Govt can put preconditions on Cairn deal: SGI

In a setback to the Cairn-Vedanta deal, Solicitor General Gopal Subramanium has reaffairmed that the government can impose preconditions like equitable sharing of royalty in the all-important Rajasthan block for clearing Vedanta Resources' takeover of Cairn India.

Contrary to media reports, the nation's second highest law officer has reiterated his earlier opinion that Cairn or its successor should share cess and royalty with state-owned Oil and Natural Gas Corp (ONGC) in the Rajasthan block.

In his second opinion, which was sought by Finance Minister and head of a ministerial panel vetting the $9.6 billion deal Pranab Mukherjee, the SGI said, "The government is not bound to grant consent ipso facto or mechanically."

The precondition that Cairn/Vedanta agree to cost-recovery of Rs 18,000 crore in royalty that ONGC has to pay on the Rajasthan block would be "defensible on parameters of public and national interest," the SGI said in the second opinion.

In his first opinion on March 24, the SGI had stated that transfer of Cairn India shares to Vedanta should be allowed only if the latter agrees to treating royalty paid by ONGC as cost-recoverable from its revenues.

ONGC owns 30% stake in Cairn India's mainstay Rajasthan block, but is liable to pay royalty on the entire output from the field. Cairn is also contesting its liability to pay a Rs 2,500 per tonne cess on its 70% share.

But unlike royalty, it is treating cess as a cost-recoverable item. All cost-recoverable items like capital and operating expenditure are first deducted from revenues earned from the sale of oil before profits are shared between stakeholders, including the government.

Cairn Energy, which is selling a 40% stake in its Indian unit to Vedanta, and the London-listed mining group are opposed to making royalty cost-recoverable as it will lower the profitability of Cairn India.

"The purpose of consent is the provision of a power to regulate the performance of obligations which arise under a contract and not to defy them. Hence, a consent can be conditional," the SGI said in the second opinion on April 6.

The government "cannot deny consent except on logical grounds. Such conditions as preserve many different components of public interest can be validly imposed. The conditions must be borne out of fairness, vigilance and public interest," he said.

The Group of Ministers headed by Mukherjee is slated to meet on May 27 to discuss imposing preconditions on approving the deal. The GoM recommendation will go to the Cabinet Committee on Economic Affairs (CCEA), which had on April 6 asked the ministerial panel to vet the deal.