Churn on issue may lead to more clarity on rules for buyouts, state vetting...
With Anil Agarwal’s Vedanta group quoting almost $10 billion (Rs 47,000 crore) for a controlling stake in Cairn India, the domestic oil and gas industry is abuzz with talk of a crisis of confidence among the government and Cairn's partner, Oil and Natural Gas Corporation (ONGC).
The country has never seen a deal of such high valuations in the oil sector involving a prolific field, that has been clinched without government consent.
Much, therefore, hinges on the issue of whether government approval is required or not. The question arises because there is no precedent from which to take a cue and the production-sharing contracts (PSCs) of the three producing fields in question — in Barmer, Ravva and Cambay — that the partners signed with the government have nothing specific in them to govern changes in equity holding of the companies that hold the blocks. (For the remaining seven blocks that Cairn has in India, it has sought the government approval but these are just exploratory blocks and not central to the deal.)
Though the PSCs differ for blocks, depending on which policy regime they were signed under, no government official or ONGC executive has so far publicly quoted any clause in these that bars a change in the equity structure of Cairn India.
As of now, it is merely a corporate deal in which Cairn India happens to be a company that holds an interest in one of the biggest onshore discovery of recent times.
Article 28 of the Barmer PSC, for instance, talks of prior approval of ONGC and the government only for assignment of interest in the PSC. Which does not arise in this case, since it is the shareholders of Cairn India who are changing and its interest in the field is not being assigned to anyone else.
“The clause under the PSC entered into by the operating consortium of oil and gas blocks with the government is triggered only when one of the members decides to quit," a Cairn executive had said on condition of anonymity. The PSCs are largely framed in such a way as to ensure that companies stick to the investment commitments made when they bid.
Shadows on Cairn deal
There are two ways through which challenges to the deal have cropped up. First, the ministry of petroleum and natural gas has written to the market regulator, Sebi, that Cairn India needs government approval under the PSC. Simultaneously, government-controlled ONGC has informed the stock exchanges that it has “pre-emptive rights” in relation to Cairn’s participating interest under the various agreements.
In response to the government, Cairn Energy only cleared its stand under various PSCs. And, to ONGC, Simon Thomson, legal and commercial director, Cairn Energy Plc wrote to say that since the contract with Vedanta Resources Plc is at a shareholder level – there is no change to the participating interest in any of the PSCs to which the Cairn India group is party -- the transaction does not trigger any pre-emptive right or requirement for ONGC consent.
In his letter to the exchanges, ONGC company secretary N K Sinha was silent on what kind of approvals and under which agreement the approvals were required.
It is a fact that the government and ONGC are still not clear how a corporate deal requires their approval. Still, the deal spoiler could be Sebi, which is yet to clear the subsequently mandatory open offer of the Vedanta group’s Sesa Goa to acquire 20 per cent in Cairn India.
The other challenge not so evident but which has nevertheless occurred is that a precedent has been set. Within a fortnight of the announcement of the Cairn-Vedanta deal, the government cancelled the PSC of Canoro Resources for Amguri in Assam. It did so under Article 31 of the PSC due to a change in the shareholding pattern of Canoro, a Canadian company.
Canoro owned 60 per cent and is the block operator, with Assam Company India Ltd holding the remaining 40 per cent.
On June 1, the ministry had issued a showcause notice to Canoro for raising Canadian $95 million in April through a mix of debt and equity from Barbados-based Mass Financial Corporation without the “required consent” of the government. Mass initially got 18 per cent of Canoro’s equity but after a rights issue, its shareholding went up to 52.9 per cent. The Canadian company has now challenged the government in the Delhi High Court. Though the timing of the cancellation may be coincidental, the Canoro case of equity change without a change of interest in the Assam block sets a precedent for Cairn.
Policy issues
With the government policy of opening the sector to privatisation yielding fruit in the past year -- there has been an unprecedented increase of roughly 40 per cent in the country’s gas production and 18 per cent in crude oil production -- it is time now to move to the next stage, of checking whether government or regulatory interference is needed when a change takes place at the corporate level.
And, if the government wants to keep certain strategic oil and gas assets out of bounds on security grounds, on how this is supposed to be done. There is no policy on this as of now and no global benchmark is available.
In the case of Russia, the biggest non-Opec oil producer, for instance, a company takeover is allowed after clearance from the government’s anti-monopoly authority if the asset held by the company on sale is “strategic”. The term the Russian context means if the recoverable reserves are more than 70 million tonnes of oil or 50 billion cubic metres of gas.
The privatisation of the oil and gas fields Panna-Mukta and Tapti oil and gas fields, the first such deal in the oil sector, drew attention because it saw the entry of Reliance Industries Ltd into the oil and gas exploration sector. The company had no experience in the game then but is now a competitor to ONGC.
A long-drawn tug of war on who would hold the operatorship of the first privatised hydrocarbon assets in the country ensued, about eight years earlier, when Britain’s BG group stepped in and bought Enron Oil and Gas’ stake in the three fields. The issue was subsequently settled with a joint operatorship strategy being adopted by three partners -- ONGC, RIL and BG.
That battle was probably easier to handle because it involved a complete exit of one partner from the fields. The Cairn-Vedanta deal, a tougher call for the government, would be of greater significance. Nonetheless, it could see the emergence of legal clarity for future buyouts in an industry otherwise shrouded in secrets of the soil and the uncertainties associated with it.
