With the government decision on royalty affecting Cairn India’s valuation, the Anil Agarwal-promoted Vedanta Resources could exercise the option of renegotiating the offer price to buy Cairn Energy’s stake in the Indian company. The Cairn India management is awaiting a decision of the Cabinet Committee on Economic Affairs (CCEA) on the matter.
Once CCEA gave its approval to a decision of the Group of Ministers allowing Oil and Natural Gas Corporation (ONGC) to recover royalty payment on Barmer crude as costs, Cairn India would have two options — either to seek a redressal legally or accept the condition, said an executive in one of the companies who did not want to be identified. “Vedanta would act only after Cairn decides a course of action. If Cairn decides to accept the government condition on cost recoverability, Vedanta may need to think on valuations,” he said. He, however, ruled out any such decision at the moment, acalling it mere speculation.
Cost recoverability as a condition for approval to multibillion Cairn-Vedanta deal would lead to a $908-million hit to Cairn India’s revenues. Analysts said this would make the deal about 7-8 per cent more expensive for the Vedanta group.
On Friday, the GoM, headed by Finance Minister Pranab Mukherjee, decided to recommend cost recoverability of royalty and cess on crude oil being produced from Cairn India’s Mangala field in Rajasthan. Though ONGC holds 30 per cent in the field, it is required to pay 100 per cent royalty on production, since it is the licensee of the block. Cairn India, however, pays cess on the crude “in protest”, even as it is pursuing an arbitration suit in London on this issue against the Government of India.
Cairn India’s stocks were down almost 3 per cent on Monday, to Rs 337.5 a share on Monday after it had closed higher on Friday, at Rs 346.45. In a statement issued by Friday’s GoM meeting, Cairn had said the company had not received any formal communication from the government.
