How did Vedanta grab India's richest oilfields?Published by MAC on 2012-12-27
Source: Nostromo Research
A London Calling investigation
London-listed Vedanta Resources is about to pounce on India's richest oil fields, with full permission of its central government and against the wishes of state-owned oil and gas conglomerate, ONGC.
In 2011, Vedanta bought Cairn India from Scotland-based Cairn Energy, and with it came a major chunk of lucrative oil fields in Rajasthan. Many Indians deplored the acquisition as daylight "robbery", asking why the government apparently succumbed to strong-arming by Vedanta.
There does indeed appear to some evidence of growing collusion between Indian administrators and Anil Agarwal, the power behind Vedanta's tarnished throne. This week MAC publishes two articles deploring this tendency, specifically regarding the company's machinations in trying to grab the Nyamgiri bauxite deposits in Orissa. See: Vedanta poised on brink of victory - and failure?
However, a judicial enquiry into the Korba chimney collapse of 2009 - which cost the lives of at least forty workers - has just found Vedanta guility of manifold failures to follow basic safety rules. See: Vedanta guilty of grave safety breaches in India
Surely, this emphatic condemnation of Vedanta's derelictions at Korba should immediately render it persona non grata in Rajasthan's oil fields? After all, there's little substantial difference between a badly-built chimney and a faulty oil-rig, in terms of the potential sacrifice of human lives should they topple down.
Nonetheless, we strongly doubt the Indian authorities will scupper the Cairn deal at this late stage.
For there are pre-existing taxation agreements between India, the UK, Singapore and Mauritius, that appear to leave the huge South Asian state powerless to do so.
On 14 December 2012, Ram Jethmalani of The New Indian Express asked why the "small economies" of Singapore and Mauritius" have been sources of such huge Foreign Direct Investment (FDI) in India during recent years.
Said Jethmalani: "[I]t is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, through a process known as round tripping."
Looming largest among these offenders is Vedanta Resources plc, which ticks most of relevant boxes. It's majority-controlled by a Non-Resident Indian (Anil Agarwal); primarily aimed at exploiting home-grown Indian resources; and a substantial proportion of its investments are channeled through Mauritius.
In fact, thirty-eight percent of Cairn India is held by Vedanta's Mauritius-registered Twin Star Holdings.
Advising Agarwal and his henchmen in the Cairn acquisition was the well-heeled Mauritian legal firm, Conyers, Dill & Pearman.
The trio proudly boast that Mauritius "has a distinct advantage over most other offshore jurisdictions which cannot mitigate any of the tax implications in the ultimate country of investment [our italics]" [Conyers, Dill & Pearman, Mauritius Bulletin, February 2011: http://www.conyersdill.com/publication-files/Mauritius_Bulletin_Issue_1_2011.pdf].
This advantage derives from Mauritius having long-standing Double Taxation Avoidance Agreements with several countries, including India. Conyers, Dill & Pearon made a similar agreement between the island state and DR Congo in 2010, and has fixed ones for other African states.
Eighteen months ago, India's Economic Times (27 May 2011) warned the Indian government that the proposed Cairn India/ Vedanta merger posed "legal hiccups". The foreign affairs ministry had already "warned about" possible violations of India's Bilateral Investment Protection and Promotion Agreement (BIPA) obligations.
The newspaper said: "The deal involves three foreign entities - Cairn Energy, Vedanta Resources and its subsidiary Twin Star Holdings, a holding company incorporated in Mauritius.
"Cairn Energy decided to sell its stake to Vedanta Resources and Twin Star Holdings. Due to [Cairn Energy's] PSC's [Production Sharing Contracts] with the government and the involvement of [state owned] ONGC in its Gujarat project, it had to take permission from the government before going through such a deal".
Protecting Vedanta's interests
The government had earlier agreed with ONGC "that the royalty to be paid for the Gujarat project should be equally borne by Cairn India...".
But, according to the Economic Times: "Article 3 of the India-UK BIPA requires India to give a fair and equitable treatment to all foreign investments by UK nationals and companies.
"Article 7 also provides for easy transferability of investment. India's rigid pre-conditions and delay in giving approval to the transaction may be a potential violation of these Articles in letter and spirit."
Moreover, "Vedanta Resources... can claim protection under Article 3 (1) of Indian-UK BIT ,claiming failure to provide favourable conditions to make investment.
"Twin Star Holdings being legally a separate entity and a corporation under Mauritian law can make a similar, but independent claim under the India-Mauritian BIPA.
"By asking Cairn India to drop cess arbitration and accept the royalty argument, India has invited several legal hiccups on its shore. For example, Cairn Energy may bring a claim of denial of justice, which is well protected by India-UK BIPA.
"Also, if the pre-conditions are agreed, it would in turn amount to an increase in annual burden of about Rs16,500 crore on Cairn India's profit, post-takeover by Vedanta Resources, which may in turn lead to depreciation in offer price by Vedanta to buy the Cairn Energy stake. It can be argued by Cairn Energy that this may amount to a loss of profit leading to a possible claim of indirect expropriation against India".
It's therefore very likely that Vedanta twisted the arm of the Indian government to get its own way.
Having said this, the government appears to have failed in preventing the use of Mauritius as a tax haven by the UK-based company; or to counter the debilitating economic impacts of the investment protection agreement with the UK, invoked to protect Vedanta's interests.
Let's fervently hope that, if and when Vedanta strides onto the oil fields of Rajasthan, another Korba-type disaster isn't in the offing. However, on past reckoning, we can justifiably fear the worst.
Meanwhile, we should ask what are the chances that Vedanta itself will face criminal charges for causing the 2009 calamity - whether in India or the UK?
In April 2008, the UK government began (partially) enforcing the Corporate Manslaughter and Corporate Homicide Act of 2007. Although this allows charges to be brought against the British subsidiary of a foreign-based company for violations of the Act in the UK, the reverse does not apply.
This stands in contrast to recently-introduced UK Anti-Bribery legislation, which can penalise a British company for bribing, or attempting to bribe, an official or individual anywhere in the world.
In November 2010, an Indian judge ordered the board of Vedanta - including its chairman, Anil Agarwal - to appear in India and answer charges that Balco had illegally acquired the land on which the ill-fated Korba chimney was being constructed in 2009. See: World's "worst" mining company in the dock - again!
Mr Agarwal ignored the order, and although he has visited India since, no attempt has been made to arrest him.
[London Calling is pubished by Nostromo Research. Comments made in this column do not necessarily represent the opinions of any other person or group. Reproduction is welcomed under a Creative Commons Licence, with full acknowledgment to the author.]