After using its cash to help new promoter raise stake in the company, Cairn India has loaned out USD 1.25 billion to Vedanta Group, leading to its stock dropping by the most in five years.
Cairn, which has already disbursed USD 800 million out of the total loan of USD 1.25 billion, made the loan disclosure after analysts raised doubts on utilisation of cash reserves.
Its spokesperson said, "the loan has been extended for two years at floating rate of 3 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 decided to extend the loan or if shareholders' nod was required for doing a related party transaction. 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 shareholder nod for related party transactions.
Cairn India yesterday held its annual general meeting of shareholders in Mumbai but did not make any disclosures of the loan.
Shares slumped 6.67 percent, the most since April 16, 2009, to close at Rs 322.65 on the BSE.
Goldman Sachs Global Investment Research said: "Such related party transaction typically raise market concerns about conflict of interest on the most shareholder-friendly way of deploying surplus cash."
Cairn, which had yesterday stated that it had cash of Rs 13,561 crore in rupee funds and USD 922 million in dollar funds on June 30, had in January announced a share buyback programme that would give Vedanta greater control of the firm.
It 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. It could not as Cairn share traded higher than Rs 335 offered.
The loan was advanced in the middle Cairn India's three year USD 3 billion exploration campaign to drill for more oil.
"The company's 3 year capex plan of USD 3 billion, which includes both development and production, is well supported with its current cash reserves of USD 3 billion and is further bolstered with its annualised operational inflows of over USD 1.5 billion.
"As such, considering the exploration oriented focus and its advancement plan over the next 2 years, the company is adequately funded," the spokesperson said.
Analysts said if Cairn did not have a better usage of its cash, it should have rewarded its shareholders buy way of bonus etc.