ASIAN CASE RESEARCH JOURNAL, VOL.
23, ISSUE 1, 65–89 (2019)
ACRJ
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.
This case was prepared by
Professor Pitabas Mohanty
of XLRI Jamshedpur, India
and Dr. Supriti Mishra of
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com
IMI Bhubaneswar, India, as
a basis for classroom discus-
sion rather than to illustrate
either effective or ineffective
handling of an administra-
tive or business situation.
Please send all correspon-
dence to Professor Pitabas
Mohanty, XLRI, CH Area
(East), Jamshedpur, Jharkhand
831001, India.
E-mail: pitabasm@xlri.ac.in
© 2019 by World Scientific Publishing Co. DOI: 10.1142/S0218927519500032
S0218927519500032.indd 65
Profit Opportunities from Vedanta
and Cairn India Merger
Vedanta Resources PLC (UK) announced the merger of
Vedanta Limited with Cairn India Limited, its two Indian
subsidiaries on 14 June 2015. In this all-stock deal, the share-
holders of Cairn India would receive one share of Vedanta for
every share of Cairn. In addition, they would also receive one
7.5% redeemable preference share with face value of Indian
rupees (INR) 101. The stock price of Cairn India increased
by about INR 7 to INR 187.7, whereas the stock price of
Vedanta fell by INR 2.75 to INR 181.25, the day following the
announcement of the merger. The merger was expected to be
completed by the first quarter of 2016.
In its press release, Mr. Anil Agarwal, the Chairman of
Vedanta justified the merger by arguing that “… This marks a
significant step towards achieving our stated long term vision
of a simplified group structure with alignment of interests
between all shareholders for the creation of long term sustain-
able value.” In the same press release, the company justified
the merger by saying that the merger would de-risk earnings
volatility, facilitate better allocation of capital, provide better
“financial flexibility to sustain strong dividend distribution”,
reduce expenses by “streamlining internal processes and
improved productivity”, reduce cost of capital by having a
stronger balance sheet, etc.2
1 
Cairn India Limited, “Scheme of Arrangement”, Cairn India Limited Official
Website, accessed on September 13, 2015, https://www.cairnindia.com/investors/
scheme-arrangement.
2 
Vedanta, “Results and Reports”, Vedanta Limited Official Website, accessed on
September 15, 2015, http://www.vedantalimited.com/investor-relations/results-
reports.aspx?category=StockExchangeAnnouncements.
01-07-19 4:20:57 PM
 66 ACRJ

As per the prevailing rules in India in 2015, majority

of the minority shareholders must approve any merger that
takes place between two companies controlled by the same
promoter. Life Insurance Corporation (LIC) of India with
9.06% stake and Cairn UK Holdings with 9.82% stake in
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Cairn publicly stated their disapproval for the merger. This

created uncertainties about the proposed merger and the
stock prices of the two companies started trading outside the
range suggested by the share exchange ratio within a month
of the above announcement. Around mid September 2015
while Vedanta was trading at INR 97.1 per share, Cairn was
trading at INR 145.65 per share. This raised the question of
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

the type of trading strategy that an investor should adopt to

make any potential profit.

BACKGROUND OF VEDANTA LIMITED

Vedanta Limited, (earlier known as Sesa Sterlite Limited), is

a diversified company that is into exploration, extraction and
processing of different commodities such as copper, oil and
gas, zinc, iron ore, and the likes. It is a subsidiary of Vedanta
Resources, a globally diversified natural resources major,
headquartered in London3.
Vedanta Limited or Sesa Sterlite, as it was known
earlier, emerged from a merger between Sterlite Industries
and Sesa Goa Limited. Sterlite Industries was originally
set up as Rainbow Investments in 1975 by Anil Agarwal,
Dwaraka Agarwal and Ishwarlal Patwari. The name of the
company was subsequently changed to Sterlite Industries
in 1986. In its earlier days, the company was manufacturing
cables, copper wires and conductors4. Sesa Goa was estab-
lished in 1965, as a producer and exporter of iron ore. In

3 
Vedanta, “Our Story”, Vedanta Limited Official Website, accessed on June 13, 2017,
http://www.vedantalimited.com/know-us/our-story.aspx.
4
 ET, “Sterlite Industries (India) Limited. (Amalgamated)”, Economic Times Official
Website, accessed on June 13, 2017, http://economictimes.indiatimes.com/sterlite-
industries-(india)-ltd-(amalgamated)/infocompanyhistory/companyid-12977.cms.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  67

2007, Vedanta Resources acquired 51% stake in Sesa Goa from

Mitsui & Co5.
In a merger that took place in 2013, Vedanta group first
merged Sesa Goa and Sterlite Industries to form Sesa Sterlite.
Subsequently other group companies, namely, Vedanta Alu-
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

minum, Madras Aluminum, and Sterlite Energy got merged

into Sesa Sterlite. As a part of this merger, Vedanta group
transferred its stake in Cairn India to Sesa Sterlite6. The name
of Sesa Sterlite was subsequently changed to Vedanta Limited
in April 20157.
In its 2014–15 annual report, Vedanta Limited stated,
“Vedanta operates across the value chain, undertaking explo-
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

ration, asset development, extraction, processing and value

addition with a primary focus on upstream operations.”
Vedanta Limited is in the business of exploration and produc-
tion of zinc, silver, copper, oil and gas, iron ore and commer-
cial paper8. Hindustan Zinc, Cairn Energy, Bharat Aluminum
Company, Talwandi Sobo Power, and Sesa Resources, are
some of the major subsidiaries of Vedanta Limited.
According to its 2014–15 annual report, oil and gas
business accounted for 19% of the total revenue and 37% of
the total EBITDA, zinc accounted for 23% of the total revenue
and 37% of the EBITDA, aluminum accounted for 16% of the
revenue and EBITDA. Power, copper and iron ore accounted
for the rest of the revenue and EBITDA9. While some of the
products are manufactured by Vedanta, other products are
manufactured by its subsidiaries. Thus, for example, zinc is
5 
“Vedanta Limited (VEDL): Company History”, Business Standard Official Website,
accessed on June 13, 2017, http://www.business-standard.com/company/vedanta-
502/information/company-history.
6 
Vedanta Limited, “Results and Reports”, Vedanta Limited Official Website, accessed
on September 15, 2015, http://www.vedantalimited.com/investor-relations/results-
reports.aspx?year=20112012&category=StockExchangeAnnouncements.
7 
PTI, “Sesa Sterlite renamed as Vedanta Ltd”, The Hindu, April 22, 2015, accessed on
June 11, 2017, http://www.thehindu.com/business/Industry/sesa-sterlite-renamed-
as-vedanta-ltd/article7130007.ece.
8
 Vedanta Limited, “Annual Report 2014-15”, Vedanta Limited Official Website,
accessed on September 13, 2015, http://www.vedantalimited.com/investor-
relations/results-reports.aspx?category=AnnualReports.
9
 Vedanta Limited, “Annual Report 2014-15”, page 5, Vedanta Limited Official
Website, accessed on September 13, 2015, http://www.vedantalimited.com/investor-
relations/results-reports.aspx?category=AnnualReports.

S0218927519500032.indd 67 01-07-19 4:20:57 PM

 68 ACRJ

manufactured by Hindustan Zinc, aluminum is manufactured

by BALCO, energy is produced by Sterlite Energy, etc.
The company believed that “by having operations
across a diversified commodity business, the company would
be able to adjust to market cycles and offset market down-
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

turns”. Though the company identified fluctuating com-

modity prices to be a source of risk in its annual report, it
believed that a diversified portfolio would take care of the
risk. The annual report of the company further stated, “…our
group has a well-diversified portfolio, which acts as a hedge
against fluctuations in commodities and delivers cash flow
through the cycle”10.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

For the financial year ending 31 March 2015, Vedanta

Limited reported consolidated total revenue of INR 737
billion and net loss of INR 113.73 billion. Exhibit 1 shows
the reported financials for the company. Promoters control
64.33% of the total shares in Vedanta Limited. The share-
holding pattern of the company is given in Exhibit 2 of
the case.
The high debt of Vedanta, coupled with declining
oil prices made CRISIL revise the credit rating outlook of
Vedanta Limited to ‘Negative’ from ‘Stable’ in January 201511.
Moody’s and S&P similarly revised Vedanta Resources’ rating
outlook to ‘Negative’ in 201512.

BACKGROUND OF CAIRN INDIA LIMITED

The history of Cairn India can be traced back to 1994, when

Cairn Energy started developing the Ravva field in the
Krishna Godavari basin of Andhra Pradesh, India for explora-

10
 Vedanta Limited, “Principal Risks and Uncertainties”, Vedanta Limited Offi-
cial Website, accessed on December 25, 2015, http://ar2015.vedantalimited.com/
principal-risk-and-uncertainties.html.
11 
CRISIL Ratings, “CRISIL revises rating outlook to ‘Negative’ for Sesa Sterlite,
Balco, Talwandi Sabo and Vizag General Cargo; reaffirms ratings on all Vedanta
group companies”, CRISIL Official Website, accessed on June 13, 2017, https://www.
crisil.com/Ratings/RatingList/RatingDocs/SesaSterliteLimited_200114.htm.
12
 Vedanta, “Annual Reports and Accounts: FY 2015”, Annual Reports of Vedanta
Resources, page 51.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  69

tion and production of oil. Cairn Energy subsequently entered

into an operational alliance with Shell to develop different oil
fields in India and Sri Lanka. Subsequently the company dis-
covered oil in Rajasthan and Gujarat in 1999 and 2000 respec-
tively. Cairn acquired Shell’s stake in the Rajasthan block and
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

increased its stake to 50% in 1999. In 2002, it acquired the

remaining 50% stake from Shell13.
Cairn Energy’s Indian assets were originally owned
by Cairn India Holdings, a 100% subsidiary of Cairn UK
Holdings, which itself was a 100% subsidiary of Cairn
Energy. In 2007, Cairn Energy raised $1.98 billion by selling
31% stake in Cairn India in an IPO. At that point of time, it
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

was the largest IPO in Indian corporate history. Cairn India

acquired all the shares of Cairn India Holdings 2006 from
Cairn UK Holdings. Cairn UK Holdings, in turn, was issued
69% of the shares of Cairn India14.
In August 2010, Vedanta acquired 58.5% stake of Cairn
India from Cairn Energy at a total acquisition cost of $8.7
billion. Vedanta subsequently increased its stake in Cairn
by making open market acquisition and in December 2011
became the promoter of Cairn India.
In 2015, Cairn India was the largest independent
oil and gas exploration and production company in India
accounting for 28% of India’s total oil and gas production.
It has two processing plants, 200 km of sub-sea pipelines15.
It had a portfolio of 9 blocks in India, Sri Lanka and South
Africa with proven and provable reserves of 1.4 billion
boe (barrels of oil equivalent)16. In the fiscal year ending 31
March, 2015, Cairn Energy reported net sales of INR 88.55
billion and net income of INR 13.2 billion. Exhibit 3 provides
the relevant financials of Cairn India Limited. At the end
13
 Cairn Energy PLC. “Who We Are: History”, Cairn Energy PLC Official Website,
accessed on October 13, 2015, http://www.cairnenergy.com/index.asp?pageid=18.
14
 Arvind Kalyanraman, “Cairn and able: a guide to the tax dispute”, Business Line,
March 16, 2015, accessed on June 14, 2017, http://www.thehindubusinessline.com/
companies/cairn-and-able-a-guide-to-the-tax-dispute/article7000057.ece.
15 
NDTV, “Cairn India Limited (Amalgamated): History”, NDTV Official Website,
accessed on June 13, 2017, http://profit.ndtv.com/stock/cairn-india-ltd-_cairn/
reports.
16 
Cairn India Limited, “Corporate Brochure”, Cairn India Limited Official Website,
accessed on October 13, 2015, https://www.cairnindia.com/about-us.

S0218927519500032.indd 69 01-07-19 4:20:57 PM

 70  ACRJ

of March, 2015, the promoters held 59.88% of the shares in

Cairn India. Exhibit 4 shows the shareholding pattern of the
company.
The decline in oil process affected the performance
of Cairn India and its valuation. In April 2015, Vedanta
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Limited reported $3 billion as goodwill impairment charges,

which was one-third of what it paid to acquire Cairn India
in 201117. Moody’s called this decision ‘credit negative’ as
it showed that Vedanta was no more bullish on oil and gas
business. Moody’s argued that Vedanta would find it difficult
to service the $4.4 billion debt it raised to finance Cairn
acquisition18.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

In March 2015, Cairn India received a notice from the

Income Tax Authorities in India, asking it to pay a tax of
INR 204 billion for its failure to deduct withholding tax on
the capital gains realized by its former parent company at
the time of listing of its shares in 2007. Cairn UK Holdings
received a total of INR 266.82 billion from the sale of their
stake during the IPO. However, the company invested only
INR 21.78 billion in India and hence the income tax depart-
ment treated the difference as capital gains. The Income Tax
Department had frozen the 9.2% stake of Cairn PLC in Cairn
India until the tax was paid19.
Both Vedanta and Cairn Energy decided to appeal
against the ruling under the ‘UK-India bilateral investment
treaty’20. In April 2015, Cairn India moved to the Delhi High

17
 Rakhi Mazumdaar and Satish John, “Vedanta reports $3 bn goodwill impairment
charges related to oil, gas biz, biggest in India’s corporate history”, Economic Times,
April 30, 2015, accessed on June 13, 2017, http://economictimes.indiatimes.com/
industry/energy/oil-gas/vedanta-reports-3-bn-goodwill-impairment-charges-related-
to-oil-gas-biz-biggest-in-indias-corporate-history/articleshow/47096231.cms.
18
 Promit Mukherjee, “Vedanta’s $3.1bn Cairn India impairment credit negative:
Moody’s”, Mint, May 4, 2015, accessed on June 13, 2017, http://www.livemint.com/
Companies/ZFzBw6daiQDl2ZzNyT4rjJ/Vedanta-may-find-it-difficult-to-repay-Cairn-
Indias-debt-s.html.
19 
Arvind Kalyanraman, “Cairn and able: a guide to the tax dispute”, Business Line,
March 16, 2015, accessed on June 14, 2017, http://www.thehindubusinessline.com/
companies/cairn-and-able-a-guide-to-the-tax-dispute/article7000057.ece.
20 
Hindu Business Line, “Cairn takes Indian authorities to court over $3.3 billion
tax demand”, The Hindu Business Line, April 7, 2015, accessed on October 13, 2015,
http://www.thehindubusinessline.com/companies/cairn-india-takes-indian-authorities-
to-court-over-33-bn-tax-demand/article7076558.ece.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  71

Court against the Income Tax Department, requesting the

‘quashing/setting aside’ of the income tax ruling. The effect
of the decline in oil prices and the demand of tax were also
reflected in the stock price of Cairn India, which fell from
325.01 in June 2014 to 166.83 in June 2015.
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BACKGROUND OF INDIA, INDIAN FINANCIAL AND

SHARE-BROKING INDUSTRY

India, one of the fastest growing economy in the world, was

also the second most populous country in the world in 2015.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

India liberalized its economy in 1991 and as a result started

realizing higher growth rate in the economy. The share of
agriculture in the total GDP of India decreased from 30% in
1991 to about 17% in 2015. During the same time, the contri-
bution of services sector increased from around 40% to 57%21.
The financial sector also experienced rapid growth during
this time. The broad-based Sensitivity Index of Bombay
Stock Exchange of India increased 25 times during this time
period22. Exhibit 5 shows some of the key macro-economic
variables during 2005–2015.
As of 2015, though there were 20 stock exchanges in
India, with Bombay Stock Exchange (BSE) and National Stock
Exchange of India (NSE), the two largest exchanges accounted
for more than 70% of the total turnover. The total turnover
in the market increased from 360.11 billion in 1990–91 to
51,806.82 billion in 2014–1523.
With growth in economy, the savings of the people
also increased. However, as of 2015, 95% of the household
savings is still invested in banks and other risk-free assets
and only 5% is invested in financial assets. The total assets
under management (AUM) of the mutual funds increased

21
“Sector-wise Contribution of GDP of India”, Statistics Times, accessed on June 16,
2017, http://statisticstimes.com/economy/sectorwise-gdp-contribution-of-india.php.
22 
BSE, “Historical Indices”, Bombay Stock Exchange of India Official Website,
accessed June 16, 2017, http://www.bseindia.com/indices/IndexArchiveData.aspx.
23
RBI, “Handbook of Indian Economy”, Reserve Bank of India Official Website,
accessed June 15, 2017, https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!2.

S0218927519500032.indd 71 01-07-19 4:20:57 PM

 72  ACRJ

from 858.22 billion in 1995-96 to 10827.57 billion in 2014–

15, with corporate sector explaining more than 45% of the
total mutual funds’ investments24. 2014–15 also witnessed
a 125% increase in M&A deals and 22% increase in private-
equity deals25.
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

In 2015, there were around 8,000 brokers and 42,000

sub-brokers in India helping the investors buy and sell shares
in the stock market26. As per an equity research report by
DION, top 100 of these brokers account for 80% of the total
business in India27. With the advent of discount brokerage
houses, many of the full-service brokerage houses entered
into other financial services industries in India to survive.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Thus for example, India Info Line (IIFL), the first online bro-
kerage house in India also operates in housing finance and
asset management28.
Derivatives trading started in India in 2000 and the
total turnover in the derivatives market has increased by
more than 20 times during 2005–201529. With the introduc-
tion of derivatives trading, a few arbitrage funds started oper-
ating in India. These arbitrage funds mostly look at the price
difference between cash and futures market and try to take
advantage of this price difference30. However, as of June 2015,

24
AMFI, “Research and Information: AUM Data”, Association of Mutual Funds in
India Official Website, accessed June 15, 2017, https://www.amfiindia.com/research-
information/aum-data.
25
IBEF, “About Indian Economy Growth Rate and Statistics”, Indian Brand Equity
Foundation Official Website, accessed June 15, 2017, https://www.amfiindia.com/
research-information/aum-data.
26
IBEF, “Financial Services in India”, Indian Brand Equity Foundation Official
Website, accessed June 15, 2017, https://www.ibef.org/industry/financial-services-
india.aspx.
27
Dion, “Brokerage and Securities Industry”, DION Global Solutions, April 9,
2015, aaccessed June 15, 2017, www.anmi.in/downloads/Seminar-on-Equity-
Research-Dion-Presentation-ANMI.pdf.
28
Shishir Asthana, “The changing face of brokerage industry”, Business Standard,
October 28, 2015, accessed June 15, 2017, https://www.business-standard.com/
article/companies/the-changing-face-of-broking-industry-115102800472_1.html.
29
IBEF, “Financial Services Industry in India”, Indian Brand Equity Fund official
website, accessed June 15, 2017, https://www.ibef.org/industry/financial-services-
presentation.
30“Arbitrage Trading in India”, Indian Share Broker Official Website, accessed on
June 15, 2017, https://www.indiansharebroker.com/arbitrage-trading-in-india/.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  73

there was no merger arbitrage fund in India. Low volume of

mergers and acquisitions and the friendly nature of most the
transactions were stated to be the primary reason for this31.
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THE PROPOSED MERGER

On June 14, 2015, the Boards of Vedanta Limited and Cairn

India met independently to approve the merger between the
two Indian subsidiaries of the Vedanta group. As part of the
merger, Vedanta Limited would issue one share of Vedanta
for every share of Cairn India. In addition, the shareholders
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

of Cairn India would also receive a redeemable preference

share with face value of INR 10, carrying an annual dividend
of 7.5%. The tenure of these preferences shares would be
18 months and the coupons would be paid annually32. In
its press release, the company claimed that the shareholders
of Cairn were receiving a 7.3% premium compared to the
previous close.
The company provided the following justifications for
the merger:
• The merger would ‘de-risk earnings volatility’ and would
generate stable cash flows.
• The company would be able to allocate capital to projects
generating higher returns.
• Stronger balance sheet would reduce the cost of capital of
the company.
• The merged company would be able to sustain ‘strong div-
idend distribution’ by providing greater financial flexibility.
• Finally, the merger would simplify the group structure.
As per the press release, the merger would provide benefits to
the shareholders of Cairn in the form of lowering of earnings

31
Nishanth Vasudevan, “M&A arbitrage funds have a long way to go”, Economic
Times, October 10, 2006, accessed on June 15, 2017, http://economictimes.indiatimes.
com/markets/stocks/stocks-news/ma-arbitrage-funds-have-a-long-way-to-go-in-
india/articleshow/2132882.cms.
32
The dividends were to be paid on a pro-rata basis at the end of the year for the
time period for which the preference share was outstanding.

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 74  ACRJ
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Figure 1
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

volatility, by providing access to the assets of Vedanta

Limited and by providing cash flows to finance investments
and dividends in all phases of the cycle. In addition, the
shareholders of Cairn India could participate in the marketing
and procurement cost savings initiative started in Vedanta.
Figure 1 shows the relevant shareholding pattern
within the Vedanta group. Immediately after the merger,
Vedanta group’s stake in Vedanta Limited would reduce to
50.1% from 62.9% (just prior to the merger). The minority
shareholders of Vedanta and Cairn would hold 19.7% and
20.2% of the shares of Vedanta Limited after the merger. This
merger was expected to be complete in the first quarter of
2016 calendar year.
Both the companies hired the services of Price Water-
house Coopers and Walker Chandiok & Co to value the
stocks of Vedanta and Cairn India and recommend the stock
exchange ratio. Since the companies had investments in many
subsidiaries and oil and gas fields at different stages, sum-
of-parts valuation method had been used. Based on the stock
values arrived at, the two consultants recommended the
above terms of merger.

REACTION FROM THE MARKET

There were rumors in the market about the likelihood of

the merger and many analysts were expecting an exchange

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  75

ratio of 1:133. In fact, when rumors about a possible merger

appeared in many newspapers in India in the week before the
merger announcement, the stock price of Vedanta increased
by more than 6%, whereas the stock prices of Cairn India
remained largely volatile (it first decreased by 4% and then
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recovered from that)34.

On the day following the merger, the stock of
Cairn India increased to INR 187.7 (from its previous close
of INR 180.75). The stock price of Vedanta, however,
decreased to INR 181.25 from its previous close of INR 184.
The broad-based index (Sensex) increased by 0.6% on the
same date.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

The announcement of the merger received mixed reac-

tion from the analysts. In the beginning analysts believed
that the merger was a win-win situation for the shareholders
of both the companies35 and it would reduce the exposure
of Cairn India’s shareholders to one commodity. This would
also reduce the cost of capital of the company36. Since the
market cap of Cairn India had fallen by around 50% in the
year 2014-15, many analysts believed that the market had
already factored in the effect of tax demand on the stock
prices37 and hence that would not affect the merger.
Some corporate governance experts believed that the
merger would alleviate all corporate misgovernance con-
cerns. In 2014, Cairn India had lent $1.25 billion to Vedanta
Limited (known as Sesa Sterlite then) at an annual interest

33
The Hindu Business Line, “What is in store if Cairn-Vedanta do merge”, The Hindu
Business Line, June 12, 2015, accessed on September 13, 2015, http://www.thehin-
dubusinessline.com/companies/whats-in-store-if-cairn-indiavedanta-do-merge/
article7306232.ece.
34
ibid.
35
Business Standard, “Should you buy Cairn?”, Business Standard, June 15, 2015,
accessed on September 13, 2015, http://www.business-standard.com/article/
markets/should-you-buy-cairn-india-115061500242_1.html.
36
Ibid.
37
Moneycontrol.com, “Vedanta India to merge with Cairn India, swap ratio at 1:1”,
Moneycontrol.com website, accessed on September 13, 2015,
http://www.moneycontrol.com/news/business/
vedanta-india-to-mergecairn-india-swap-ratio-at-11_1445601.html.

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 76  ACRJ

of LIBOR plus 300 bps38. The merger between the two compa-
nies would prevent such transactions in the future39.
However, few analysts showed concern about the likely
benefit that would accrue to the shareholders. First, prices of
iron ore and copper have been declining for quite some time
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

putting pressure on Vedanta’s bottom line. Cairn India was

under similar pressure due to the decline in oil prices. In such
a situation it was not very clear how the merger would add
value. Exhibit 6 shows the trend in the key commodity prices
in London Metal Exchange. Second, though the stock prices
of Cairn India increased following the announcement of the
merger, many analysts showed concern about the higher
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

debt of Vedanta and how Vedanta might use Cairn India’s

cash balance to repay part of its debt40. As on 31 March 2015,
Vedanta Limited had long-term borrowings of INR 520 billion
as reflected in its balance sheet. On the same day, Cairn
India had cash and marketable securities of Rs.126.67 billion.
In fact, an analyst from CLSA expressed his apprehension
by saying that if the minority shareholders of Cairn did not
approve the merger, Vedanta might ask Cairn to distribute
the cash as dividends41.
Third, any related party transaction in India would
require the approval of majority of the minority shareholders’
permission. As per Section 188 of the Companies Act, 2013
in India, all related party transactions would require the
approval of the audit committee of the Board and the per-

38
Cairn India Limited, “Corporate Presentation”, Cairn India Limited Official
Website, accessed on September 13, 2015, http://www.cairnindia.com/media/
corporate-presentation.
39
Moneycontrol.com, “Vedanta India to merge with Cairn India, swap ratio at
1:1”, Moneycontrol.com website, accessed on September 13, 2015, http://www.
moneycontrol.com/news/business/vedanta-india-to-mergecairn-india-swap-ratio-
at-11_1445601.html.
40
Business Line Bureau, “Cairn India, Vedanta to merge in $2.3 bn all-stock deal”,
Business Line. June 14, 2015, accessed on September 13, 2015,
http://www.thehindubusinessline.com/companies/cairn-india-to-merge-with-
vedanta/article7315147.ece.
41
Business Standard, “Vedanta India’s merger with Cairn may fall through”,
Business Standard, July 24, 2015, accessed on September 13, 2015, http://www.
business-standard.com/article/companies/cairn-india-s-merger-with-vedanta-may-
fall-through-115072300336_1.html.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  77

mission of majority of the minority shareholders42. Simi-

larly, as per the revised Clause 49 of the listing agreement
of the Securities Exchange Board of India (SEBI), any mate-
rial related party transaction would require majority of the
minority shareholders’ permission. Though initially, the law
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

was stricter initially and required the approval of two-third

of the minority shareholders, but subsequently clause 49
was amended in 2015 to seek approval of only 50% of the
minority shareholders for such transactions43.
Since the promoters had 60% of shares in Cairn India,
at least half of the minority shareholders’ approval of the
merger was required. Cairn UK Holdings held 9.82% of the
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

shares and LIC of India held 9.06% of the shares in Cairn

India. It was therefore crucial to obtain the approval of both
these shareholders44. LIC had stated its preference for a better
deal including a higher dividend on the preference shares45.
Cairn UK Holdings had already said that it would vote
against the merger46. United India Insurance Company, with
less than 1% stake in Cairn India also disapproved the merger
saying the merger would affect the Capex plans of Cairn
India47.

42
MCA, “188:Related Party Transactions”, Ministry of Corporate Affairs, accessed on
September 13, 2015, https://www.mca.gov.in/SearchableActs/Section188.htm.
43
SEBI, “Corporate Governance in listed entities: Amendments to Clause 49
of the Listing Agreement”, SEBI official website, accessed on June 14, 2017,
www.sebi.gov.in/cms/sebi_data/attachdocs/1410777212906.pdf.
44
Business Standard, “UK’s Cairn Energy set to vote against Vedanta-Cairn
India Merger”, Business Standard, July 17, 2015, accessed on October 13, 2015,
https://www.business-standard.com/article/reuters/cairn-energy-set-to-vote-against-
vedanta-cairn-india-merger-ft-115072201495_1.html.
45
Business Standard, “LIC wants Vedanta to sweeten the Cairn Deal”,
Business Standard, June 16, 2015, accessed on September 13, 2015, https://www.
business-standard.com/article/companies/lic-wants-more-cash-out-of-vedanta-cairns-
merger-115061501046_1.html.
46
Business Standard, “Vedanta India’s merger with Cairn may fall through”,
Business Standard, July 24, 2015, accessed on September 13, 2015, https://www.
business-standard.com/article/companies/cairn-india-s-merger-with-vedanta-may-
fall-through-115072300336_1.html.
47
Moneycopntrol.com, “Cairn Vedanta merger blues: After LIC, UIIC unhappy”,
Moneycontrol.com website, accessed on September 13, 2015,
https://www.moneycontrol.com/news/cnbc-tv18-comments/cairn-vedanta-merger-
blues-after-lic-uiic-unhappy_2072941.html.

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 78  ACRJ

In its equity research report, an analyst from Edelweiss

commented that the fair value of Cairn India came to 218
per share under the worst-case scenario and hence the current
exchange ratio would not be acceptable to the minority share-
holders of Cairn India. Given that a few of the institutional
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

investors had expressed their unhappiness over the terms

of the merger, Edelweiss expected Vedanta to sweeten the
deal48.

STOCK PRICE MOVEMENTS OF VEDANTA AND CAIRN

AND CHOICE BEFORE THE SHAREHOLDERS
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Both the subsidiaries of Vedanta group generated nega-

tive returns for the shareholders in the year before the
merger announcement. While Vedanta’s price decreased
from INR 292.30 to INR 184, Cairn’s price decreased from
INR 370.30 to INR 180.75 in the year before merger. Exhibit 7
shows the movement of the stock prices of both the com-
panies and that of Sensex, a broad-based stock index in
India, during the one–year period preceding the merger
announcement.
The decreasing trend in the stock prices of both the
companies continued even after the merger announcement.
While the price of Vedanta’s shares decreased to INR 97.10
by mid September 2015, the price of Cairn India decreased to
INR 145.65 by the same time. Exhibit 8 shows the stock prices
of both the companies and the index in the period following
the merger announcement.
Analysts from Edelweiss Research and Nomura voiced
their concerns over the lower swap ratio and the possible
effect of the merger on the stock prices of Cairn India49. Edel-
weiss estimated the intrinsic value of Cairn at INR 241 per
share, whereas Nomura estimated it at INR 155 per share.
Since the merger is expected to be completed by March
2016, the formal letter from the company asking the share-

48
Edelweiss, “Cairn India: In the merger’s shadows”, Edelweiss Equity Research
Report, July 21, 2015.
49 
Source: Bloomberg Database, accessed on October 13, 2015.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  79

holders to vote for/against the merger would come sometime

in December, 2015. Both the companies would first seek the
approval of the minority shareholders. As per the extant law
prevailing in India, at least 50% of the minority shareholders
(in value) of both the companies must approve the merger.
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Then in two separate meetings (convened by the respective

High Courts), at least 75% of the shareholders (in value) must
approve the merger. In these meetings, all shareholders can
cast their vote. In addition, the merger also would require
approval of the Ministry of Petroleum and Natural Gas
(MPNG) and the Foreign Investment Promotion Board (FIPB).
The stock prices prevailing in mid September 2015
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posed interesting questions before the shareholders. With the

prevailing prices being out of sync with the exchange ratio,
some possible scenarios included, i) Vedanta would manage
to get the approval of the minority shareholders, ii) Vedanta
would offer a higher exchange ratio or offer higher number
of preference shares, iii) Vedanta would withdraw the merger
offer. The trading strategy for an investor would depend on
the probability assigned to each of these scenarios and the
payoff from each scenario.
While there can be no risk-free arbitrage opportunity
in an efficient capital market, risky arbitrage opportunities
do sometimes exist in markets and arbitragers may take dif-
ferent positions in the stocks depending on their assessment
of the probability of the outcome. In this particular case, the
expected payoff from any trading strategy would depend on
the probability of the possible outcomes.

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 80 ACRJ

Exhibit 1

Summary Financial Statements of Vedanta Limited

(figures, other than per-share figures, are in INR billions)
2015 2014
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Net Revenue 737.10 661.52

Other Income 29.77 20.73
Total Revenue 766.87 682.26
Raw Material Expenses 246.69 230.99
Power & Fuel 81.59 73.16
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Employee Benefit Expenses 29.15 27.64

Depreciation and Amortization Expenses 71.59 68.82
Other Expenses 159.21 134.11
EBIT 178.63 147.54
Interest Expenses 56.59 50.94
Tax 34.31 31.32
Exceptional Items (221.29) (1.67)
Prior Period Adjustments 19.83 39.79
Net Income before share in profit of associates and minority interest (113.73) 103.39
Share in Profit of Associates 0.04 10.82
Share in Profit attributable to Minority Interest (42.76) (51.23)
Net Income (Loss) (156.46) 62.99
Earnings per Share
Basic −52.77 21.46
Diluted −52.77 21.46

Balance Sheet
Equity & Liabilities
Share Capital 2.97 2.97
Reserves & Surpluses 535.79 727.12
Total 538.75 730.09
Source: Annual report of the company.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  81

Exhibit 1 (Continued)
Minority Interest 355.30 337.97
Long term Borrowings 520.25 549.66
Deferred Tax Liabilities (Net of Deferred Tax Assets) 33.30 27.35
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Other Long term Liabilities 12.24 13.99

Long term Provisions 23.42 42.03
Current Liabilities
Short term borrowings 199.41 173.95
Accounts Payable 52.78 41.67
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Other current Liabilities 152.83 212.24

Short term Provisions 14.53 12.24
Total Liabilities & Equity 1,902.81 2,141.20
Fixed Assets 910.66 910.95
Goodwill 177.90 392.38
Non-current Investments 2.13 2.09
Long-term loans and advances 164.53 139.85
Other non-current assets 21.02 61.60
Current Assets
Current Investments 393.93 377.01
Inventories 87.25 90.34
Accounts Receivables 36.05 46.20
Cash and cash equivalents 56.96 76.86
Short-term loans and advances 43.83 32.29
Other current assets 8.56 11.63
Total Assets 1,902.81 2,141.20

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 82 ACRJ

Exhibit 2

Shareholding Pattern in Vedanta Limited

Shareholding Pattern in Vedanta Limited (end of 31 March, 2015)
Type of Shareholder No of Shares Held* Stake (%)
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Promoters 1,864,025,368 62.87%

Domestic Financial Institutions 167,896,335 5.66%
Foreign Institutional Investors 636,319,371 21.46%
Others 296,453,165 10.00%
Total 2,964,694,239 100.00%
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

*
It includes depository receipts

Source: Vedanta Limited, “Shareholder Information”, Vedanta Limited Official Website,

accessed on December 25, 2015, http://www.vedantalimited.com/investor-relations/
shareholder-information.aspx?year=2015&category=ShareholdingPattern.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  83

Exhibit 3

Summary Financials of Cairn India

(figures, other than per-share figures, are in INR billions)
2015 2014
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Net Revenue 146.46 187.62

Other Income 18.09 15.03
Total Revenue 164.55 202.64
Raw Material Expenses 45.66 40.59
Employee Benefit Expenses 1.10 2.74
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Depletion, Depreciation and Amortization Expenses 25.69 22.97

Exploration costs written off 10.98 4.12
Other Expenses 3.50 3.31
EBIT 77.62 128.91
Interest Expenses 0.20 0.41
Tax 21.10 28.25
Exceptional Items (20.61) -
Prior Period Adjustments (9.08) (24.07)
Net Income (Loss) 44.80 124.32
Earnings per Share
Basic 23.85 65.08
Diluted 23.77 64.95

Balance Sheet
Equity & Liabilities
Share Capital 18.75 19.08
Reserves & Surpluses 569.95 555.30
Total 588.70 574.38
Source: Annual report of the company.

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 84  ACRJ

Exhibit 3 (Continued)
Deferred Tax Liabilities (Net of Deferred Tax Assets) 12.72 7.36
Long term Provisions 16.18 31.13
Current Liabilities
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Accounts Payable 9.19 6.21

Other current Liabilities 30.99 20.97
Short term Provisions 10.56 16.88
Total Liabilities & Equity 668.34 656.92
Fixed Assets 295.40 307.73
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Long-term loans and advances 162.28 74.03

Other non-current assets 16.63 53.83
Current Assets
Current Investments 152.33 163.64
Inventories 3.44 2.97
Accounts Receivables 11.25 25.12
Cash and cash equivalents 8.52 17.63
Short-term loans and advances 16.21 10.47
Other current assets 2.28 1.51
Total Assets 668.34 656.92

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  85

Exhibit 4A

Shareholding Pattern for Cairn India

Shareholding Pattern in Cairn India Limited (end of 31 March, 2015)

Type of Shareholder No of Shares Held Stake (%)

by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

Promoters* 1,122,713,999 59.88%

Domestic Financial Institutions 194,078,281 10.35%
Foreign Institutional Investors 267,367,338 14.26%
Others 290,693,134 15.50%
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Total 1,874,852,752 100.00%

*
Vedanta Limited, Sesa Resources and Twin Star Mauritius hold 31.28%, 2.91% and 65.81%
respectively of these shares.

Source: Cairn India, “Shareholding Pattern”, Cairn India official website, accessed on
December 25, 2015, https://www.cairnindia.com/investors/shareholding-pattern.

Exhibit 4B

Details of Promoter’s holdings in Cairn India

Vedanta Limited 351,140,413 31.28%

Sesa Resources* 32,700,000 2.91%
Twin Star Mauritius Holdings* 738,873,586 65.81%
Total 1,122,713,999
*
Sesa Resources and Twin Star Mauritius Holdings are 100% subsidiaries of Vedanta
Limited.

Source: Cairn India, “Shareholding Pattern”, Cairn India official website, accessed on
December 25, 2015, https://www.cairnindia.com/investors/shareholding-pattern.

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 86 ACRJ

Exhibit 5A

Price Movements of Key Commodities

Copper Zinc Silver Oil Iron Ore

Date
($/mt) ($/mt) ($/oz) ($/bbl) ($/dmt)
by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.

5/29/2015 6,015.00 2,182.00 16.79 61.23 60.00

4/30/2015 6,335.00 2,367.00 16.24 62.64 52.00
3/31/2015 6,041.00 2,072.00 16.71 54.18 58.00
2/27/2015 5,895.00 2,048.25 16.67 59.39 63.00
1/30/2015 5,495.00 2,119.75 17.34 56.03 68.00
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

12/31/2014 6,300.00 2,167.00 15.73 58.79 68.00

11/28/2014 6,351.00 2,212.75 15.66 67.99 74.00
10/31/2014 6,695.00 2,315.50 16.27 80.20 81.00
9/30/2014 6,667.00 2,281.75 17.18 87.11 82.38
8/29/2014 6,982.00 2,359.25 19.70 91.83 92.61
7/31/2014 7,115.00 2,377.50 20.71 92.04 96.05
6/30/2014 7,015.00 2,214.25 21.31 95.00 92.74
5/30/2014 6,845.00 2,055.50 18.93 90.99 100.56
4/30/2014 6,642.00 2,040.25 19.39 88.36 114.58
3/31/2014 6,645.00 1,970.25 20.00 88.12 111.83
2/28/2014 7,010.00 2,111.00 21.48 87.61 121.37
1/31/2014 7,065.00 1,964.00 19.40 83.59 128.12
12/31/2013 7,360.00 2,053.00 19.67 86.60 135.79
11/29/2013 7,055.00 1,866.00 20.32 86.64 136.32
10/31/2013 7,249.00 1,919.00 22.20 86.99 132.57

Source: Bloomberg Database, accessed on November 6, 2015.

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  87

Exhibit 5B

Graphical Representation of the Data

by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

Source: Authors’ own analysis (data from Exhibit 5A have been used to prepare these charts in R).

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 88 ACRJ

Exhibit 6

Stock Price Movements before the Merger Announcement

by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

**
Sensex figures have been divided with 100.

Source: Authors’ own analysis (daily stock prices data have been collected from Prowess Database
of the Centre for Monitoring Indian Economy).

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 PROFIT OPPORTUNITIES FROM VEDANTA AND CAIRN INDIA MERGER  89

Exhibit 7

Stock Price Movements after the Merger Announcement

by UNIVERSITY OF NEW ENGLAND on 09/14/19. Re-use and distribution is strictly not permitted, except for Open Access articles.
Asian Case Res. J. 2019.23:65-89. Downloaded from www.worldscientific.com

**
Sensex figures have been divided with 100.

Source: Authors’ own analysis (daily stock prices data have been collected from Prowess Database of the Centre for
Monitoring Indian Economy).

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