Sunday, December 19, 2010

Banks can force Vedanta's Rights issue at face value if debt default.

As an investor in Cairn India, I am tracking the Vedanta deal avidly. When Vedanta issued a circular(available here) to its shareholders seeking transaction approval, there were some surprising nuggets.

A consortium of banks have arranged bridge finance which is meant to be repaid by
  • IPO of a copper company
  • Issue of unsecured loans
But in case the bridge facility is not repaid, a concession has been extracted from Vedanta(page 14) that
In the event that any amount of the bridge facility is outstanding nine months plus 30 days following
Completion of the Acquisition...... or.Vedanta has irrevocably undertaken to implement a pre-emptive rights issue of Ordinary Shares to raise an amount equal to up to two times the amount then outstanding under the bridge facility to fund the repayment of any remaining balance of this bridge facility (net of costs, fees and expenses), such amount to be determined by the Banks.The price at which any Ordinary Shares of Vedanta are to be issued in connection with the rights issue will be determined by Vedanta and the Banks at the time of issue provided that, in the event no agreement is reached, the price at which Ordinary Shares shall be offered pursuant to the rights issue will be equal to the nominal value of the Ordinary Shares (being US$0.10 per Ordinary Share)
. ......

For a share trading at 2700 pence or so, this provision is quite insulting albeit boilerplate. There is not even a token reference to over Last traded price/ arbitration. Straight away the reference is to nominal value. Of course, the shareholders will get a bonaza but the question is is this rationale?

Naturally, the directors have glossed it over stating that
"The Vedanta Directors expect that any equity issue required in accordance with the
Standby Equity Underwriting Letter will be undertaken at a price which is at a significant premium to
the nominal value of the Ordinary Shares utilizing the Company’s existing authorities to issue shares
granted by Vedanta Shareholders at this year’s annual general meeting of the Company. Should any
additional authorities be required, these will be sought from Vedanta Shareholders prior to the
implementation of the rights issue

Whether the shareholders would have approved such a clause is interesting. Anyways, do the banks know something which the layperson does not? Future events will reveal that

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