One of the crucial files on the table of Murli Deora before he moved out of the petroleum ministry on January 19 was on the $10-billion Cairn-Vedanta deal. The companies had been awaiting clearance from the government ever since Deora, now in the corporate affairs ministry, forced Cairn Plc to apply for the approval. The requirement approval arose in the wake of Cairn Plc's plan, unveiled in August 2010, to sell its stake in Cairn India to the Anil Agarwal-controlled Vedanta group.
The file had worked out the form in which the government approval should come, especially since directions from the Prime Minister’s Office to clear the way landed in the ministry on January 5, 2011. While most of the 11 conditions under discussion within the government are procedural, one of them is to unconditionally accept government decisions on issues under litigation between Cairn and the government.
The other relates to 15 per cent royalty on crude oil produced from the Barmer block in Rajasthan. Both the issues are not related to the technical capabilities of the new owner and future production, yet have a bearing on the valuation of the deal.
The production sharing contract (PSC) for the Barmer oil block under which the government has insisted that Cairn Plc needs permission from it is silent on cess payment and gives the operator the benefit of not paying the royalty. Instead, government-controlled Oil and Natural Gas Corporation, that holds 30 per cent in the Barmer block, bears the entire royalty burden since it is the original licensee of the block which was first bid out to Shell. There are more than 20 other PSCs which have a similar arrangement for payment of royalty. An amendment in one is bound to have a huge ripple effect.
The question, oil industry experts are raising, is whether government approval can come with riders such as unconditional acceptance of issues under litigation with the government itself. “Any agreement that takes away the right of a party to legal recourse is void under Sec 28 of the Contract Act. Therefore, any agreement whereby a party gives up its right to legal recourse would be void,” said a senior partner in a New Delhi-based law firm who did not want to get quoted.
Though Cairn India is paying “cess in protest” to the government, arbitration is going on. “The government is taking advantage of its position. Parties to a contract should be on a par with each other. It is mixing its contractual power with the sovereign power,” said Vikram Nankani, litigation partner, Economic Law Practice. He said the government could not expect :contracts to be reopened under the pain of approvals”.
All commercial contracts entered into by the government are treated on a par with commercial contracts between private parties. It has been held repeatedly by the Supreme Court that entering into commercial contracts is not exercise of sovereign function of the government and therefore it cannot invoke “public interest” for changing the terms and/or reneging on the contract. The government cannot seek to impose new conditions as this is not an exercise of sovereign function. “It will all boil down to what is actually there in a particular contract. If you have a commercial contract then it is binding. It can only be overwritten if another law allows it to or consensually,” said MP Bharucha, senior partner, Bharucha & Partners.
On the proposed formula for allowing ONGC to recover royalty payments as cost to the government, ONGC and Cairn India, Hemant Sahai, managing partner, Hemant Sahai Associates said the terms of a PSC could not be changed unilaterally. “Therefore, imposition of this condition at this stage (since the PSC provided otherwise) cannot be sustained legally. This appears to be a case of the government trying to benefit ONGC and using this opportunity to try and get Vedanta to give its consent.”
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The petroleum ministry has also sought views of the ministry of law on the conditions. “There is a concept of economic duress. And the law equates economic duress with physical duress. So, if conditions are imposed to clear a deal, they can seek legal recourse,” said Bharucha.
Sunday is crucial for London-listed Vedanta Resources and Cairn Plc and Bombay Stock Exchange-listed Cairn India since Petroleum Secretary S Sunderashan has convened a meeting of the companies and any burden of royalty on Cairn India will change the valuations. It will also be important for the government, since it will decide on how the approval is cloaked after the ministry under Deora delayed its approval.