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Cairn-Vedanta deal in doubt on govt move

Cairn-Vedanta deal in doubt on govt move
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First Published: Thu, Apr 07 2011. 12 18 AM IST
Updated: Thu, Apr 07 2011. 12 18 AM IST
New Delhi: The cabinet unanimously feels that royalty payments for Cairn India Ltd’s assets should be shared by all owners, casting fresh doubt over Vedanta Resources Plc’s acquisition of a majority stake in Cairn India in a $9.6 billion (aroundRs 42,430 crore) deal facing a deadline.
The cabinet committee on economic affairs (CCEA) on Wednesday referred the deal to a group of ministers (GoM), which will be headed by finance minister Pranab Mukherjee. The referral further delays the deal, which would be the largest in India’s oil and gas sector.
According to oil minister Jaipal Reddy, the GoM’s job is to decide on one of two options on the Cairn-Vedanta deal.
The deal can be cleared while allowing the parties involved to separately pursue legal action if necessary, said Reddy of one option. The other option is to give a conditional approval to the deal, he added.
The conditional approval would be subject to both Cairn and Vedanta accepting the government’s position on royalty and cess.
GoM was brought into the picture as there was a difference of opinion in CCEA on the options. “Such nuanced differences cannot be sorted out in cabinet meetings,” Reddy said.
Cairn Energy Plc agreed last August to sell a majority stake in Cairn India to Vedanta, but the deal has been delayed due to a dispute over royalty payments by Cairn India’s partner, state-run Oil and Natural Gas Corp. Ltd (ONGC).
ONGC, which has a 30% holding in the Cairn-operated Rajasthan fields, pays 100% of the royalties.
The oil ministry has been pushing to share the royalty burden between ONGC and Cairn India. Both Cairn and Vedanta have opposed that move. Any changes in the royalty structure would impact valuations and could jeopardize the deal, analysts have said.
According to Reddy, CCEA unanimously agreed with the oil ministry’s position on royalty and also its stand that cess must be paid by all partners and not just ONGC. “Interest of ONGC has to be taken care of by government,” he said.
“Even after eight months there doesn’t seem to be any change in the government’s stance on the royalty issue and if they continue to maintain it to be cost recoverable, then I think the deal may not go through,” said K.K. Mital, head of portfolio management services at Globe Capital.
Cairn has set an internal deadline of 15 April to seal the deal.
GoM has not been given a deadline. “Government of India cannot be hustled into taking decisions,” Reddy said.
Vedanta on Wednesday said it would go ahead with its open offer as scheduled, reflecting optimism about the deal.
“It is surprising that they are going ahead with the open offer, because if the government gives a conditional acceptance, then it will be value-destructive for Vedanta,” said Deepak Pareek, sector analyst at Mumbai brokerage Prabhudas Lilladher Pvt. Ltd.
Vedanta on Wednesday said its offer would open on 11 April and close on 30 April.
“Cairn and Vedanta continue to work with the government of India to secure the necessary consents and approvals,” Cairn India said in a statement.
Approval from the government is crucial for completion of the biggest acquisition in the Indian oil sector and could help boost investor sentiment in Asia’s third largest economy.
India, the world’s fourth largest oil importer, failed to woo global companies in its latest oil and gas exploration licensing round that closed last week due to its relatively weak track record of commercial discoveries and sluggish bureaucracy, with most of the 33 blocks going to domestic players.
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Sanjiv Shankaran of Mint contributed to this story.
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First Published: Thu, Apr 07 2011. 12 18 AM IST