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CCEA to consider giving nod to Cairn-Vedanta deal on Thursday

CCEA to consider giving nod to Cairn-Vedanta deal on Thursday

New Delhi: The Cabinet Committee on Economic Affairs (CCEA) may on 30 June consider giving nod to Edinburgh-based Cairn Energy Plc selling stake in its Indian unit to London-listed mining group Vedanta Resources.

The $9-billion transaction is listed as the second item on the agenda of CCEA that will meet on 4.45 pm on Thursday, a source privy to the development said. As of now, the CCEA has just two items listed for discussion.

As if in preparation for the nod which will come with conditions attached, the Edinburgh-based energy explorer on Monday announced lowering of the price at which it will sell 40% stake in Cairn India to Vedanta by over 3,800 crore.

A Group of Ministers (GoM) headed by finance minister Pranab Mukherjee had on 27 May recommended that the government nod be given to the transaction only if Cairn or its successor agrees to bear a portion of royalty payable on its mainstay Rajasthan oil fields and also accepts its liability to pay cess on the crude oil produced from the fields.

If imposed, these conditions will materially affect the deal and Cairn/Vedanta by agreeing to lower the sale price appears to be headed towards accepting them.

Cairn Energy will sell its 40% stake in Cairn India to Vedanta at 355 per share instead of 405 a share agreed in August 2010. It will now get gross proceeds of 27,007 crore (about $6.02 billion) instead of 30,811 crore ($6.84 billion) it was initially expecting.

The Scottish explorer has for the past 10 months denied the need for government approval to what it called a corporate transaction. It also rejected both the requirement of nod and pre-emption of partner Oil and Natural Gas Corp (ONGC), which holds stake in 8 out of 10 properties of Cairn India, including the crown-jewel Rajasthan block.

Besides agreeing to take partner consent, Cairn and its successor have to agree to making royalty ONGC pays on entire crude output from Rajasthan despite owning only 30%, as recoverable from sale of oil, the source said.

ONGC had cited provisions of the contract months before the Cairn-Vedanta deal was announced, to demand that royalty be made cost recoverable.

GoM wanted the 20% royalty paid on Rajasthan crude be made cost recoverable and Cairn India agree to pay 2,500 per tonne cess on its 70% share in Rajasthan as preconditions for the government consent for the deal.

Both the conditions had material impact on the deal and Cairn Energy’s announcement on Monday that it is willing to forego 50 per share non-compete fee it was charging from Vedanta, indicated its willingness to accept these conditions for the sake of the deal.

ONGC had cited provisions in the contract for Rajasthan oilfields in July 2010 to demand that royalty like other taxes and levies should first be deducted (recovered) from the sale proceeds of oil before the profits were split between partners and the government.

Cairn as well as Vedanta had opposed ONGC’s demand.

Sources said Cairn has also disputed its liability to pay oil cess at the rate of 2,500 per tonne on its 70% share in the Rajasthan fields, saying ONGC is also liable to pay cess on its behalf, like in the case of royalty.

The government has rejected this position as the contract imposes the royalty liability on ONGC, but is silent on cess, meaning partners have to pay in proportion to their share. Cairn did not agree and has initiated arbitration.

Sources said the GoM recommended that Cairn withdraw the cess arbitration and agree to pay its share of cess as the second pre-condition for approval. Also, the company will have to obtain a no-objection certificate from ONGC for transferring ownership to Vedanta.

For the seven exploration blocks or areas Cairn had won under the New Exploration Licensing Policy (NELP), the GoM held that the PSC provision of seeking partner consent must be met. ONGC is a partner in five of these blocks, they said.

In case of CB-OS/2 and the Ravva oil and gas fields in the Eastern Offshore -- the other producing properties of Cairn -- the GoM suggested the government nod should be subject to Vedanta providing performance and financial guarantees.

Also, Vedanta will need security clearance from the Ministry of Home Affairs, sources said.

Cairn Energy, which currently owns 62.1% in Cairn India, was charging 50 per share as fee for staying away from India and other neighbouring countries for three years.

With the removal of the non-compete fee, “gross proceeds for the sale of a 40 % interest in Cairn India will amount to $6.023 billion with net proceeds (after payment of taxes) is expected to be about $5.408 billion in cash," Cairn and Vedanta had said in identical statements on Monday.

Cairn said the transaction will now take place in two tranches: Cairn Energy will sell 10% out of its 62.2% stake in Cairn India by 11 July and another 30% upon receipt of the government approval.

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