Cairn gives consent to govt terms for Vedanta stake sale

New Delhi: UK’s Cairn Energy Plc finally accepted all government riders to get approval to its stake sale in Cairn India to mining group Vedanta Resources after dilly-dallying with the issue for almost a year.

Cairn Energy Chairman Bill Gammell, who had till recently maintained that forcing Cairn India to pay royalty and cess on the mainstay Rajasthan oil block was against the signed contract and would hurt minority shareholder’s interest, on 3 August wrote to oil secretary G C Chaturvedi saying all the preconditions set by the government were acceptable to the company and Vedanta.

To get $6.02 billion from the sale of a 40 percent stake, Gammell said Cairn Energy and Vedanta will vote at a shareholders’ meet for acceptance of the royalty and cess riders, ignoring the resolution passed by the Cairn India board in February opposing the value demolishing preconditions.

“Cairn UK Holdings Ltd (a wholly owned subsidiary of Cairn Energy), holding 52.11 percent of the issued share capital of Cairn India, and Vedanta Resources Plc Group, holding an aggregate of 28.5 percent of the issued share capital of Cairn India, shall both be voting in favour of acceptance” of these conditions, Gammell wrote.

Cairn India had on 26 July stated that its April-June quarter net profit would halve to Rs 1,435 crore if it was asked to share royalty on crude oil produced from the Rajasthan fields.

The company currently does not pay any royalty on its 70 percent interest in the Rajasthan fields. The royalty, as per the contract, is paid by state-owned ONGC, which got a 30 percent stake in the 6.5 billion barrel field for free.

The Cabinet Committee on Economic Affairs (CCEA) on 27 June gave consent to the Cairn-Vedanta deal, but subject to Cairn or its successor agreeing to charging or deducting the royalty paid by ONGC from revenues earned from sale of oil before profits are split between the partners.

This cost recovery of royalty will lower Cairn India’s profitability.

Also, the CCEA said Cairn India must pay a Rs 2,500 per tonne cess on its 70 percent share of oil production. Cairn maintains that cess, like royalty, is a liability of ONGC and had initiated arbitration against the government on being forced to pay cess.

Gammell said Cairn Energy and Vedanta will vote in a postal ballot being conducted among Cairn India shareholders for withdrawal of the cess arbitration.

Cairn Energy, together with Vedanta, has 80 percent voting rights in Cairn India and can overrule the objections of minority shareholders to see any proposal through.

“We expect the results of the shareholder vote to be announced in September and hope thereafter to be in a position to comply with all of the conditions set,” he wrote, seeking an extension of the one-month deadline the government has set for acceptance of the conditions.

Since the board of Cairn India, which Gammell chaired on 10 February, opposed accepting the government preconditions, Cairn Energy wants these conditions to be voted on by the company shareholders.

Besides Vedanta furnishing financial and performance guarantees and an undertaking to keep Cairn India’s technical capability undisturbed, the preconditions include Oil and Natural Gas Corp. (ONGC)-Cairn India’s partner in most of its 10 properties in India-giving a no objection

certificate, as well as the home ministry giving security clearance to Vedanta.

Since the Cairn-Vedanta deal was announced in August last year, Cairn India has been opposed to making royalty payments recoverable from the sale of oil and the company being made liable to pay a Rs 2,500 per tonne cess, as this was not in line with the Production Sharing Contract (PSC).

A change in the contract was neither in the interest of the company, nor its minority shareholders, it has maintained.

“It should be noted that if royalty were to be cost recoverable, it would lead to a decline in the revenues and profit-after-tax for the current quarter by Rs 1,291.6 crore,” Cairn India said, announcing its Q1 earnings on 26 July.

Cairn India reported a 10-fold jump in net profit to Rs 2,726.6 crore for the April-June quarter.

Last August, Vedanta proposed buying a 51-60 percent stake in oil and gas explorer Cairn India for up to $9.6 billion in cash, but the deal has been delayed due to the lack of government and regulatory approvals.

A group of ministers headed by Finance Minister Pranab Mukherjee had recommended to cabinet that the deal should be approved if Cairn or its successor agreed to royalty being added to the project cost and recovered from oil sales, as well as agreed to pay its share of the Rs 2,500 per tonne oil

cess.

Days before the CCEA accepted the GoM recommendation and gave conditional approval, Cairn Energy lowered the price it was demanding from Vedanta to make up for the reduced profitability from acceptance of the preconditions.

It removed a non-compete provision and related non-compete fee of Rs 50 per share.

Vedanta’s total payment, at the reduced price of Rs 355 per share for a 40 percent stake in Cairn India, will now be 6.02 billion, instead of 6.84 billion previously.

PTI