In the world today, corporate fraud, corruption and tax evasion are at an all time high with direct involvement of banks, politicians and their respective parties. The standards and obligations prescribed by the criminal, civil and administrative levels of law are invariably undermined and hence ineffective.

To give some insight how it works, we (Gordon Bowden and I) focus on one company in which our own Prime Minister was involved on his last trip to India this year. The story was covered by Rowena Mason in The Telegraph (19 February 2011) when she quoted:

-        Mr Cameron wrote to Indian Prime Minister Dr Manmohan Singh expressing worries about unpredictable government decisions which could potentially be costly for the two FTSE 100 companies. He also raised the other complications relating to Vodafone

-        The British prime minister specifically mentioned the delay in government approval for Cairn Energy’s $9.6bn (£6bn) sale of its Indian subsidiary to Vedanta Resources. The deal has been waiting for the nod from Indian authorities for seven months.

Rowena’s report also mentioned the following:

-        British officials said Mr Cameron’s letter raises more general concerns about the need for “predictability” in Indian government decision-making. “It is about the predictability of the Indian environment and that’s the same problem Vodafone is facing with this capital gains tax levied on them for buying Hutchison. That was not clear when the initial deal went through,” said one official.

So who is behind Cairn Energy and is there a connection between this company, Prime Minister David Cameron, and his party? Rowena described Sir Bill Gammell, Chief Executive of Cairn Energy, as being well connected with the political establishment; he is a personal friend of George W Bush and former school friend our ex-PM, Tony Blair. The report said they are keen to get the deal completed so they can focus on exploration in Greenland.

Let’s take a look at this Scottish based company listed on the London Stock Exchange and based in Edinburgh. Their two main areas of activity are developing the Rajasthan resource base in India and exploring frontier basins in Greenland.

The company’s punch line is: CAIRN: DISCOVERING HIDDEN VALUE. Let’s discover that hidden value for some of their shareholders/investors.

Cairn Energy Plc formed a subsidiary in India called Cairn India and now the parent company in Edinburgh wants to sell a proportion of Cairn India to another company called Vedanta. Both companies are listed on the Bombay Stock Exchange and the London Stock Exchange.

This basically means that an over-estimated value of Cairn India is being offered for part sale to Vedanta with common directorship. This indirectly makes Vedanta shareholders pay more for the purchase of Cairn India (being possibly overpriced), thus taking money out of the coffers in India and out of the pocket of the shareholders (some shareholders may be outside of India). There is also a possibility that more shares may be offered or raised by Vedanta if and when the partial takeover takes place.

As far as Cairn India goes, the $9.6 billion will then end up in the coffers of Cairn in UK, with a small proportion going to Indian shareholders (if at all)... this amounts to “Asset Stripping” which means two things for Indian investors

1.       They loose a big percentage of their company to another company, and consequently do not get back the longer term yields one would expect if the company continued to be successful.

2.      They are no longer share holders in the part that has been sold off.

Again, they may be offered the option to buy share in Vedanta?

Cairn Energy Plc, UK, says the reason for this sale is to re-invest this vast sum of money in an oil/gas exploration project in offshore Greenland. But in December 2009, Cairn Energy Plc took from the public-owned Royal Bank of Scotland a $100m loan, though it was soon going to have

$9.6 billion to re-invest!!!

The company issued a statement:

-        Subject to approval from the Government of Greenland, Cairn intends to drill up to four wells in 2011. Further details on the exploration programme will be provided in Cairn’s next operational update.

-        To provide the immediate liquidity required to enable the group to agree to these contracts, Cairn has entered into a stand-by secured revolving debt facility of US $900 million that will also provide funding for general corporate purposes. The facility is provided by Standard Chartered Bank, Bank of Scotland Plc, Crédit Agricole Corporate and Investment Bank, HSBC Bank PLC and Société Générale. [Note: one of the directors used to be a kingpin in the HSBC!] 

The Greenland project may fail for two reasons:

1.       Greenpeace may succeed in stopping exploration in this pristine environment, which is a World Heritage location

2.      No commercial quantities of oil/gas may be found

So if and when the entire project fails, it becomes a massive toxic debt!! The question arises, who pays – the British taxpayer?

We should also address another aspect of the London based “Vedanta Empire,” that of its Chief Executive, the multi-billionaire Anil Agarwal. Gordon Bowden says Agarwal has a very long list of interconnecting companies that deserve investigation. He has uncovered some interesting facts, which he calls forensic evidence. The evidence shows that Aman Mehta is involved with the parent company in Edinburgh, but also runs some virtual/shell companies by playing around with his name. The Indian Government needs to be aware of this; it seems illegal under the term of insider trader etc.

List the Board of Directors in Cairn India and the Board of Directors for Vedanta, and you see a couple of connections:

-        Sir Bill Gammell [Chairman], 57, holds a BA in Economics and Accountancy from Stirling University and was awarded a knighthood in 2006 for services to the industry in Scotland. He has over 25 years of experience in the international oil and gas industry. He founded Cairn Energy PLC and was appointed Chief Executive on its initial listing in 1988. He is the Chairman and Non-Executive Director of Cairn India Limited and is member of the Asia Task Force and the UK India Business Council. Sir Gammell, who is an ex-Scotland rugby internationalist, is also Chairman of Winning Scotland Foundation, a Director of Sport Scotland and Glasgow 2014 Limited, and a member of the British Olympic Advisory Board.

-        Rahul Dhir [Managing Director & Chief Executive Officer], 44, joined Cairn India in May 2006 as Chief Executive Officer and was appointed Managing Director on 22 August 2006. He completed his degree in Bachelor of Technology from the Indian Institute of Technology, Delhi. He went on to complete his M.Sc from the University of Texas at Austin and MBA from the Wharton Business School in Pennsylvania. Mr Dhir started his career as an oil and gas reservoir engineer before moving into investment banking. He has worked at SBC Warburg, Morgan Stanley and Merrill Lynch. Before joining Cairn India, he was Managing Director and Co-Head of Energy and Power Investment Banking at Merrill Lynch.

-        Rick Bott [Executive Director & Chief Operating Officer], 50, was appointed as Additional Director on 29 April 2008 and assumed office of Executive Director and Chief Operating Officer with effect from 15 June 2008. Mr Bott holds a B.S in Marine Sciences and Masters in Geology from Texas A & M. Mr Bott has global exploration and production experience of more than 27 years and has served in several senior positions in Ocean Egypt Companies, Ocean Yemen Corporation, British Gas and Tenneco. Before joining Cairn India, he was Vice President of Devon Energy’s International Division, responsible for developing and implementing business growth and exploration strategy for assets in 12 countries outside of North America.

-        Indrajit Banerjee [Executive Director & Chief Financial Officer], 54, was appointed as an Additional Director on 26 February 2007 and as Executive Director and Chief Financial Officer on 1 March 2007. He graduated from the University of Calcutta with a Bachelor’s Degree in Commerce. An associate member of the Institute of Chartered Accountants of India, Mr Banerjee started his career at PriceWaterhouse Coopers in Calcutta in 1979. He has held several senior positions throughout his career, including 17 years at the Indian Aluminium Company, formerly part of the Alcan Group and at Lucent Technologies (India). Before joining Cairn India, he was President-Finance and Planning at Lupin Limited.

-        Jann Brown [Non-Executive Director], 55, was appointed Finance Director of Cairn Energy PLC in 2006 and is also a non-executive director of Cairn India Limited. She holds an MA degree from Edinburgh University and joined Cairn Energy PLC in 1998 after a career in the accountancy profession, mainly with KPMG. Prior to her appointment as Finance Director, she served on the Group Management Board for seven years. She is a member of the Institute of Chartered Accountants of Scotland and the Chartered Institute of Taxation. She is the Senior Independent Director of Hansen Transmissions International NV, a Belgian engineering company which is listed on the London Stock exchange.

-        Malcolm Thoms [Deputy Chairman], 54, holds a B.Sc. Honours degree in Physics from Edinburgh University and is an MBA from Heriot-Watt University, and is currently trustee of the University of Edinburgh Development Trust. He started his career in the oil industry with Schlumberger and became manager of their businesses in Qatar and Brunei. He joined Cairn Energy PLC in 1989 and held a number of senior management positions prior to his appointment as executive director in 2000. Currently, the Chief Operating Officer of Cairn Energy PLC, Mr Thoms is a non-executive director of Cairn India Limited and has recently been appointed as a non-executive director of Agora Oil & Gas AS.

-        Edward Story [Non-Executive and Independent Director], 66, is a science graduate from Trinity University, San Antonio, Texas, and holds a Masters degree in Business Administration from the University of Texas, with an honorary Doctorate by the Institute of Finance and Economics of Mongolia. He is Chairman of the North America Mongolia Business Council. Mr Story has more than 40 years experience in the international oil and gas industry and is founder, President, and Chief Executive Officer of the LSE listed SOCO International PLC.

-        Naresh Chandra [Non-Executive and Independent Director], 75, is a post graduate (M.Sc. in Mathematics) from Allahabad University and a retired IAS officer. Previously, Mr Chandra was Chairman of the Indian Government Committee on Corporate Governance, India’s Ambassador to the USA, Advisor to the Prime Minister, Governor of Rajasthan, Union Cabinet Secretary, and Chief Secretary to the Government of Rajasthan. A reputed administrator and diplomat, Mr Chandra serves as an independent director on the boards of a number of companies.

-        Aman Mehta [Non-Executive and Independent Director], 63, is an economics graduate from Delhi University. He was earlier Chief Executive Officer of HSBC Asia Pacific until 2003. Mr Mehta is currently an independent non-executive director of several public companies in India as well as overseas. He is also a member of the Advisory Council of INSEAD, France, and International Advisory Boards of Prudential Inc., USA and CapitaLand Ltd., Singapore.

-        Dr. Omkar Goswami [Non-Executive and Independent Director], 53, holds a Master of Economics Degree from Delhi School of Economics. He is a D. Phil. in Economics from Oxford University. He has authored various books and research papers on economic history, industrial economics, public sector, bankruptcy laws and procedures, economic policy, corporate finance, corporate governance, public finance, tax enforcement and legal reforms.

Now the Board of Directors for Vedanta:

Executive Directors

-        Anil Agarwal [Executive Chairman], 55, founded the Group in 1976 and is also Chairman of Sterlite and Director of BALCO, HZL, and Vedanta Alumina Ltd. Since 1976 the Group has grown under his leadership, vision and strategy. Mr Agarwal has over 30 years’ experience as an industrialist.

-        Navin Agarwal [Deputy Executive Chairman], 48, is responsible for directing the Group’s business strategy and managing its overall growth. He also chairs the Group’s Executive Committee. In this role, he oversees the planning and completion of the pipeline of strategic growth projects. Mr Agarwal is also responsible for inorganic growth opportunities, strategic treasury and fund raising initiatives including long-term debt and equity global investor relations, as well as augmenting and managing the top talent of the Group.

-        M.S. Mehta [Chief Executive Officer], 53. Prior to his appointment on the board and as CEO, Mr Mehta was whole-time Director and CEO of Hindustan Zinc Limited. Mr Mehta has been with the group since April 2000 and has held various leadership roles, such as Commercial Director (Base Metals) at group level and Head of Sterlite Copper. Prior to joining the group, Mr Mehta worked for about 20 years in the steel sector. He is a mechanical engineer and holds a management degree from the Indian Institute of Management, Ahmedabad.

Non-Executive Directors

-        Naresh Chandra, 75, joined the board in May 2004. Mr Chandra was Union Home Secretary in 1990, Cabinet Secretary from 1990 to 1992, Senior Adviser to the Prime Minister of India from 1992 to 1995 and Indian Ambassador to America from 1996 to 2001. He was Chairman of the Indian Government Committee on Corporate Governance from 2002 to 2003. He was given the prestigious civilian award, Padma Vibhushan, by the President of India. Mr Chandra has a Master’s degree in Mathematics from Allahabad University.

-        Aman Mehta, 62, a senior banker, joined the board in November 2004, following retirement from HSBC where he had a career spanning 36 years. He held numerous positions, including that of Chairman and Chief Executive Officer of HSBC USA Inc. (New York based arm of HSBC Holdings plc), and as Deputy Chairman of HSBC Bank Middle East, based in Dubai with responsibility for the HSBC Group’s operations in the Middle East. In 1999, Mr Mehta was appointed Chief Executive Officer of the Hong Kong and Shanghai Banking Corporation, a position he held until his retirement. Mr Mehta has a Bachelor’s degree in Economics from Delhi University. He resides in Delhi and is a member of a number of Corporate and Institutional Boards in India as well as overseas.

-        Euan Macdonald, 69, spent over 20 years with S.G. Warburg, specialising in emerging market finance. From 1995 to 1999, Mr Macdonald was Chairman of SBC Warburg India, responsible for all the bank’s activities in India, and then from 1999 to 2001, was Executive Vice Chairman of HSBC Securities and Capital Markets, India. Mr Macdonald has a Bachelor’s degree in economics from the Cambridge University and a Masters degree in finance and international business from Columbia Business School.

Gordon sent me an attachment regarding Greenpeace, part of which is shown below:

Greenpeace Media Briefing 31 August 2010

Cairn Energy – ‘wildcat drilling’ at the ends of the earth

Key facts:

-        Cairn Energy is an Edinburgh-based oil company founded in 1981 by former Scottish rugby player Sir Bill Gammell. Despite its small size relative to other oil majors, the company is listed on the FTSE 100 with a market value of £6.8bn.

-        In December 2009 the publicly owned bank RBS made a $100m loan to Cairn, meaning that the British taxpayer is now partially underwriting the company.

-        Financially strengthened by a major find in Rajasthan, India in 2004, the company is now at what Cairn executives describe as the ‘wildcat stage’ of exploratory drilling in the Arctic.

-        Cairn holds two licenses in Baffin Bay, Greenland, covering approximately 72,000 square kilometres - just under the size of Scotland as a whole. The company estimates its chances of a significant find this summer at between 7-14% (emphasis added).

-        Although other oil majors including Chevron and Exxon Mobil own licenses nearby, Cairn is currently the only company drilling in this area. Only six wells have ever been completed in offshore Greenland – the last in 2000 (emphasis added).

-        The company has completed one exploratory well (which struck gas, but not oil), is still drilling another, and plans to move to two new locations in the near future. The wells are at a sea depth of between 320 and 630 meters.

-        The six month moratorium on new drilling introduced by the US government after the Deepwater Horizon disaster applies to wells deeper than 500ft, or 152 meters.

-        Drilling is limited to a ‘summer window’ between July and November. After this date, sea ice becomes too thick to allow vessels to operate and relief wells cannot be drilled effectively. In addition, Cairn’s environmental impact assessment only considers ice conditions during the summer months.

-        The Greenlandic government is refusing to release Cairn’s spill response plan 11, but reports suggest that it now has 14 vessels in the Greenland area capable of dealing with a spill. BP’s response in the Gulf of Mexico involved over 6,500 vessels.

-        The company is using ‘ice management’ techniques to tow icebergs out of the rig’s path or use water cannons to divert them. The area in which the rig is situated is known locally as ‘iceberg alley’.

-        In August 2010 a section of the Petermann glacier four times size of Manhattan calved into the sea, and is now floating south. An iceberg this size would force the entire rig to be moved at short notice.

-        Baffin Bay is home to 80 to 90% of the world’s Narwhals. The region is also home to blue whales, polar bears, seals, sharks, cormorants, kittiwakes and numerous other migratory birds.

Endnote:

The deal is stuck over a dispute about royalty payments by the state-owned Oil and Natural Gas Corp (ONGC), which has a 30-per cent holding in the Cairn-operated Rajasthan fields, but pays 100 per cent of the royalties. Agarwal says royalty payments issue should be treated separately.