New Delhi: The cabinet committee on economic affairs (CCEA) on?Thursday approved Vedanta Resources Plc’s proposed acquisition of a majority stake in Cairn India Ltd, with riders to protect the interests of Cairn’s state-owned partner, Oil and Natural Gas Corp. Ltd (ONGC), which may lead to the 10-month deadlock over the deal ending.

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CCEA endorsed the view of a group of ministers (GoM) headed by finance minister Pranab Mukherjee that vetted the deal, petroleum minister S. Jaipal Reddy told reporters in Delhi on Thursday. The ministers had recommended that royalty on the Cairn-ONGC oil fields in Rajasthan be treated as cost recoverable and the ongoing arbitration case on cess to be withdrawn.

ONGC is Cairn India’s partner in a joint venture that runs the latter’s main oil asset—block RJ-ON-90/1 in Rajasthan. ONGC wants to be compensated for royalty payments it has been making on the oil produced at this field. The firm expects the royalty to be $2 billion (Rs 8,940 crore) over the life of the field. Cairn had earlier declined to make these payments. Similarly, Cairn has challenged its cess dues and is paying these under protest.

“In view of the huge implications, we took time," Reddy said. “We wanted to be fair to the investors without sacrificing the interest of the government of India. Now it’s all in the court of Cairn-Vedanta." The decision is retrospective in effect, starting from the first day of production, Reddy added. The petroleum ministry had earlier placed the issue before CCEA, which in turn had recommended it to a GoM.

The closure of one of the largest domestic acquisitions in India announced in August last year has been hanging fire with the state-owned company making the resolution of the royalty dispute a precondition for approval. The deal’s progress is being keenly watched by overseas investors looking to enter India.

“The clearance of the Cairn -Vedanta deal was important. The restructuring of the deal is quite pragmatic—a brand new transaction could have required approval under the Competition Law, which covers transactions signed in and after June 2011," said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors.

Vedanta said it was awaiting “official intimation of the approval and details of the pre-conditions from the government of India, in order to consider further course of action."

Cairn said that it hadn’t received information about the decision. “Cairn and Vedanta continue to work with the government to secure the necessary consents and approvals," a company spokesperson said.

The deal will require security clearance from the home ministry, Reddy said.

A senior home ministry official who did not want to be identified said: “The home ministry has received clearances from other agencies except the Directorate of Revenue Intelligence."

If the conditions imposed by CCEA are agreed to, Vedanta will be acquiring a total 58.5% stake in Cairn India for $8.71 billion.

The decision will help drum up investor interest in ONGC’s follow-on public offer (FPO), said a top executive of company who requested anonymity.

Reddy said the petroleum ministry will consult the finance ministry about the FPO timing.

Mint had reported on 17 August 2010 that the acquisition would have to overcome significant regulatory hurdles and a possible challenge by ONGC.

Vedanta currently holds an 18.5% stake in Cairn India after its subsidiary Sesa Goa Ltd picked up a 10.4% stake in Cairn India from Malaysia’s Petronas International Corp. Ltd and a further 8.1% through an open offer from other shareholders that closed on 30 April.

In a late evening announcement on 27 June, Cairn announced changes to the deal that may have been influenced by the royalty issue. The non-compete fee of 50 per share was scrapped, translating into a reduction of about $800 million in the purchase price. This may have been in lieu of the likely imposition of a royalty burden.

Since the deal was first announced there has been a change of guard in the petroleum ministry. Reddy replaced Murli Deora as minister and G.C. Chaturvedi took over from S. Sundareshan as secretary.

Sahil Makkar contributed to this story.