OilMin cuts pre-conditions for Cairn-Vedanta deal

The Petroleum Ministry has beaten a hasty retreat on some of contentious pre-conditions it had set for approving mining group Vedanta Resources' acquisition of Cairn India and will not play a spoiler to the $9.6 billion deal.

The ministry has watered down the 11 pre-conditions it had in January proposed for giving Vedanta nod to buy a 51% stake from UK's Cairn Energy, officials with direct knowledge of the matter said.

It has completely withdrawn the precondition asking Cairn India to give up its legal rights on future disputes over its mainstay Rajasthan oilfield and abide by the government and oil regulator DGH's diktat.

"The Law Ministry, in its opinion on the pre-conditions, stated that any terms and conditions to be stipulated should be mutually agreed and they cannot be unilaterally imposed," one of the officials said. "The condition that Cairn has to forego its legal right shall be void under Indian Contract Act."

In a draft Cabinet note circulated for approving the deal, the Oil Ministry has almost withdrawn its precondition that Rs 21,802 crore in royalty and cess paid by state-owned ONGC on behalf of Cairn India on production from the Rajasthan oilfields should be equitably shared.

"In January, the Oil Ministry wanted the Cabinet to give nod only after Cairn India agrees to equitable sharing of royalty and paying its sharing of cess," an official said.

"However, in the note that was finally circulated to the ministries of finance, law, home, environment and corporate affairs for comments, the Petroleum Ministry has given an alternative that it will continue to legally pursue equitable sharing of royalty and cess, but will not make it a precondition for approval of the deal," the official said.

The note lists two alternatives. In the first, it lists out five pre-conditions, instead of 11 it had originally proposed to Cairn/Vedanta in January.

The five pre-conditions include 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, another official said.

As an alternative to the precondition of royalty and cess, the ministry has suggested that government shall pursue all legal recourse for establishing its rights under the Production Sharing Contract (PSC) in the case of cess. On royalty, it shall take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable.

Sources said it was unlikely that the Cabinet will go with the first option when an easier and least controversial option has been given in the second.

ONGC owns a 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 Rs 18,000 crore, of which ONGC has to also bear Cairn's share of about Rs 12,600 crore.

Cairn has also disputed any liability to pay Rs 2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals up to Rs 9,202 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 the oil ministry now wants Vedanta to do is 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.

Comments on the note are likely to be received by next week and the matter may go to the Cabinet in the following week for consideration.

Though Cairn Energy and Vedanta have a timeline of April 15 to close the transaction, the deal would go through even if Cabinet was to give its nod by the month-end.

Once the government's nod is obtained, the two firms can approach their shareholders seeking extension of the April 15 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 January 28 that the transaction needs to be closed by April 15.