New Delhi: The government will decide on giving approval to the $9.6 billion Cairn-Vedanta deal by February-end, reports PTI quoting oil secretary S Sundareshan.
"I had earlier given a timeline of December-end (for deciding on giving approval to Vedanta Resources, buying majority stake in Cairn India) on the presumption that it will take 2-3 months to process (the case) from the date we get all applications.
"But given that we have got the application (seeking approval) only last week, we will certainly be able to decide on the case by February-end," he said here.
After months of dithering, UK's Cairn Energy on 25th November applied for government nod to transfer control in its three producing assets, including the prolific Rajasthan fields to Vedanta Resources.
Mr Sundareshan said the oil ministry had told Cairn that it would have to apply for approval in all of its 10 assets for the government to consider giving consent to the deal.
Three separate applications were made for the Barmer oil fields in Rajasthan, the eastern offshore Ravva oil and gas fields and the Cambay fields off the west coast, which had previously been omitted from the applications for government approval.
"Yes, we have got the applications in the last 2-3 days," Mr Sundareshan said.
Cairn Energy had on 16th August announced sale of 40%-51% stake in its Indian unit to London-listed Vedanta, but has been selective in approaching government for approval for the deal.
The applications stated that the company's legal advisers had stated that the consent of the government was not required for transfer of control in a company holding interest in the three blocks that were awarded prior to advent of the New Exploration Licensing Policy (NELP).
NELP explicitly has such provisions and so Cairn had sought government nod for seven exploration acreage it has.
Cairn in its application last week had stated that it was applying for the government consent on being asked to do so by the oil ministry, which backed its claim for prior approval based on an opinion by the law ministry.
Mr Sundareshan said the law ministry has backed oil ministry's contention that Cairn needs government approval in all of it 10 blocks.
The law ministry has given the opinion that the transaction is nothing but transfer of control in all the 10 properties held by Cairn India and so requires government consent and trigger pre-emption or right of first refusal (ROFR) of Oil and Natural Gas Corporation (ONGC) that partners the company in all the three producing properties and several of exploration acreage.
Cairn, however, has maintained that the need for consent does not trigger ONGC's pre-emption rights.
Mr Sundareshan said the pre-emption right has to be decided by ONGC "keeping in mind if it wants to exercise those rights."
Cairn, sources said, did not apply for consent under any specific provision of the Production Sharing Contract (PSC) that the company had signed for the three properties with the government.
The oil ministry, too, had not sought the application under any specific clause of the PSC.
The PSC has clause for prior-government consent in case of one of the companies deciding to sell its stake in the property (a situation referred technically as sale or transfer of participating interest (PI).
Cairn has denied that it is selling its PI in fields like Rajasthan and that the Vedanta deal is a corporate transaction and Cairn India as a company will continue to exist and operate the properties.
If it were to make an application under the PSC, it would have been an acknowledgment of ONGC's pre-emption rights whose existence Cairn has been denying from day one.
In its 16th August announcement of the deal, Cairn Energy did not say that the sale of its majority stake in Cairn India to London-listed Vedanta was conditional on government approvals.
However, on being shown relevant provisions of the contracts for exploration it has with the government, Cairn Energy-about a month later-made an application for permission that left out all of its three producing properties including its mainstay 6.5 billion barrels Rajasthan block.
"This position was not acceptable to the oil ministry, which sought law ministry's views on the issue. The law ministry opined that Cairn was contractually bound to apply for approvals in all the properties," a source said.
Earlier this month, the oil ministry wrote to Cairn Energy, citing the law ministry views after which the UK-based firm has had a change of heart.
Though the company conceded ground on the requirement of prior-government consent, Cairn has not yielded pre-emption rights to state-owned ONGC, which partners its Indian unit in most of its properties including the Rajasthan block.
"It remains to be seen how the government will react to the continued defiance of Cairn on pre-emption rights," the source said.
The pre-emption is a natural extension of the requirement of government consent and the same has been upheld by law ministry and the Solicitor General of India, the nation's second highest law officer, in their separate opinions on the Cairn-Vedanta deal.
The law ministry, in an opinion sent late last month, had held that the share sale was nothing but transfer of control (in all of the 10 properties of Cairn India), necessitating government nod in all of them and triggering ONGC's pre-emption rights.
Cairn India is primarily an aggregation of interests that it holds directly or indirectly through its subsidiaries in 11 blocks (in India and Sri Lanka).
A transfer of controlling stake in Cairn India amounts to a transfer of the respective participating interests, therefore, necessitating government approval, according to the legal opinion.
And transfer/sale/assignment of interest to third party will trigger pre-emption rights of state-owned ONGC, which partners Cairn India in most of its properties.
Cairn says the Vedanta deal is only a corporate transaction, involving share transfer, which does not trigger issues like examination of new owners' technical capability and ONGC's pre-emption rights.
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Most people believe that an underground economy exists in defiance of the law. The truth is that they exist because of the law. When legal systems don’t work, the main victims will be investors
Every country in the world has an underground economy. They differ only by degree. Most people believe that an underground economy exists in defiance of the law. The truth is that they exist because of the law. When legal systems don't work, the main victims will be investors.
Legal systems can create underground economies for a variety of reasons. For example, if the law imposes too many burdens on an economy as in irrational regulations or pervasive fees, they will be simply ignored or not paid. Often it is not the regulations themselves that create the problems. It is the people enforcing them. If regulations require constantly escalating payments to rent-seeking bureaucrats, businesses will find it easier to do business outside the system.
Governments like to utilise the law to control or interfere with the markets. More often than not it has limited or no effect. An example is price controls. To stop inflation governments are fond of putting in place price controls, which only increases hoarding and encourages corruption of the enforcement mechanism. Limits on interest rates within the financial system will often result in the diversion of savings to alternative investments. A government monopoly invariably instigates a gray economy.
An attempt to limit supply for something the market demands is also doomed to failure. The most obvious example has to do with government attempts to limit the practice of supposedly immoral activities like gambling, drugs and sex.
Governments have also attempted to stop expensive loans supplied by loan sharks and cheap labour supplied by illegal migration. But even enforcement obsessed America has failed to stop these practices despite spending hundreds of billions of dollars over decades.
A poor legal infrastructure with corrupt, biased, slow or expensive courts will invariably result in alternative dispute resolution mechanisms. For example, in Afghanistan the Taliban have been very effective in creating a shadow court system that is generally perceived by at least the Pashtuns, as less corrupt and more sensitive to their cultural traditions.
Although underground economies are more pervasive in emerging markets, they certainly exist in developed countries as well. In a recent poll of the European Union's 27 members, almost 30% of some of its most honest citizens-Denmark and the Netherlands-admitted to paying for unlicensed, unregistered or illegal goods and services.
The most accurate measure a legal infrastructure's efficiency is the size of its underground economy. In most of the OECD countries (Organisaion for Economic Co-operation and Development) the estimated size is about 13.8% of GDP. Of course this varies widely. Greece has an estimated black economy that represents 25% of its GDP. Italy's is 22%, and the illegal economies in the US, Switzerland and Austria represent only 7.6%, 8.3% and 8.5% of their GDP respectively.
While the underground economy in the US seems relatively small compared to other countries, it does not mean it is irrelevant. The reported US GDP is close to $14 trillion economy. This means that a trillion-dollar grey, or black, economy goes unreported and untaxed. It escapes economic and financial forecasts. It does not come within the purview of government or private company plans or programmes.
As this problem is multiplied from country to country across the world we start to see major distortions. Greece misses out on €15 billion annually. The Italian tax authority loses €100 billion. Both Greece and Italy are relatively sophisticated developed countries.
The less developed and emerging markets make up far more of the world's economy than ever before. As these economies have grown, so has the size of their subterranean economies, which leaves an ever larger hole in accurate information.
The obvious enormous example is China. China's capricious regulations and state-dominated economy guarantee a large grey economy. It is so large that it dwarfs the economies of many countries. But China's secretive markets are not just about simple illegal activities. They include all forms of finance. The alternative banking system in China comes in various forms. According to the former Financial Times Beijing correspondent James Kynge, they include "off-balance-sheet lending by state banks, the funds under management by 'private' funds and the assets of a booming multitude of unregistered banks and loan sharks."
According to Mr Kynge, the total amount of lending in this underground financial system could top an estimated 6 trillion renminbi. If this amount is added to the reported loans of 7 trillion renminbi, you end up with a money supply that is out of control and certainly heading towards inflation.
Financial professionals and economists pride themselves on the amount and quality of information available to them. Governments pride themselves on their ability to use law to regulate their economies. They both are quite vain about their forecasts. What investors need to know is that they are both wrong and the effects of their mistakes will be something that they can't predict. So perhaps the best strategy is to listen to what they have to say, and bet the other way.
(The writer is president of Emerging Market Strategies and can be contacted at email@example.com or firstname.lastname@example.org)