Earlier this week, the Cabinet Committee on Economic Affairs, for the second time, cleared the purchase by the Anil Agarwal-promoted Vedanta Resources of a 58.5 per cent stake in Cairn India from Edinburgh-based Cairn Energy. Though this approval comes a little over a month after the deal was completed between the two UK-headquartered companies, the fact that it took this $8.48 billion deal, the largest involving an Indian company in the oil and gas sector, some 17 months to surmount wholly unanticipated governmental hurdles hardly redounds to the credit of the United Progressive Alliance (UPA). Taken together with the six-year-long controversies over the sale of the government’s residual stake in another Agarwal-controlled company, Balco, the 13-day backtracking on foreign direct investment in multi-brand retail, and the four-year tax controversy that dogged the $11 billion Vodafone-Hutchison deal, it would be fair to say that UPA-II has distinguished itself by its ability to make India unattractive to the foreign investor community.
Questions have been raised about Vedanta’s businesses in the past, and there are aspects of this transaction, too, that have raised eyebrows. Yet Mr Agarwal has reason to feel hard done by. The Cairn-Vedanta deal, which was announced in August 2010, was opportunistically blocked by government-controlled ONGC, a 30 per cent partner in the Barmer field in Rajasthan, Cairn’s biggest producing block in India. The government had earlier committed ONGC to paying 100 per cent royalty on any oil produced from the block. The arrangement was certainly unfair to ONGC — but it was intended as a sweetener in a sector that had failed to attract sufficient foreign interest. Indeed, it was the major attraction for Cairn Energy, and had significant implications for the company’s profitability. It took till mid-2011 for the two parties to negotiate an agreement that lowered ONGC’s commitment to 30 per cent, and made royalty cost-recoverable — which substantially altered the profitability of operations, not to speak of the government’s share. This in itself would hardly have reassured any investor in India’s natural resources business, Indian or foreign. The fact that the home ministry saw fit to raise “security issues” to the deal in November, five months after the Cabinet first approved it, would scarcely have enhanced confidence. Meanwhile, Mr Agarwal lost out again when, a year ago, an arbitration panel ruled that the government did not have to honour a commitment to sell its residual 49 per cent stake in aluminium maker Balco to Sterlite, the Agarwal-owned company that bought it in 2001. In Vodafone’s case, the demand for capital gains tax on the deal was another compelling reason to deter foreign direct investment.
It is one thing for the government to raise objections to deals that involve exploiting the country’s natural resources — whether telecom spectrum or oil and gas. It is another for it to change the rules of the game midway, so that investors have to waste time and money clearing hurdles the government arbitrarily chooses to raise. In the long run, it is the country that pays the price for such a haphazard approach.
