Cairn-Vedanta deal cleared, royalty to be shared

[LesCrozes]

Cairn-Vedanta deal cleared, royalty to be shared
NDTV Correspondent, June 30, 2011 (New Delhi)

The Cabinet Committee on Economic Affairs (CCEA) has given a conditional approval to the $9-billion Cairn-Vedanta deal. The CCEA has accepted most of the recommendations made by the Group of Ministers (GoM) that met to discuss the deal on May 27.
The government's approval has come with stringent pre-conditions that include royalty being cost recoverable for the Barmer field in Rajasthan. That means Cairn India will have to pay 20 per cent royalty on Rajasthan crude. Cairn has been in a tussle with ONGC, which owns only 30 per cent stake in the Rajasthan oilfields, but is forced to pay the entire royalty on crude output from this block. ONGC has been objecting to the Cairn-Vedanta deal, saying that its approval is a must for Cairn to sell a controlling stake of its Indian arm to Vedanta.

Cairn India will also have to withdraw the arbitration suit it had filed against cess payment. That means the company will have to pay Rs. 2,500 per tonne cess on its 70 per cent share in Rajasthan. Currently, Cairn India is paying this amount under protest and has challenged it through an arbitration suit.

Jagannathan Thunuguntla, Head of Equity at SMC Capital said, "From global investors' point of view it is very critical to clear this deal otherwise they will say India invites FDI but while exiting they will create so many hurdles."

Edinburgh-based Cairn Energy Plc had earlier announced that it would sell stake in its Indian unit to the London-listed mining group Vedanta Resources. Vedanta currently holds 28.5 percent stake in Cairn India and requires the government’s approval to acquire controlling stake to become the majority shareholder.

At $ 9.6-billion one of India's biggest energy deals, the Cairn-Vedanta deal was announced in August 2010, but has languished ever since in the absence of government approval – the stumbling block being dispute over the Rajasthan oilfields. Cairn India owns 70 per cent stake in the Rajasthan block - India’s largest onshore field - and derives 90 per cent of its revenue from it. Making royalty cost-recoverable is the pre-condition that ONGC set for a nod to the deal. If royalty is made cost recoverable, it would first be deducted (recovered) from the sale proceeds of oil before profits are split between partners and the government.

On Monday, Cairn Energy Plc had agreed to lower the sale price for its stake by over Rs. 3,800 crore ($600 million) in a bid to make the deal more lucrative for Vedanta. So, Cairn Energy will sell its remaining 40 per cent stake in Cairn India to Vedanta at Rs. 355 per share instead of Rs. 405 a share agreed in August last year. Cairn Energy was charging Rs. 50 per share as non-compete fee for staying away from India and other neighbouring countries for three years.

The government has also asked the two companies to get regulatory and security clearances. That might still prove to be the biggest stumbling block for the deal going ahead. That is because Vedanta is acquiring Cairn India through its mining company Sesa Goa which is under the scanner after the Serious Frauds Investigations Office recommended prosecution against the company for over and under-invoicing of exports and imports. Anil Agarwal-promoted Vedanta Resources owns 51 per cent stake in Sesa Goa.

UK-based Vedanta Resources Corporation is headed by Anil Agarwal, who also founded Sterlite Industries. Mr Agarwal is the 12th richest Indian according to the Forbes list (2011).


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