Cairn India was founded and registered as a limited company in India in August 2006. It is currently a wholly-owned subsidiary of Cairn UK, with the latter expected to remain a significant shareholder following the planned IPO of the company.

The total project cost is estimated at $1.6 billion. IFC is considering an equity investment in Cairn India in the form of ordinary shares of up to $45 million equivalent

50.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan
Equity	50.0

* These investment figures are indicative

The project activities shall be undertaken in several locations in India, including in the states of Andhra Pradesh, Gujarat and Rajasthan. The company maintains corporate offices in New Delhi and Chennai, India, as well as project offices at its exploration and production sites.

- Fit with WBG Strategy:

The current World Bank Group Country Assistance Strategy (CAS) for India focuses on improving government effectiveness; investing in people and empowering communities; and promoting private sector-led growth. The strategy for promoting private-sector led growth is further elaborated in the World Bank Group’s Private Sector Development Strategy, appended to the CAS, which proposes that the World Bank and IFC work closely together to:

- facilitate greater competitiveness;
- improve the quantity and quality of infrastructure through greater private participation;
- promote the provision of private health services; and
- improve rural productivity and growth through greater private investment.

IFC will focus on providing firms with long-term debt and equity which may not be available from domestic financial markets; and on adding value in the areas of global best practices, creating international partnerships, entering new markets, environmental and social sustainability and corporate governance.

The proposed IFC investment is therefore consistent with the WBG’s strategic priorities in India.

- Development Impact:

Since the mid-1990s, India has implemented policy changes to encourage private investment in its upstream oil and gas sector. Although success remains modest, a number of foreign companies, such as Cairn, have successfully entered the sector. IFC''s proposed investment reflects its continuing commitment to enhance the role of the private sector in the upstream hydrocarbons sector in India. The proposed transaction, similar to the senior loan investment made by IFC earlier this year, is expected to have the following key development impacts:

Enhancing Availability of Higher-Quality, Domestic Fuel: The project is expected to reduce the reliance of India''s power sector and small industry on supplies on relatively inferior coal and more expensive naphtha, respectively.

- Import Substitution:

At its currently projected peak plateau production rate of 150,000 bbl/d, the Rajasthan development would account for a significant portion of India’s indigenous oil production and help reduce its oil imports.

- Creation and Preservation of Direct and Indirect Employment:

In 2005 approximately 75% of Cairn Energy PLC’s staff and contractors were local nationals. The Rajasthan development is expected to generate 450-500 jobs during peak operations (approximately 2,500 during the construction period), benefiting the local community through increased employment opportunities both directly and indirectly.

- Supporting Local Communities:

Cairn supports a wide range of community development activities in all its operations. Its work is concentrated in five main areas – health, education, local entrepreneurship development, environment and infrastructure – and benefits from effective co-ordination with local government, NGOs and media. Significant emphasis going forward is to be placed on meeting local community expectations for value-added employment opportunities, as well as further improvements of water infrastructure, medical services, health education, etc.

- Benefits to Government:

It is expected that the government of India will receive substantial fiscal receipts from royalties, production sharing and corporate taxes, generated by the incremental production to be achieved as a result of the proposed investment. Specifically in the case of Rajasthan, a sizeable proportion of fiscal payments will accrue directly to the state government in the form of royalties.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- annual production of oil and gas in India,
- direct employment levels,
- production sharing and fiscal payments accruing to the governments of India, and
- implementation of community development programs.

The proposed equity investment will build on the successful partnership established between IFC and Cairn UK, a model extractive industries client. It will assist the company in its next stage of development, as it seeks to affirm the Indian identity of its local operations, through the establishment of an India-incorporated entity with Indian management and staff. This assistance will take three main forms:

- Funding Mobilization:

IFC’s support to the company, through equity, debt as well as technical assistance on environmental and social issues and community development, will provide comfort to other potential investors.

- Environmental and Social Management Systems:

The proposed equity investment will reinforce the past co-operation between IFC and Cairn UK on the enhancement and optimization of the newly incorporated Cairn India’s ESMS. Going beyond the work undertaken in conjunction with the earlier debt investment, IFC will provide specifically Cairn India with guidance on the systems, processes and resourcing which it would require as it begins to operate with increasing independence from Cairn UK, in order to minimize key project risks for its activities.

- Community Development and Linkages:

Similarly, the equity investment will help deepen and expand Cairn India’s partnership with IFC in the areas of community and enterprise development, particularly to support its operations in poorer areas, such as Rajasthan. These will focus initially on the development and implementation of a full-scale supplier enhancement and income generation program for Rajasthan (including the establishment of an Enterprise Center), and a campaign to raise awareness on Child & Maternity Help, including AIDS awareness.

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. The review of the project consisted of appraising technical, environmental and social information, in addition to appraising the operations of the company. The following corporate systems and potential environment, health, safety and social impacts of the project were analyzed:

- establishing an integrated Environmental, Health, Safety and Social Management System at the corporate level, as well as a specific system for India;
- the company’s capacity to manage multiple projects and implement the Integrated Management System;
- impacts from construction, including transportation of materials;
- air emissions;
- greenhouse gas emissions;
- water supply and disposal;
- liquid and solid waste disposal;
- noise from drilling operations;
- contamination from past or present operations;
- public and worker safety;
- emergency response plans including oil spill response;
- land acquisition and compensation;
- community development; and
- public consultation.

The company has presented plans to address these impacts to ensure that the proposed project will upon implementation of the specific agreed measures, comply with all relevant environmental and social requirements, namely the Indian laws and regulations, and the World Bank/IFC environment and social policies and environmental, health and safety guidelines. The information about how these potential impacts will be addressed by the company is detailed in the Environmental and Social Review Summary disclosed in the World Bank Infoshop.

An important benefit of the investments supported by the proposed financing is revenue flows to governments in the form of taxes, royalties and other payments, especially in the case of prospective oil projects in India. The World Bank has very active programs in India which is one of its largest borrowers and is generally seen, based on available indicators such as Transparency International’s Corruption Perceptions Index and the World Bank Institute’s Governance Indicators, as having adequate governance capacity. Accountability for collection and use of revenues at the national level is not seen as a significant risk. The company has agreed to disclose publicly its payments to governments (including production sharing) at the state and national level. On balance, given the governance context, the expected development impact and the projected benefits, including to communities and local government, IFC believes that this is a project which it should support.