A specific non- compete clause may be the answer to Vedanta’s takeover woes

Vedanta’s first venture into the oil and gas industry has so far been plagued by perpetual troubles and obstacles. The company’s plans to purchase more than 20% of Cairn India in a hostile open offer were seemingly a completed deal, yet the nation’s government has put pressure on Cairn India to let the locally- based ONGC exercise the first right of refusal that was granted to them due to their close partnership with Cairn in the past. And though ONGC’s representatives have announced that they are backing out of the buyout; Vedanta’s standings in the deal are still less clear, when compared to the situation before the state’s involvement.

As it stands now, ONGC have drastically reduced their royalty amounts, taxing simply the amount they hold in the company. Yet some are doubtful about the inexperienced Vedanta’s capability of adhering to the standards set by the Production Sharing Contracts.

The non- compete fees paid out to promoters is the other potential impeder in the proceedings. Since the promoters are not out of the picture altogether, Vedanta has a chance to utilize the newfound goodwill aspect of the contract, which will allow it to widen the open offer up to 25% when dealing with the promoters present.

Though in similar previous deals, like in the cases of Tate Tea, the state put a stop to non- compete payments from being paid out; the precedent was set, as representatives from the firm put together a case proving its competency and prowess in the field. Despite the fact that the non- compete restrictions were not lifted then, the case did set an example that legal action can be taken to bypass the seemingly insurmountable technicality superimposed on the process by the government.

Vedanta’s chances grow manifold as well since the Advisory Committee responsible for the measure are now debating whether the fees should even remain as a necessity. However, the company’s virginal entrance into the oil trade may still make investors and federal powers consider implementing the clause. As it stands now however, in the accordance with the non- compete clause, Cairn India are to retain most of their capabilities within the actual company for at least a 3- year stretch. By that measure, the non- compete clause is actually working for Vedanta’s benefit, as it will prevent Cairn from directly competing with the inexperienced venture for the coming few years, giving Vedanta the opportunity to settle in its new niche.