.

On Wednesday, the government stuck to its stance on royalties and referred the matter to a panel for further
review, after discussing it in a meeting in which they were expected to make a final decision. The move cast
new doubt over the deal.

The deal would be the largest in India's oil and gas sector and could help boost investor sentiment in Asia's third-
largest economy.

Vedanta on Wednesday said it would go ahead with its open offer as scheduled, reflecting optimism for the deal. The
open offer by Vedanta unit Sesa Goa would open April 11 and close April 30.

Cairn India shares were trading 0.5% lower in a weak Mumbai market.