New Delhi: Cairn India’s board on Wednesday may concede to pay royalty and cess on its mainstay Rajasthan oilfields after parent firm Cairn Energy did a u-turn and accepted riders imposed by the government to clear its over $6 billion stake sale to Vedanta Resources.
The board of Cairn India, which had in February opposed changes in the Rajasthan contract making it liable to pay royalty and a Rs 2,500 per tonne cess, will meet tomorrow, following which the results of a shareholder vote called by Cairn Energy on the twin riders will be out, sources privy to the development said.
Cairn Energy, which owns a 52.11% stake in Cairn India, has voted to accept the two government conditions.
Vedanta, which has already bought a 10% stake in the company from Cairn Energy and another 18.5% from Petronas of Malaysia and other minority shareholders, has also voted for acceptance of the conditions.
Sources said Cairn Energy chairman Bill Gammell arrived here today to chair the Cairn India board meeting.
Gammell had last month skipped a Cairn India shareholders’ meet, apparently to escape uncomfortable questions on the change of position.
After Cairn India’s board agrees to make royalty cost-recoverable and pay cess on oil produced from the Rajasthan fields, it will write to its partner, state-owned Oil and Natural Gas Corp (ONGC), for consent for the Vedanta transaction.
The ONGC board may consider waiving its preemption or right of first refusal (ROFR) and give Cairn a no-objection certificate to conclude the deal at its board meeting on 27 September.
Cairn Energy, which is selling a 40% stake in its Indian unit to Vedanta, had previously said it would rather call off the deal than force Cairn India to accept the government’s conditions.
Minority shareholders at Cairn India’s AGM in Mumbai last month had booed Cairn Energy for changing tack on the issue of royalty and cess to get $6.02 billion from the stake sale to Vedanta.
Cairn India had on 26 July stated that its April-June quarter net profit would halve to Rs 1,435 crore if it was asked to share royalty on the Rajasthan crude oil.
The company currently does not pay any royalty on its 70% interest in the Rajasthan fields. Royalty, as per the contract, is paid by state-owned ONGC, which got a 30% stake in the 6.5 billion barrel field for free.
The Cabinet Committee on Economic Affairs (CCEA) on 27 June gave consent to the Cairn-Vedanta deal, subject to Cairn or its successor agreeing to charge or deduct the royalty paid by ONGC from revenues earned from the sale of oil before the profits are split between partners.
Also, Cairn India must pay a Rs 2,500 per tonne cess on its 70% share of oil production. Till recently, Cairn had maintained that cess, like royalty, is a liability of ONGC and had initiated arbitration against the government over being forced to pay cess.
Cairn Energy’s request for the twin government conditions to be voted on by shareholders is being done through a postal ballot.
Sources said the results of the postal ballot will be announced tomorrow afternoon, after which Cairn India’s board of directors will meet.
Cairn Energy is selling a 40% stake in Cairn India in two tranches. The first tranche of 10% was completed in July and the second of 30% will be done after final government approval for the deal.
Since the Cairn-Vedanta deal was announced in August last year, Cairn India has been opposed to making royalty payments recoverable from the sale of oil and the company being made liable to pay a Rs 2,500 per tonne cess, as this was not in line with the Production Sharing Contract (PSC).
A change in the contract was neither in the interest of the company, nor its minority shareholders, it has maintained.
Last August, Vedanta proposed buying a 51-60% stake in oil and gas explorer Cairn India for up to $9.6 billion in cash, but the deal has been delayed awaiting government and regulatory approvals.
A Group of Ministers headed by finance minister Pranab Mukherjee had recommended to Cabinet that the deal should be approved if Cairn or its successor agreed to royalty being added to the project cost and recovered from oil sales, as well as agreeing to pay its share of oil cess.
Days before the CCEA accepted the GoM recommendation and gave conditional approval, Cairn Energy lowered the price it was demanding from Vedanta to make up for the reduced profitability due to acceptance of the preconditions.
It also removed a non-compete provision from the deal and the related non-compete fee of Rs 50 per share.
Vedanta’s total payment for a 40% stake in Cairn India, at the reduced price of Rs 355 per share, will now be $6.02 billion, instead of the earlier announced $6.84 billion.