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CCEA refers Cairn-Vedanta deal to GoM; buyout may be delayed

The decision followed differences in the Cabinet panel on whether London-listed mining group with no experience in oil should be given unconditional approval for buying a company that owns the nation's largest onland oil fields or after attaching reasonable conditions

New Delhi: In a move that is set to delay and possibly scuttle the biggest acquisition in India's energy sector, the Cabinet Committee on Economic Affairs (CCEA) on Wednesday referred Vedanta Resources' $9.6 billion buyout of Cairn India to a ministerial panel, reports PTI.

The move followed differences in the Cabinet panel on whether London-listed mining group with no experience in oil should be given unconditional approval for buying a company that owns the nation's largest onland oil fields or after attaching reasonable conditions.

"There are some complex issues. CCEA felt such a decision should not be taken in a hurry," oil minister S Jaipal Reddy told reporters after the meeting.

UK's Cairn Energy Plc, which is selling majority in its Indian unit, and Vedanta have set 15th April as the deadline for conclusion of the transaction and a government decision is unlikely before that.

Both of them will have to go back to their shareholders for extending the deadline and it remains to be seen if Vedanta will still pay Rs405 a share price considering government nod has not come in the past eight months.

Vedanta however said its open offer to acquire additional 20% stake from minority shareholders of Cairn India will open as scheduled on 11th April. Conclusion of the open offer is intrinsic part of the transaction.

Sources said the CCEA did not take long to defer a decision after law ministry strongly backed protection of partner ONGC's rights in the deal.

Solicitor General of India (SGI) had opined that Vedanta must agree to equitably share Rs18,000 crore royalty ONGC pays in excess of its share from Cairn India's mainstay Rajasthan oilfields, before the government nod.

"It has been decided in the meeting of the CCEA that the issue of clearance of sale of Cairn's share to Vedanta should be referred to a Group of Ministers (GoM), headed by finance minister Pranab Mukherjee" Mr Reddy said.

Other members of the grouping, which has to deliberate and report back to the Cabinet on the issue, includes law minister M Veerappa Moily, telecom minister Kapil Sibal and Planning Commission deputy chairman Montek Singh Ahluwalia.

Mr Reddy said there was no difference in the Cabinet on royalty, like other project cost and government levies, should be recovered from revenues earned from sale of oil. Profits between stakeholders including the government, is to be shared after that.

"On the question that the royalty should be cost recoverable, there are no differences (in the Cabinet). My own ministry took a categorically position that royalty should be treated as a cost recoverable item," he said.

Cairn India, which holds 70% stake in the 6.5 billion barrels Rajasthan block, does not pay any royalty and is opposed to making it cost recoverable as it will dent its profits.

Besides opposing cost recovery of royalty, Cairn Energy has maintained that its stake sale to Vedanta does not require the government nod and had through its Indian unit made a conditional application in November-end on insistence of the oil ministry. The application also rejected rights of ONGC, which has stake in eight out of 10 properties of Cairn India.

"I don't think it is negative signal. We have not sent no," Mr Reddy said.

He said his ministry had listed two options-in the first making royalty cost-recoverable as a pre-condition for approval. Alternatively, it has suggested that the government gives its consent to the deal without any pre-condition and "appropriate decision" will be taken to enforce ONGC's right.

The GoM, which is yet to be officially constituted and terms of reference set, will take a decision as early as possible but no timeframe has been set, he added.

SGI, whose opinion was endorsed by Mr Moily, had however, opposed the second option suggested by Mr Reddy saying "The second option which has been suggested in the Cabinet note i.e. pursuing rights under the PSC (production sharing contract) to recover the rightful dues of ONGC, would involve an undesirable amount of time and resources to be spent and would be contrary to the public interest."

The Cabinet note has admitted that Cairn could later play hooky as it was doing in the arbitration case on payment of cess on Rajasthan oil.

Cairn says it is not liable to pay Rs2,500 per tonne cess on its 70% share of production from the Rajasthan blocks and the same has to be paid by ONGC.

The Cabinet note says that Cairn has alleged that the non-inclusion of cess payment in the PSC was "either a mutual or a unilateral mistake by the government by playing fraud by diverting (original operator) Shell's attention away from cess during the contract negotiations."

"Vedanta Resources may also take a similar position at a later point of time to its advantage on the issue of cost recovery of royalty. Therefore, a suitable safeguard may be put in place as the ministry feels that the cess is payable by the contractor and royalty is cost recoverable under the PSC," it says.

"If the competent authority does accord its consent to the transfer of participating interest from Cairn to Vedanta, the same should be granted subject to the stipulation/condition regarding the recoverability of the cost of the royalty," SGI said in his opinion.

SGI's opinion was taken on insistence of finance ministry which wanted to know the legality of ONGC's demand.

The oil ministry's Cabinet note on the issue lists two alternatives. In the first, five preconditions, including 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 have been listed.

The alternative to the precondition of royalty and cess suggests that the government shall pursue all legal recourses for establishing its rights under the PSC in the case of cess.

On royalty, it should take appropriate decision to enforce the provisions of PSC to make royalty cost- recoverable. In both the options, ONGC's consent or no-objection is a pre-requisite.

ONGC owns 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 be Rs18,000 crore, of which ONGC also has to bear Cairn's share of about Rs12,600 crore.

Cairn has also disputed any liability to pay Rs2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals Rs9,202 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.

More than three months after announcing the sale of its up to 51% stake in the Indian unit to Vedanta, Cairn Energy Plc on 23rd November last year had made a conditional application to seek the government's nod but refused to accept partner ONGC's rights.

ONGC holds stakes in eight out of Cairn India's 10 assets, including the mainstay Rajasthan oilfields.

Cairn Energy and Vedanta have set a deadline of 15th April to close the transaction. After the clearance by the government, the two firms can approach their shareholders seeking an extension of the 15th April deadline, saying the conclusion now remains a mere formality.

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