ONGC may give nod to Cairn-Vedanta deal on 27 Sept

The need for a legal document has arisen because Cairn India insisted on ONGC giving no-objection to the Cairn-Vedanta deal before it agrees to accept conditions that the government has set for clearing the $9 billion transaction.

hidden September 21, 2011 18:02:25 IST
ONGC may give nod to Cairn-Vedanta deal on 27 Sept

New Delhi: State-owned ONGC may next week give consent for transfer of control in Cairn India to Vedanta Resources, provided the Cairn Energy subsidiary and the Anil Agarwal-led firm sign a legally binding agreement to share royalty and pay cess on production from their Rajasthan field.

The need for a legal document has arisen because Cairn India insisted on ONGC giving no-objection to the Cairn-Vedanta deal before it agrees to accept conditions that the government has set for clearing the $9 billion transaction.

Sources privy to the development said the board of Oil and Natural Gas Corp (ONGC) can waive its preemption rights only when Cairn India agrees to pay its share of the Rs 2,500 per tonne cess on production from the all-important Rajasthan oilfields, as per its stake of 70 cent, and also makes royalty payments cost-recoverable.

ONGC may give nod to CairnVedanta deal on 27 Sept

State-owned ONGC may next week give consent for transfer of control in Cairn India to Vedanta Resources.

ONGC holds 30 percent interest in the Rajasthan fields and Cairn previously felt the state-owned firm was liable to pay royalty and cess on its share of production, as well as Cairn's 70 percent participating interest.

"There is mutual distrust between the two partners," a source said. "Cairn doesn't want to agree to paying royalty and cess without getting a no-objection certificate (NOC) from ONGC, while ONGC doesn't want to give its consent without Cairn agreeing to the conditions set by the government."

A way out of this would be for ONGC, Cairn India, Vedanta and UK's Cairn Energy - which is selling its 40 percent stake in its Indian unit - to sign a legally binding document agreeing on the government conditions as well as a separate paper granting clearance to the transaction simultaneously.

Sources said ONGC board may on 27 September agree to waive its right of first refusal (ROFR) on the proposal, subject to Cairn India and others signing the legal document.

Upon board approval, the legal agreement can be signed that very day if Cairn/Vedanta so desire, they said, adding that the NOC will be handed over upon signing of the papers.

SBI Caps, which had been appointed by ONGC to advise on exercising its preemption rights, has opined that the Rs 355 a share price that Vedanta is paying Cairn Energy for buying a majority stake in Cairn India is too high a price.

Stating that SBI Caps was in the process of finalising its report, sources said the valuation - along with a recommendation for waiver of ONGC's ROFR over the deal - would be put before the state-run oil and gas explorer's board on 27 September.

In a postal ballot earlier this month, 97 percent of Cairn India's shareholders - including Cairn Energy (52.1 percent) and Vedanta (28.5 percent) - had voted for acceptance of the government conditions so that the transaction can conclude.

The company board, which met on 14 September, accepted the shareholder's mandate, but added a caveat that the conditions would be accepted only upon receiving a NOC from ONGC.

Sources said Cairn India had conveyed the same to ONGC in a formal letter it wrote shortly after the board meeting, seeking formal approval for the Vedanta deal.

Cairn India currently does not pay any royalty on its 70 percent stake in the Rajasthan fields. 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.

However, even before the $9.6 billion Cairn-Vedanta deal was announced in August last year, ONGC had demanded that like all other taxes, royalty should be added to the project cost, considering it as revenues earned from oil sales before profits were split between partners.

Cairn had opposed this as it would lower its profitability and had also initiated arbitration against the government, contesting its liability to pay oil cess on its share. It believed that cess, like royalty, was also the liability of ONGC.

"The acceptance of royalty as being cost-recoverable and the withdrawal of the arbitration pertaining to cess will be concomitant with transfer of control of Cairn India Ltd," the company said in a letter seeking approval for the deal from ONGC, which holds a stake in eight out of the company's 10 properties in India.

Cairn currently produces 125,000 barrels of oil per day from the Rajasthan block and believes the output could rise to 300,000 bpd (15 million tonnes a year).

Cairn Energy, which is selling a 40 percent stake in its Indian unit to Vedanta, had previously said it would rather call off the deal than force Cairn India to accept the government's conditions.

Cairn India had on July 26 stated that its April-June quarter net profit would halve to Rs 1,435 crore if royalty on the Rajasthan crude oil was made cost-recoverable.

PTI

Updated Date:

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