New Delhi: In a blow to Cairn Energy, the government’s law officers have held that Edinburgh-based firm needs state-owned ONGC’s consent to sell its majority stake in Cairn India to Vedanta Resources.
More than three months after announcing the sale of its up to 51% stake in the Indian unit to Vedanta, Cairn Energy Plc on 23 November last year had made a conditional application to seek government’s nod but refused to accept partner ONGC’s rights.
Sources in the know of the development said the cabinet committee on economic affairs (CCEA) may decide on giving in- principle approval to the $9.6 billion deal subject to Cairn making an unconditional application to the government and seeking no-objection from partner Oil and Natural Gas Corp.
The equitable sharing of the royalty that ONGC pays on behalf of Cairn India on oil produced from Rajasthan fields will be decided post completion of the transaction, they said.
Also, Cairn’s refusal to accept the government’s position that it must pay Rs2,500 per tonne cess on its 70% share of crude oil produced from Rajasthan fields will be enforced after the deal.
Sources said a legal view was sought as finance ministry wanted law ministry opinion on royalty that ONGC pays on behalf of Cairn India in Rajasthan oilfields.
The legal opinion stated that the change of control of Cairn India amounts to an indirect assignment or transfer of participating interest in its 10 blocks and so there is a need of the government as well as the partner’s nod.
ONGC holds stakes in eight out of Cairn India’s 10 assets, including the mainstay Rajasthan oilfields.
The precondition that Rs21,802 crore in royalty and cess paid by ONGC on behalf of Cairn India on the Rajasthan oilfields should be equitably shared has been watered down and the approval to the deal will not be conditional to the fulfillment of it.
The cabinet note on the issue lists two alternatives. In the first, five preconditions including royalty being made cost-recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC’s no-objection and Vedanta providing performance and financial guarantees have been listed.
The alternative to the precondition of royalty and cess suggests that the government shall pursue all legal recourses for establishing its rights under the production sharing contract (PSC) in the case of cess.
On royalty, it should take appropriate decision to enforce the provisions of PSC to make royalty cost- recoverable.
In both the options, ONGC’s consent or no-objection is a pre-requisite.
Sources said that it was unlikely that the Cabinet would go with the first option, as the second one was easier and least controversial option.
ONGC owns 30% stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields. Over the life of the field, the royalty burden works out to be Rs18,000 crore, of which ONGC also has to bear Cairn’s share of about Rs12,600 crore.
Cairn has also disputed any liability to pay Rs2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals Rs9,202 crore for ONGC over the life of the field.
Sources said ONGC wants royalty and cess to be cost- recoverable, like capital and operating expenses. Under the PSC, capital and operating expenses are first deducted from the sale of oil and the profits shared between the stakeholders, including the government, thereafter.
Cairn and Vedanta are opposed to the move as it would lower Cairn India’s profitability.
Sources said all that oil ministry now wants is for Vedanta to make appropriate disclosures to market regulator Sebi when it makes an open offer for acquiring an additional 20% stake in Cairn India, as per takeover rules.
Though Cairn Energy and Vedanta have a timeline of 15 April to close the transaction, the deal will go through even if the Cabinet was to give its nod by the month-end.
After the clearance by the government, the two firms can approach their shareholders seeking an extension of the 15 April deadline, saying the conclusion now remains a mere formality.
Sources said that in all likelihood, the deal can be closed by May-end.
The note states that Vedanta Resources had only “very recently” informed the ministry through a letter dated 28 January that the transaction needs to be closed by 15 April.