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Cairn loan spooks investors

Mumbai, July 24: The Cairn India stock today slumped almost 7 per cent as investors reacted negatively to a disclosure by the company that it would lend $1.25 billion to Vedanta Group.

The oil & gas exploration company has already provided around $800 million of the loan during the first quarter ended June 30, results of which were announced on Wednesday.

The stock price fell on apprehensions over how the company was utilising its cash reserves and the lack of adequate disclosure related to this transaction.

On the BSE, the Cairn India stock hit an intra-day low of Rs 321.50 before ending with a loss of 6.67 per cent, or Rs 23.05, at Rs 322.65

On Wednesday, Cairn India revealed the transaction in a conference call with analysts. The company said the money was lent at 300 basis points above the London Inter-bank Offered Rate (Libor).

According to Cairn India, the transaction is purely a treasury operation and yields a much higher rate than bank deposits.

Libor is an international benchmark rate that some global banks charge each other for loans.

Some brokerages, however, slammed the move.

Foreign brokerage CLSA said the related-party loan would create doubts among investors, raising fears about leakage of cash from core businesses.

“Such related-party transactions typically raise market concerns about a conflict of interest on the most shareholder-friendly way of deploying surplus cash,” Goldman Sachs Investment Research said in a note.

A report from Jefferies said the company would have utilised its cash better by rewarding investors via higher dividend or a share buyback.

Cairn India refused to disclose when the board had decided to extend the loan or whether shareholders’ nod was required for doing a related-party transaction.

Vedanta Group holds a 59.90 per cent stake in Cairn India.

The company yesterday held its annual general meeting in Mumbai but did not make any disclosure about the loan.

 
 
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