The Cabinet Committee on Economic Affairs (CCEA) may this week consider giving nod to London-listed mining group Vedanta Resources' $9.4 billion takeover of Cairn India after imposing stringent conditions.
Oil Minister S Jaipal Reddy said the CCEA, chaired by Prime Minister Manmohan Singh, may meet this week to consider giving the government nod based on recommendations of a Group of Ministers that went into the issue of granting approval to Cairn India's parent firm, Cairn Energy, selling its stake to Vedanta.
"It is my attempt to take it to the Cabinet this week," he told reporters adding the agenda for the CCEA is decided by the Cabinet Secretrait.
The GoM headed by Finance Minister Pranab Mukherjee had on May 27 suggested the government nod only if Cairn or its successor agrees to bear a portion of royalty payable on its mainstay Rajasthan oil fields and also accepts its liability to pay cess on the oil produced.
If imposed, these conditions will materially affect the deal.
Sources said the GoM wants Cairn or its successor to agree to make royalties paid by state-owned Oil and Natural Gas Corporation (ONGC) on its most important Rajasthan oilfields cost-recoverable from oil sales.
ONGC owns 30% interest in the Rajasthan oilfields, but has to pay royalty at the rate of 20% of the crude oil price realised on all of the 240,000 barrels per day of peak output expected from the fields.
At a $70 per barrel oil price, it has to pay Rs 12,600 crore in royalties on Cairn India's behalf over the life of the field, making India's largest onland fields a losing proposition for it.
ONGC had cited provisions in the Production Sharing Contract (PSC) of the Rajasthan oilfields in July last year, which was more than a month before the Cairn-Vedanta deal was announced, to demand that royalty like other taxes and levies should first be deducted (recovered) from the sale proceeds of oil before the profits were split between partners and the government.
Cairn as well as Vedanta have opposed ONGC's demand.
Sources said Cairn has also disputed its liability to pay oil cess at the rate of Rs 2,500 per tonne on its 70% share in the Rajasthan fields, saying ONGC is also liable to pay cess on its behalf, like in the case of royalty.
The government has rejected this position as the PSC imposes the royalty liability on ONGC, but is silent on cess, meaning partners have to pay in proportion to their share. Cairn has initiated arbitration against the government on this issue.
Sources said the GoM recommended that Cairn withdraw the cess arbitration and agree to pay its share of cess as the second pre-condition for approval. Also, the company will have to obtain a no-objection certificate from ONGC for transferring ownership to Vedanta.
For the seven exploration blocks or areas Cairn had won under the New Exploration Licensing Policy (NELP), the GoM held that the PSC provision of seeking partner consent must be met. ONGC is a partner in five of these blocks, they said.
In case of CB-OS/2 and the Ravva oil and gas fields in the Eastern Offshore -- the other producing properties of Cairn -- the GoM suggested the government nod should be subject to Vedanta providing performance and financial guarantees.
Also, Vedanta will need security clearance from the Ministry of Home Affairs, sources said.
In the two-part deal, Vedanta was to buy a minimum 40% stake in Cairn India from its Edinburgh-based parent firm at Rs 405 per share, including a non-compete fee of Rs 50 per share.
In the second part, its subsidiary Sesa Goa was to make an open offer to buy as much as 20% from minority shareholders of Cairn India at Rs 355 per share (offer price minus the non-compete fee).
Sesa Goa in April got only 8.1% in the open offer. Separately, it acquired a 10.4% stake from Malaysia's Petronas, taking its total holding in Cairn India to 18.5%.
Cairn Energy currently owns 62.1% in Cairn India.
Cairn, which has disputed the need for the government's nod on the transaction, has only made a conditional application. It has also refused to accept the requirement of partner consent even though five oil blocks it won under New Exploration Licensing Policy (NELP) explicitly provide for obtaining no objection from partners in case of a change in ownership.
The CCEA had on April 6 constituted a GoM to look into the issue of granting conditional or unconditional consent to the Cairn-Vedanta deal.
Solicitor General Gopal Subramaniam had in March opined that the government should not give unconditional nod to the deal and on April 6 he reaffirmed the cost-recoverability of royalty.
Besides royalty, Cairn had also contested its liability to pay a Rs 2,500 per tonne cess on its 70% share.
But unlike royalty, it is treating cess as a cost-recoverable item after paying it under protest.
All cost-recoverable items like capital and operating expenditure are first deducted from revenues earned from the sale of oil before profits are shared between stakeholders, including the government.
