UK’s Cairn Energy or its successor Vedanta Resources may have to bulldoze Cairn India board if they were to accept conditions set by the government to clear their $9 billion deal.

The board of Cairn India (CIL) has on two occasions rejected oil ministry conditions that royalties paid by ONGC on its all important Rajasthan oilfields, be cost recoverable from oil sales saying this was against contractual provisions and not in the interest of the company and its shareholders.

Also, CIL is against Rs 2,500 per tonne cess being imposed on it saying contractually ONGC, like in case of royalty, is responsible for payment of the levy. Cost recovery of royalty and payment of cess are preconditions Cabinet set last week for approving Cairn Energy selling sake in CIL to Vedanta.

But now if its parent (Cairn Energy) or Vedanta were to accept these conditions, a serious corporate governance issue will arise for CIL, analysts tracking the deal said.

“Can CIL compromise other shareholders’ interest just because one shareholder (Cairn Energy) is selling its stake to other (Vedanta),” one of them asked.

“I think there is a larger corporate governance issue involved. It is true that it is a corporate transaction involving share transfer between two entities. But can someone sell a majority stake in a company without taking that company into confidence,” another person asked.

Accepting the royalty condition alone would mean about $900 million dent in revenues of Cairn India annually, they said, adding either Cairn Energy will have to convince CIL board into accepting the conditions or Vedanta when it takes over the company overrule the board.

Cairn Energy had publicly voiced concern over both the preconditions and Vedanta opposed them in a January 28 letter to the then Oil Secretary Mr S Sundareshan.

Stating that acceptance of the conditions could be challenged by CIL’s minority shareholders under provisions of the Companies Act, Vedanta CEO Mr M S Mehta wrote Vedanta would become just a shareholder of CIL after completion of the deal.

“CIL and its subsidiaries are the signatories to and counterparties to the various Production Sharing Contracts (PSCs) entered into the Government of India. As Vedanta would not be a party to any of these contracts, and would be merely shareholders of CIL, it would be neither possible nor appropriate for Vedanta to agree to any conditions which directly impacts their terms - particularly as this impacts the rights of minority shareholders,” he wrote.

Emphasing that CIL was an independently run listed entity with an independent board that was duty bound to act in the interests of all shareholders, he said the riders “would involve a significant departure from the terms of the existing contracts entered into by CIL and government.”

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