Thursday, June 30, 2011


The government has given the green signal to the controversial deal that will give Vedanta resources the controlling stake in the Cairn India.

The cabinet committee on economic affairs on Thursday gave the go-ahead with two principal riders. One, it asked both Vedanta Resources and Cairn Energy to provide relief to the state-run ONGC on the issue of royalty. Two, Cairn India will have to withdraw the arbitration petition in international courts against the payment of a cess.

The approval came 10 months after the multi-billion dollar deal was announced by Cairn Energy and Vedanta Resources, both UK-based, in August last year. Briefing media after the cabinet committee meeting, oil minister S Jaipal Reddy said, “The committee gave conditional approval to the sale of Cairn India stake to Vedanta…This chapter is over today.”

The approval is in sync with the recommendations of a ministerial group headed by finance minister Pranab Mukherjee. The group had said the deal could be cleared subject to Vedanta and Cairn agreeing to bear the cost of royalty for oil from the country’s most prolific onshore field in Barmer, Rajasthan, and to withdraw the arbitration case.

Cairn India will have to pay Rs 12,600 crore in royalty over the lifetime of the Barmer oilfield. After apportionment, the state-owned ONGC will have to pay Rs 5,400 crore over 15 years as royalty. The total royalty at current rates will thus work out to Rs 18,000 crore, payable by Cairn and ONGC, which together own the field.

Cairn India operates the block and holds 70 per cent stake, whereas ONGC has 30 per cent participating interest in the field. Cairn now mines 125,000 barrels of crude a day from the Mangla field in Barmer. The projected peak production is 175,000 barrels a day.

The government position is that the cess is payable by oil producers under the provisions of the Oil Industry Development Act of 1974, and there are no specific provisions in the production sharing contracts for exempting Cairn from the cess.

“I am happy that Cairn will pay royalty,” ONGC group chairman AK Hazarika told Financial Chronicle. Asked how much would be the financial benefit to ONGC, Hazarika said, “It is difficult to say right now. Royalty will vary over the life cycle of the field and the crude oil price. A preliminary estimate shows royalty over the entire lifetime may be between Rs 17,000 crore and Rs 18,000 crore.”

“It (the cabinet committee decision) is very positive. It vindicates ONGC’s stand and it is entirely in line with the production sharing contract,” ONGC director of finance DK Saraf told Financial Chronicle.

These are other conditions set by the ministerial group to which neither side had any objections.

“They (Cairn and Vedanta) will have to agree in principle to all these conditions,” said Jaipal Reddy. He also made clear that the companies couldn’t raise these issues again in the future.

Asked if ONGC would exercise its first right of refusal, the minister said, “The company has already made it clear through a resolution that it will not press for it.”

Among other conditions are that Cairn and Vedanta will have to obtain no- objection certificates from its partner and provide performance and financial guarantees. Also, the companies will have to seek all regulatory clearances, including from market regulator Securities and Exchange Board of India. The companies will also have to seek security clearance from the home ministry.

“We have to see if Cairn India’s management agrees to these conditions on royalty and cess,” Vienna-based Juergen Maier of Raiffeisen Capital Management told Bloomberg News. “If the management approves, then it is a negative for Cairn India shareholders.”

The deal was initially valued at between $8.5 billion and $9.4 billion for the 40-51 per cent stake in Cairn India which Anil Aggarwal’s Vedanta Resources wanted to buy from Cairn Energy.

However, it has undergone several changes since then. In April the Anil Agarwal-promoted Sesa Goa acquired 10.41 per cent in Cairn India from Petronas of Malaysia. Sesa Goa also bought 8 per cent more at Rs 355 a share in an open offer on April 30.

A surprising turn came on Monday when Cairn Energy and Vedanta announced ‘adjustments’ to the deal. The companies brought down the value of the deal to Rs 355 a share from the Rs 405 negotiated earlier.

After the cabinet committee meeting, Vedanta Resources said it was awaiting official intimation of the approval and details of the pre-conditions from the government to consider the next course of action.

Cairn took the same stand, saying, “Cairn has not yet received formal confirmation of any decision that has been made by the government.”

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