Commentary by Nostromo Research
The release of a wikileak (below) last week raises questions about the operations (and governance) of one of the largest companies recently registered on the London Stock Exchange – one which shot straight into the FTSE 100 on its Initial Public Offering (IPO) of 7 May 2010.
In fact, Essar Energy plc’s debut marked the largest-ever listing of an Indian company on London’s main trading market, priced at £1.3 billion (making it more significant than that of Vedanta in December 2003); and smaller in recent years only to those of Glencore and ENRC.
As Dow Jones newswires (helpfully) pointed out at the time:
“A premium listing means the company is expected to meet the U.K.’s highest standards of regulation and corporate governance…However, the company was hit by volatility in stock markets following a wave of credit downgrades in Europe that rattled investor confidence and lowered the price for its stock offering to 420 pence, from its previous range of 450 pence to 550 pence, to ensure a more successful debut. Shares have continued to tumble since the IPO.
“As the IPO was being marketed, analysts had raised concerns about the company’s corporate governance.”
[DJN 7 May 2010].
In fact , over the past year, Essar Energy’s fortunes have declined further. Its market capitalisation (marcap) at the time of its listing was estimated at around £5.47 billion.
But on 6 September 2011, its marcap stood at only £3.064 billion.
Essar Energy was “spun off” from India’s Essar Group, one of the three most powerful, geographically extended, diversified (and controversial) power companies on the subcontinent, with investments in coal mining , oil and gas, and associated refining and power production.
Getting exposure to foreign markets through listing in London was a no-brainer for the Group. In the past year Essar Energy has brokered a refinery deal with Kenya’s state oil company and, inter alia, with Shell UK. Most recently (in July 2011) Essar Energy acquired the Stanlow oil refinery at Ellesmere Port, Cheshire.
The company operates four power plants in India and one at Algoma in Canada – which powers the eponymous steel plant, wholly-owned by Essar Global Inc. This is the holding company for the Essar Group’s 76% controlling shareholding in Essar Energy plc (see below).
Essar Energy plc’s “diverse portfolio” includes 17 blocks and fields for the exploration and production of oil and gas in India, Australia, Indonesia, Madagascar, Nigeria and Vietnam.
In July 2010, Essar Energy plc’s subsidiary Essar Power Ltd (EPL) signed a binding agreement to acquire Navabharat Power Pvt. Ltd.–a coal power plant project in India. This is a. 2,250-megawatt coal-fired power plant project in the Dhenkanal district of Orissa on India’s east coast (DJN 13 July 2010).
In September 2011 Essar Energy said it planned to bid for coal-bed methane and shale gas blocks in Indonesia, and would also bid for “similar assets” in China at the end of the year [Business Standard 14 September 2010). S.R. Agarwal, director and chief executive officer of Essar Exploration and Production India Ltd commented that “This would be our first international foray into unconventional resources. Indonesia opens its CBM blocks auction next month and we would be bidding for the same. We would seek approval of the Essar Energy PLC board for the same,” No further news is available.
Although Essar Energy plc’s direct involvement in mining and coal is so far relatively minor, the ownership and governance of the London-listed company is firmly in the grip of the Essar Group itself (though its subsidiary, wholly-owned Essar Global), with the brothers Ruia (Ravi and Prashant – respectively the chairman and vice-chairman of Essar Energy plc) between them holding 76.72% of the company’s share capital. (The only other main shareholder is Bank of New York Nominees, with 3.35%).
When, therefore the Essar Group announced in March this year, that it “may jointly bid [with India’s JSW Energy] for Australia-based Hancock Holding Co.’s (HBHC) two coal mines worth $2 billion” [Financial Express 28 March 2011] the prospects are high that, were a deal concluded, management of the mines would end up in Essar plc’s hands. (The point being that the Group may find it easier to raise the capital required to purchase and operate the mines more easily in London than in Mumbai).
In any case, the wikileaks revelation – though not a major surprise (Tata has also been accused of backing “both sides” in the war on tribal communities in Chhattisgarh) – does raise serious questions about Essar Energy plc’s governance, in light of the control exercised by the Essar Group itself; and specifically to what extent the UK Bribery act might be used against its UK subsidiary (if at all).
The extraordinary statement, accredited to an Essar Group spokesperson in the wikileak, that the company “sets different Maoist groups against each other to suppress the situation” must (if verified) surely be one of the most horrendous ever made by a major extractive company, anywhere.
At the very least, we should demand to know why two of the three executive directors of a London company (already criticised for its poor governance since listing) have apparently admitted to funding “terrorist” groups; albeit in a foreign country and in their capacity as directors of an Indian-based corporation.
Essar rejects allegations of paying Maoists protection money
WASHINGTON: The Ruias-led Essar Group, which has mining interests in Chhattisgarh, pays protection money to Maoists to safeguard its operations in the state, a leaked US diplomatic cable said.
“A senior representative from Essar, a major industrial company with large mining and steel-related facilities in Chhattisgarh, told Congenoff (Consul General Office) that the company pays the Maoists ‘a significant amount’ not to harm or interfere with their operations,” a cable dated January 11, 2010, originating from the US consulate in Mumbai and released by WikiLeaks stated.
“When the Maoists occasionally break this agreement and damage Essar property or threaten personnel, Essar sets different Maoist groups against each other to suppress the situation,” it said.
The cable said the Maoists pose a real threat to development and security in the region and efforts to bring these areas back into the orbit of the government is warranted.
As the government prepared to initiate action against the Naxals in Chhattisgarh, the US consulate, based on the trip of its officials to the region, said that the potential for human rights abuses by the security forces in the state is high.
Commentary by Nostromo Research