New Delhi: After agreeing to accept all government conditions to get approval for stake sale in its Indian unit to Vedanta Resources, UK’s Cairn Energy Plc has written to state-owned ONGC seeking a no-objection certificate for the deal by 21 September.
The government wants Cairn India to agree to pay royalty and cess on its all important Rajasthan block and seek consent of partner Oil and Natural Gas Corp (ONGC) before its control can be transfered to London-listed mining group Vedanta.
Cairn India is opposed to the riders but its parent firm has demanded these be voted by shareholders where it along with Vedanta will vote for their acceptance.
While the postal ballot being conducted by Cairn India will be completed by 14 September, Cairn Energy wants ONGC to immediately begin process of giving NOC so as to wrap up the transaction quickly.
In normal course, Cairn Energy would have written to ONGC seeking formal waiver of the pre-emption rights by the state- owned firm, which holds stakes in 8 out of 10 properties of Cairn India, including the mainstay Rajasthan block, after shareholder vote.
Thereafter, ONGC would have done its due diligence of acquiring Cairn India at Rs 355 or $6 billion, and taken the matter to the board, a process which would have taken 45 days.
To cut that process short, Cairn Energy managing director and CFO Jann Brown on 16 August wrote to ONGC chairman and managing director A K Hazarika to begin the process now so that NOC is granted by 21 September.
“We would very much appreciate your prompt attention to this matter and would be very grateful if you could be fully prepared to provide the NOC,” he wrote.
Cairn Energy holds 52.11% stake in Cairn India while Vedanta has another 18.5% and both will vote for acceptance of the government pre-conditions.
“We have advised Cairn India and the Government of our intention to vote our 52% stake in favour of these conditions and will recommend their adoption by the Cairn India board,” he wrote. “Cairn India will announce the result of this vote on 14 September and we would expect Cairn India to write to you immediately on confirmation of the results of this ballot to request your NOC”.
When contacted, Cairn Energy spokesperson said: “We are merely requesting ONGC to help satisfy the conditions put in place by the government of India”.
Cairn Energy will get $6.02 billion from selling 40% stake in Cairn India to London-listed mining group Vedanta.
Cairn India currently does not pay any royalty on its 70% interest in the Rajasthan fields. The 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 June 27 gave consent to the Cairn-Vedanta deal, but subject to Cairn or its successor agreeing to deducting the royalty paid by ONGC from revenues earned from sale of oil before profits are split between the partners.
This cost recovery of royalty will lower Cairn India’s profitability.
Also, the CCEA said Cairn India must pay a Rs 2,500 per tonne cess on its 70 % share of oil production. Cairn maintains that cess, like royalty, is a liability of ONGC and had initiated arbitration against the government on being forced to pay cess.
Besides Vedanta furnishing financial and performance guarantees and an undertaking to keep Cairn India’s technical capability undisturbed, the preconditions include ONGC -- Cairn India’s partner in most of its 10 properties in India -- giving a no objection certificate, as well as the Home Ministry giving security clearance to Vedanta.
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 the Rs 2,500 per tonne 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 removed a non-compete provision and the related non-compete fee of Rs 50 per share.
Vedanta’s total payment, at the reduced price of Rs 355 per share for a 40 % stake in Cairn India, will now be $6.02 billion, instead of $6.84 billion previously.