Erikka Askeland: Cairn's India deal a financial winner but ethically it has its critics

SOME owners are better than others. In India there is some disquiet about a majority share in its fourth-largest oil and gas company switching from Cairn Energy - led by the urbane and well-respected Sir Bill Gammell - to that of Vedanta Resources - led by the controversial mining mogul Anil Agarwal.

The news so far has focused on the terms of the deal - the $9.6bn Agarwal will pay for a 60 per cent stake in Cairn India and how much of this will make it back to Cairn's rather pleased shareholders.

But last week, the Indian petroleum secretary S Sundareshan made it clear that government approval would be needed if there were to be changes in ownership of Cairn India.

"Domestic oil and gas blocks are national assets. Energy firms are merely contractors. A third-party can't be allowed to manage national assets without the government's permission," said Sundareshan to reporters in New Delhi last Friday.

There is a risk that the Indian government's reluctance to give the go ahead could throw the deal into a regulatory loop at best, or at worst even threaten the deal.

Cairn Energy, which will sell between 40 and 51 per cent of its holding in Cairn India, insists the transaction is purely a corporate matter and there is no known need for further regulatory consent, but that it will be up to Vedanta to seek government endorsement of the trade.

Oil and Natural Gas Corp (ONGC), India's state oil company, will maintain its 30 per cent stake in the firm's assets in Rajasthan. Cairn India, run by chief executive Rahul Dhir, will continue to manage the extensive assets it owns in India and Sri Lanka.

For Dhir, the transaction was a matter of the gods moving around the furniture. "I am not in the picture, a shareholder is selling stake. For us it is business as usual," he said.

Gammell is proud of - and has even made a career of - playing by the rules. In India, these can be baroque in the extreme.

But even the firm's dispute with the Indian government over 150m due the firm was described by Cairn finance director Jann Brown as "amicable" and in India the firm is admired for floating off its assets on the Bombay and the National Stock Exchange stock exchanges in order that India could retain a portion of ownership of her own resources.

Agarwal has said he wants to create an Indian-owned "natural resources champion in India".

But the level of respect accorded Gammell is clearly not given to Agarwal, who despite being born in Bihar cuts a more divisive figure both in the UK and India.Criticism has focused on the level of debt - 577m and growing - Vedanta carries as well as the fact that, as a miner of iron ore, zinc and copper, it has no experience of oil extraction.

Analysts at Evolution Securities point out that Cairn Energy has got out while the going was good, with the risks of extracting the oil only getting harder from here on in.

"It is easily forgotten that the Rajasthan field has a 20 to 30 year life requiring both water injection and enhanced oil recovery. Capturing value now and sidestepping the technical risks shows Sir Bill hasn't forgotten some of his old skills," said a note from Evo.

The New Delhi-based Economic Times reported an unnamed Indian official complaining that it was "a matter of concern that a non-energy firm is to take over operatorship of these complex fields".

"World-over, governments insist on prior experience before companies are allowed even to explore. And here is a firm which has never even seen an oilfield," he added.

And in complete contrast to Cairn, which has been one of the few oil and gas explorers to be listed on the ethical FTSE 4 Good index, Vedanta has been accused of polluting and running roughshod over the rights of indigenous people. In July, Bianca Jagger led hundreds of protesters against Vedanta's controversial bauxite mine in the Indian state of Orissa. Outside the Westminster based Institute of Civil Engineers where the AGM was held, the Dongria Kondh tribe living next to the bauxite mine were compared to the Na'vi people of the hit film Avatar. The protests, and an influential report by Amnesty International, which alleged the group's activities in Orissa polluted rivers and damaged crops, have prompted institutional investors including the Church of England, The Joseph Rowntree Trust and Dutch pension fund PGGM to dump shares in the LSE-listed Vedanta. Aviva too also said it was considering giving up its investment in the firm,

In another blow to Vedanta's track record, a panel set up by the Indian government environment ministry yesterday rejected the Orissa mining project on the grounds it has violated the rights of the local tribes in collusion with state government officials.

The report on Vedanta's plans for Orissa has been submitted to the Indian environment minister, who said a final decision in the matter will be taken later in the month.

That the panel's damning report was announced the same day as the deal was struck with Cairn may be just kismet, or it could be a bad sign of the Indian government's waning confidence in Vedanta.