Edinburgh-based Cairn Energy plc and state-owned insurer LIC hold the key to billionaire Anil Agarwal's move to absorb his cash-rich oil firm Cairn India Ltd into debt-laden resources arm Vedanta Ltd.
The merger, under which Cairn India shareholders will receive one equity share and one 7.5 per cent preference share in Vedanta Ltd for every share they hold, needs approval of at least half of the minority shareholders.
Cairn Energy, which in 2011 sold majority stake in Cairn India to Vedanta for $8.67 billion, still holds 9.82 per cent stake in the company. Life Insurance Corp of India (LIC) has another 9.06 per cent and the deal will fall if the two decide to vote against the merger .
Vedanta holds 59.88 per cent stake in Cairn India.
"We note the announcement and will assess whether the proposal is in the interests of Cairn Energy plc as a shareholder in Cairn India Limited in due course," a Cairn Energy spokesperson said.
Cairn Energy would have sold its remainder shareholding in the sharebuy Cairn India did last year. But it couldn't as Income Tax Department frooze the shareholding over $1.6 billion tax demand.
Credit Suisse Group AG said the merger would also need an approval of the Income Tax Department.
Vedanta chief executive Tom Albanese said the company will engage with minority shareholders to get an approval.
CLSA in a research note said merger plan may be rejected by minority shareholders of Cairn India. "Approval from government due to court cases and minority shareholders because of unattractive valuations may prove a hurdle for this merger."
A rejection will hinder Vedanta's access to Cairn India's $2.9 billion cash as he seeks to lower debt.
Through the merger, Agarwal plans to use Rs 16,867 crore cash lying with Cairn to pay off part of Vedanta's debt. Cairn has no debt, and cash needs have dwindled after investment programme was slashed by 60 per cent to $500 million for current year.
Vedanta Ltd, India's top producer of aluminium and copper, is nation's second-most indebted metals company and its annual interest costs is nearly three times the London parent's.
It has debt of Rs 77,752 crore, excluding a $1.25 billion inter-company loan from Cairn India.
Cairn's cash could have been funnelled to its parent through dividends, but that would incur taxes. It last year extended a low interest loan of $1.25 billion to Vedanta Ltd, a move that spooked investors about corporate governance.