In the $9.6 billion Cairn-Vedanta deal, former Union petroleum minister Murli Deora has left his successor Jaipal Reddy with a significant issue to resolve: can a government use its sovereign power to alter commercial contracts? The world is watching how India will answer that question. On the face of it, Cairn Energy’s offer to sell a controlling stake in Cairn India to Anil Agarwal’s Vedanta group amounts to a change of corporate ownership that requires shareholder approval, which both have already received. For Cairn India, an open offer should suffice. But as with any deal that involves what politicians are wont to call “national resources” — in this case oilfields — the issue has become a lot more complicated. It is by no means obvious that the government’s insistence on permission and conditionalities for the deal is entirely warranted. The issue of government approval has arisen because it involves a state-owned company — the Oil and Natural Gas Corporation (ONGC) — that holds a 30 per cent stake in Cairn India’s biggest asset and India’s largest onshore discovery, the oilfields in Barmer, Rajasthan. Even this can be considered unexceptionable were it not for the fact that ONGC is seeking to leverage the deal to rid itself of the contractual obligation of bearing the entire financial burden of royalty payments.
To be fair to ONGC, the royalty payment is certainly a non-commercial impost. It was a conditionality imposed by its owner, the government, as an incentive to attract private (especially foreign) participation in oil exploration. ONGC came under this obligation as the original licensee of the block when it was first bid out to Shell. As long as Shell did nothing with the block, the question of royalty payments did not arise. Now that Cairn is pumping 125,000 barrels of oil through one of its oil fields, ONGC’s contractual obligation to pay the entire royalty on crude oil produced from the block gives it a negative return. So, ONGC’s argument for a “cost recoverable” royalty may be commercially sound, but it is equally unfair for it to use the government’s sovereign power to press for a contractual change now, when production has begun. More so when the outcome of this issue has a significant bearing on the fate of some 20 other production-sharing contracts with similar conditions. There is certainly a case for the government to scrap this provision going forward, but chopping and changing legally binding contracts halfway through sets a precedent that will do little good for a fast-growing economy with an acute need for oil and mineral resources. Similarly, it is surely bizarre for the government to insist that Cairn and Vedanta unconditionally accept government decisions on issues under litigation between it and Cairn (cess payment is one of them). This is tantamount to the government telling the international community that India’s judicial system is irrelevant to the conduct of business and, therefore, the sanctity of commercial contracts rests solely on discretionary political powers. Even some banana republics are better at disguising their intentions.