The Cabinet Committee on Economic Affairs headed by Prime Minister Manmohan Singh is likely to clear London-listed mining group Vedanta Resources' $9.6 billion acquisition of Cairn India tomorrow after overruling the law ministry's opinion on state-owned ONGC's rights.
"The Cabinet Committee on Economic Affairs (CCEA) has been scheduled for tomorrow afternoon...In all likelihood, it will give an in-principal approval to the Cairn-Vedanta deal," an official privy to the development said.
The Cabinet panel, which will besides Prime Minister, includes Finance Minister Pranab Mukherjee, Home Minister P Chidambaram, Oil Minister S Jaipal Reddy, Environment Minister Jairam Ramesh, Law Minister M Veerappa Moily and Corporate Affairs Minister Murli Deora, may overrule opinion of the Solicitor General of India that Vedanta must agree to equitably share royalty on oil produced from Cairn India's mainstay Rajasthan oilfields before the government nod.
"The pre-condition will be overruled by arguing that the government's take from Rajasthan oilfields will be impacted if Rs 18,000 crore royalty ONGC will pay in excess of its share in the oilfields is cost recovered from revenues," the official said. "The government revenues will be dented by USD 1 billion."
Incidentally, the government is committed to reimbursing in full the royalty ONGC pays in excess of its 30% share in Rajasthan oilfields in case it is not cost recovered.
Oil and Natural Gas Corp (ONGC) had in July 2010, more than a month before Edinburgh-based Cairn Energy announced sale of majority stake in its Indian unit to Vedanta, cited provisions in the field contracts to say royalty, like any other levy, is cost recoverable.
Cairn India, which holds 70% stake in the 6.5 billion barrels Rajasthan block, does not pay any royalty and is opposed to making it cost recoverable as it will dent its profits.
Besides opposing cost recovery of royalty, Cairn Energy has maintained that its stake sale to Vedanta does not require the government nod and had through its Indian unit made a conditional application in November-end on insistence of the oil ministry. The application also rejected rights of ONGC, which has stake in eight out of 10 properties of Cairn India.
The official said CCEA may ask Cairn to seek ONGC's no-objection.
Oil Ministry's Cabinet note lists royalty being made cost-recoverable as a pre-condition for approval as an option. Alternatively, it has suggested that the government gives its consent to the deal without any pre-condition and "appropriate decision" will be taken to enforce ONGC's right.
SGI, whose opinion has been endorsed by Moily, has, however, opposed the second option saying "the second option which has been suggested in the Cabinet note i.E. Pursuing rights under the PSC (production sharing contract) to recover the rightful dues of ONGC, would involve an undesirable amount of time and resources to be spent and would be contrary to the public interest."
Officials said the oil ministry in the Cabinet note has admitted that Cairn could later play a hooky as it was doing in the arbitration case on payment of cess on Rajasthan oil.
Cairn says it is not liable to pay Rs 2,500 per tonne cess on its 70% share of production from the Rajasthan blocks and the same has to be paid by ONGC.
The Cabinet note says that Cairn has alleged that the non-inclusion of cess payment in the PSC was "either a mutual or a unilateral mistake by the government by playing fraud by diverting (original operator) Shell's attention away from cess during the contract negotiations."
"Vedanta Resources may also take a similar position at a later point of time to its advantage on the issue of cost recovery of royalty. Therefore, a suitable safeguard may be put in place as the ministry feels that the cess is payable by the contractor and royalty is cost recoverable under the PSC," it says.
"If the competent authority does accord its consent to the transfer of participating interest from Cairn to Vedanta, the same should be granted subject to the stipulation/condition regarding the recoverability of the cost of the royalty," SGI said in his opinion.
SGI's opinion was taken on insistence of Finance Ministry which wanted to know the legality of ONGC's demand.
The Oil Ministry Cabinet note on the issue lists two alternatives. In the first, five preconditions, including royalty being made cost-recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC's no-objection and Vedanta providing performance and financial guarantees have been listed.
The alternative to the precondition of royalty and cess suggests that the government shall pursue all legal recourses for establishing its rights under the Production Sharing Contract (PSC) in the case of cess.
On royalty, it should take appropriate decision to enforce the provisions of PSC to make royalty cost- recoverable.
In both the options, ONGC's consent or no-objection is a pre-requisite.
ONGC owns 30% stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields. Over the life of the field, the royalty burden works out to be Rs 18,000 crore, of which ONGC also has to bear Cairn's share of about Rs 12,600 crore.