Stephen Foley: Vedanta lost its deft political touch in India, and may lose more still
Wednesday 20 April 2011
Outlook As political posturing goes, £920m seems a lot to pay to send a message to government. That is the sum that Vedanta has plunked down for a 10.4 per cent stake in Cairn India, where its bid for outright control has run up against political opposition. Its acquisition of this stake, the company hopes, signals its commitment to the tottering deal, and aims to put a bit of pressure on the Indian political class. But if Vedanta loses this chance to control one of Rajasthan's richest oilfields, it will be because of missteps made months ago.
The man behind Vedanta, Indian-born billionaire Anil Agarwal, has repeatedly failed to show the deft political touch needed to graduate to the top tier of natural-resources companies. Last summer, just as London-listed Cairn Energy was negotiating to sell control of its Indian business, Vedanta was refused permission to mine bauxite in the eastern state of Orissa. It had won the favour of the local authorities, in the teeth of environmental opposition, but not of a New Delhi government of a different political stripe.
Then there was the débâcle over the announcement of its move on Cairn India, which had not been signalled to New Delhi in advance of the talks becoming public. The demands for a renegotiation of the financial relationship between Cairn India and ONGC, the state oil company, which emerged in the subsequent days, were proof that the political groundwork had been laid poorly, to say the least.
And on and on. The very public pressure being put on the Indian government has seemed contrived more to annoy than to persuade. Cairn's chief executive, Sir Bill Gammell, was induced to enlist David Cameron to the cause, and both Cairn and Vedanta have suggested New Delhi's ruling on this deal is a touchstone issue for Western companies considering investing in India. Block our deal, they say, and you signal that India is not the fair and open economy that it presents on the world stage, and that New Delhi is not a government that respects the sanctity of a contract.
This is the context in which Vedanta is now attempting to crowbar its way to a negotiating position, with its new 10.4 per cent holding in Cairn India.
The stakes are high, for both of the London-listed companies. Vedanta wants to conquer in Rajasthan to get into oil and gas for the first time. Cairn needs to cash in its Indian jackpot to fund exploration in Greenland, because other options for funding those investments are likely to have downsides for shareholders.
Sir Bill has hinted he will abandon the Vedanta deal if there is no political breakthrough in the next month or so. That seems wise, given how long Cairn India has been in limbo and given the possibility that nervous managers will be poached by rivals. Vedanta has bought a seat at the table, and staked a bold claim that it will not walk away, but if New Delhi is determined to punish the company for its recent political cloth ear, then the best thing may be for Cairn to think again.
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