Billionaire Anil Agarwal-led mining firm Vedanta Ltd will ultimately be held accountable for Cairn India’s USD 3.2 billion tax liability after it absorbs the cash-rich oil firm, Moody’s Investors Service said Monday.
The I-T Department had in March imposed a tax demand of Rs. 20,495 crore on Cairn India for failing to deduct withholding tax on alleged capital gains made by its erstwhile promoter, Cairn Energy.
“Debt reduction following the merger will reduce rating pressure, although the merger increases the risk that Vedanta Ltd will ultimately be held accountable for Cairn India’s USD 3.2-billion tax liability,” it said.
Cairn India, which is 60 per cent owned by Vedanta and is being merged with the metal and mining firm, has stated that it does not agree with the tax demand and had challenged it in the Delhi High Court.
The Rs 20,495-crore tax demand is in addition to the I-T Department slapping a Rs. 10,247-crore tax demand on Cairn Energy for an alleged Rs. 24,500-crore worth capital gains it made in 2006 while transferring all of its Indian assets to a new company, Cairn India, and getting it listed on stock exchanges.
“Vedanta Ltd’s proposed merger with Cairn India is credit positive for Vedanta Resources,” Moody’s Investors Service said in a statement.
In a cashless all-stock transaction — minority shareholders would receive one equity share and one 7.5 per cent preference share in Vedanta Ltd for every share held in Cairn India.
Following completion of the transaction, Vedanta Resources’ shareholding in its subsidiary Vedanta Ltd will come down to 50.1 per cent from 62.9 per cent. At March-end 2015, Cairn India had USD 2.9 billion in cash and no external debt outstanding.
“The merger will provide Vedanta Ltd better access to Cairn India and its subsidiaries’ current large cash balances of USD 2.9 billion and future cash surpluses as previous access was only possible through up-streaming of dividends,” said Kaustubh Chaubal, Moody’s Vice-President and Senior Analyst.
With current crude oil prices at around USD 64 per barrel, and weak aluminium prices weighing on its EBITDA, the strengthening of Vedanta Resources’ balance sheet — which now seems plausible with improved access to Cairn India’s cash — is imperative to stave off further pressure on its rating.
“We also view the proposed Cairn India merger as a major step in the simplification of Vedanta Resources’ complex structure, and in particular addressing some of the risks associated with the group’s thinly capitalised but highly leveraged parent company,” Chaubal said.
At March-end 2015, Vedanta Resources reported consolidated debt of USD 16.7 billion, of which USD 7.7 billion of unsecured debt rated at Ba3 negative was held with Vedanta Resources and the balance with various operating and intermediate holding companies.
With access to Cairn India’s cash and future cash flow, Vedanta Ltd could either repay debt or fund its other businesses. However, Vedanta Resources’ credit profile will only benefit to the extent that the additional cash and cash flow are used towards reducing the group’s reliance on debt.
Reduction of debt could be in the form of part repayment of Vedanta Ltd’s external debt, or repayment in part of the USD 2.6 billion inter-company debt currently held at Twin Star Holdings Mauritius, which was by way of a loan from Vedanta Resources.
“The latter will provide Vedanta Resources the liquidity to repay some of its unsecured debt, which will also improve consolidated leverage,” Moody’s said.