How to give NTPC 26% and only minimum control

Vol 7, PW 14 (24 Sep 03) Midstream & Downstream

Companies competing for the regassification element of NTPC's 3m t/y Kawas-Gandhar gas tender have one weighty problem to deal with.

NTPC has evinced interest in acquiring 26% equity in the regassification facility if it chooses LNG over natural gas. Such a stake is not unreasonable, as it would expose NTPC to the risk and give it an incentive to ensure the venture's survival.

Yet it's not as straight-forward as it seems. Under the (Indian) Companies Act, a shareholder with 26% equity stake in a locally registered company can veto management resolutions.

These could relate to important matters like increasing the equity of the company or merging the company with another or buying another company. No company likes a minority shareholder exercising this kind of control over critical areas of its functioning.

Ditto for Shell and Petronet-LNG - the two companies competing to provide regassification services if NTPC opts for LNG at Kawas and Gandhar. How will they respond Both agree if NTPC insists on taking 26% there's nothing they can do because of the unambiguous provisions of the Companies Act.

Lawyers, however, can show you ways to honour the letter of the law in full and as much of the spirit as you are comfortable with. Consider Petronet-LNG.

Asource tells us Petronet-LNG has been advised to set up a separate subsidiary to regassify LNG exclusively for NTPC. Petronet-LNG will offer NTPC a 26% stake in this separate company and keep the balance 74%.

This new company will own either the third Petronet-LNG tank (for NTPC's LNG) or one compressor or one pump only. This way, "NTPC can influence only the incremental capital expansion plans of facilities (set aside in the separate company) meant for NTPC and will have no influence at all on Petronet-LNG or its other facilities." Likewise Shell has been advised to bargain hard with NTPC and clearly limit the areas over which it can exercise veto power as a shareholder.

"Obviously, Shell will not want NTPC to have the unfettered veto power over everything with a 26% stake," says a source. "NTPC will be told to be reasonable and accept a workable as well as mutually comfortable solution." That could mean NTPC agreeing to shareholder veto rights over the appointment of company auditors and similar (relatively minor) matters in the Shell regassification company.

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