Mumbai, June 14: Cairn India Ltd is being merged with Vedanta Ltd in an all-stock transaction worth $2.3 billion (Rs 14,720 crore).

Minority shareholders of the oil & gas exploration company will get one share of Vedanta Ltd and a 7.5 per cent redeemable preference share (RPS) for every share they hold in Cairn India.

The redeemable preference shares, which will have an 18-month tenure, will be listed on the National Stock Exchange.

Vedanta Ltd will arrange for a third-party facility to enable a cash exit on a par for RPS holders.

The merger is a result of Vedanta group chairman Anil Agarwal's plan to create an "Indian natural resources champion", which will now have a diversified portfolio that includes zinc, copper, aluminium and power in addition to oil and gas.

There has been a buzz about the merger since the start of the year and it was approved by the boards of the two companies here today.

Under the terms of the deal, Vedanta India will issue around 75.2 crore each of equity shares and RPS to the minority shareholders of Cairn India. Inclusive of RPS, the swap ratio works out to 1.04:1.

The company claimed that the share swap has an "implied premium of 7.3 per cent to the previous closing price" of Cairn India.

The Cairn India stock closed at Rs 180.75 on the BSE on Friday. No shares will be issued to Vedanta Ltd or its subsidiaries for their shareholding in Cairn India.

The deal, which is expected to close in the first quarter of calendar 2016, will ensure that overseas parent Vedanta Plc's equity stake in the merged entity will come down to 50.1 per cent from its current level of 62.9 per cent in Cairn India.

Cairn India minority shareholders will own 20.2 per cent and minority shareholders of the other company will have a stake of 29.7 per cent.

The group claimed that this would be a tax-neutral transaction for Vedanta Ltd, Cairn India and their shareholders.

The deal will now put the spotlight on the minority shareholders of Cairn India who must approve it. The resolution will have to be passed by at least 50 per cent of the minority shareholders of Cairn India, including its former parent Cairn Energy, which owns 9.8 per cent of total shares, and the Life Insurance Corporation, which owns another 9 per cent. Total public shareholding is a little over 40 per cent in the company.

The response of these minority shareholders will have to be seen as there have been some concerns about the terms of the merger.

Cairn India is a cash-rich and high dividend paying company. For the year-ended March 31, 2015, it had cash and cash equivalents worth Rs 16,867 crore ($2.7 billion) and paid a dividend amounting to 45 per cent of its annual consolidated profit. The company also generated a cash flow of Rs 8,765 crore during the year.

Cairn India Ltd, which has a debt-free balance sheet, is now being folded into Vedanta, which had a gross consolidated debt of Rs 77,752 crore. With cash of around Rs 46,212 crore, the latter's net debt stands at Rs 31,540 crore.

Debt worry

The apprehension, at least in the stock markets, is that the merger will benefit Vedanta more as it can now dip into Cairn India's cash trove and pare its debt. This was one reason why the Cairn India stock has been hammered after the group confirmed that it was mulling a merger option.

Incidentally, Cairn India has cut its capital spending to $500 million from an earlier projected level of $1.2 billion this fiscal after the decline in oil prices.

However, the senior management personnel of both the companies told reporters after the board meetings that the cash on Cairn India's books and debt on Vedanta Ltd's balance sheet had been factored into the valuation and the share-swap ratio.

The share-exchange ratio was determined by a joint independent valuation carried out by Price Waterhouse & Co and Walker Chandiok & Co.

Vedanta will be pursuing a debt-refinancing strategy that will be independent of the merger transaction.

They argued that Cairn India shareholders would gain from de-risking of its business as the company will now have interest in other commodities as well.

"This transaction consolidates our portfolio of tier-I assets, which will deliver superior returns to all shareholders. It will result in improved financial flexibility to allocate capital to the highest return projects and sustain strong dividends," said Tom Albanese, CEO of Vedanta Ltd.

He added that the merger was part of the plan to simplify the group's corporate structure. Even after the merger, the Cairn brand will be retained.

Vedanta, earlier known as Sesa Sterlite Ltd, in 2013 had consolidated its iron ore mining business by merging Sesa Goa Ltd with Sterlite Industries (India) Ltd, which ran the copper and aluminium businesses.

The proposed deal would need the approval of both the stock exchanges, Sebi, high courts as well as the petroleum and natural gas ministry.