Cairn deal to go through as OilMin goes easy

After keeping it on tenterhooks for months, the government looks set to clear London-listed mining group Vedanta Resources' $9.6 billion acquisition of Cairn India without any significant precondition.

This follows the Oil Ministry watering down preconditions it had set for Vedanta to buy a 51%stake from UK's Cairn Energy, sources with direct knowledge of the matter said.

In a draft Cabinet note circulated for approving the deal, the ministry has almost withdrawn its precondition that Rs 21,802 crore in royalty and cess paid by state-owned Oil and Natural Gas Corp (ONGC) on behalf of Cairn India on production from the Rajasthan oilfields should be equitably shared.

"In the first draft, the Oil Ministry had proposed to the Cabinet that approval be granted only after Cairn India agrees to equitable sharing of royalty and paying its sharing of cess," one of the sources said.

"However, in the note that was finally circulated to the ministries of finance, law, home, environment and corporate affairs for comments, the Petroleum Ministry has given an alternative that it will continue to legally pursue equitable sharing of royalty and cess, but will not make it a precondition for approval of the deal," he said.

Significantly, the ministry has completely withdrawn its precondition asking Cairn India to give up its legal rights on future disputes over its mainstay Rajasthan oilfield and abide by the government and oil regulator DGH's dictat.

"The note lists two alternatives. In the first, it lists out five preconditions, instead of 11 it had originally proposed to Cairn/Vedanta in January.

"The five preconditions include 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," a second source said.

As an alternative to the precondition of royalty and cess, the ministry has suggested that government shall pursue all legal recourse for establishing its rights under the Production Sharing Contract (PSC) in the case of cess. On royalty, it shall take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable.

Sources said it was unlikely that the Cabinet will go with the first option when an easier and least controversial option has been given in the second.

ONGC owns a 30 per cent 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 Rs 18,000 crore, of which ONGC has to also bear Cairn's share of about Rs 12,600 crore.

Cairn has also disputed any liability to pay Rs 2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals up to Rs 9,202 crore for ONGC over the life of the field.

Sources said ONGC wants royalty and cess to be cost-recoverable, like capital and operating expenses. Under the PSC, capital and operating expenses are first deducted from the sale of oil and the profits shared between the stakeholders, including the government, thereafter.

Cairn and Vedanta are opposed to the move as it would lower Cairn India's profitability.

Sources said all the Oil Ministry now wants Vedanta to do is make appropriate disclosures to market regulator SEBI when it makes an open offer for acquiring an additional 20% stake in Cairn India, as per takeover rules.

Comments on the note are likely to be received by next week and the matter may go to the Cabinet in the following week for consideration.

Though Cairn Energy and Vedanta have a timeline of April 15 to close the transaction, the deal would go through even if Cabinet was to give its nod by the month-end.

Once the government's nod is obtained, the two firms can approach their shareholders seeking extension of the April 15 deadline, saying the conclusion now remains a mere formality.

Sources said that in all likelihood, the deal can be closed by May-end.

The note states that Vedanta Resources had only "very recently" informed the ministry through a letter dated January 28 that the transaction needs to be closed by April 15.