The USD 2.3 billion all-share transaction was originally announced on June 2015 and the deal to create India's largest diversified natural resources firm, which could compete with BHP Billiton Ltd and Vale SA, was to close in March this year.
But a lingering retrospective tax issue and winning over half of the minority shareholders including LIC, which was said to be opposed to the deal, proved to be a stumbling block.
The revised deal implies a 20 per cent premium to the one-month volume weighted-average price of Cairn shares, a joint statement by Cairn and Vedanta Ltd said.
Vedanta is said to be wanting to use Rs 23,290 crore cash lying with Cairn to pay off part of its Rs 77,952 crore debt. It had in May rolled over a controversial USD 1.25-billion loan taken from the cash-rich oil explorer Cairn India in July 2014.
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But the merger can go through only when 9.82 per cent shares that the oil explorer's erstwhile parent Cairn Energy plc holds in Cairn India are freed by Income Tax Department.
Income Tax department had frozen the shares in pursuit of a Rs 29,000-crore tax demand on alleged capital gains made by Cairn Energy in 2006 when it transfered its India business into a new subsidiary Cairn India and listed it on stock exchanges.
Cairn Energy sold majority stake in Cairn India to Vedanta in 2011 but retained a minority shareholding.
Also LIC, which holds 9.06 per cent in Cairn India, has to come on board. The insurer was opposed to the deal in the form it was proposed in June last year.
And Income Tax Department has previously said the freeze on Cairn Energy shares can be lifted if a collateral of an equivalent to their market value is offered.
Shareholder meetings of Vedanta Ltd and Cairn India will be convened on September 8 and September 12, respectively to get a minority vote on the merger.
Cairn India shares ended 8.5 per cent higher at Rs 191.90
on BSE while Vedanta Ltd closed with a gain of 7.8 per cent at Rs 169.30.
Cairn India's minority shareholders will own 20.2 per cent and Vedanta minority shareholders 29.7 per cent in the merged entity.
In June last year, Vedanta Ltd had offered shareholders of Cairn India one ordinary share and 7.5 per cent redeemable preference share with a face value of Rs 10 each.
Today the company announced that "each Cairn India minority shareholder will receive for each equity share held one equity share in Vedanta Ltd and four Redeemable Preference Shares with a face value of Rs 10 in Vedanta Ltd, with a coupon of 7.5 per cent and tenure of 18 months from issuance."
The biggest among the minority shareholders are Life Insurance Corp of India (LIC) and Cairn Energy Plc of UK, the erstwhile owner of Cairn India. The two together control some 20 per cent shares in Cairn India.
"The Boards of Vedanta Ltd and Cairn India have today approved revised and final terms for the transaction, taking into account prevailing market conditions and having regard to underlying commercial factors," the two firms said in a joint statement.
Terming transaction terms as "attractive," it said the deal offer exposure to Vedanta Ltd's world-class metal and mining assets, increased free float and trading liquidity and potential re-rating of the merged company.
Sudhir Mathur, CFO and Acting CEO of Cairn India, said: "Cairn India shareholders will benefit from exposure to a diversified portfolio of world-class, low cost, long-life assets with significant growth."
Tom Albanese, CEO of Vedanta Ltd, said the strategic rationale for merging Vedanta Ltd and Cairn India remains highly compelling.
Stating that companies with diversified resources have delivered superior returns for shareholders historically, he said, "The transaction consolidates our portfolio of attractive tier-I assets and simplifies the group structure, better positioning the group to deliver superior value to all shareholders over the longer term.