Cairn may not accept Govt conditions on Vedanta deal

More action can be expected in the Cairn Energy-Vedanta Resources stake sale deal, with the Cairn India board unlikely to accept the conditions set by the Government. The Government has set certain riders for the deal approval including the issue of royalty raised by ONGC — royalty to be shared by all stakeholders — and that Cairn has to withdraw all arbitration cases.

According to sources privy to the developments, the Cairn India board, which is to meet later this month, will take up the matter. The board (on February 10 and May 25 meetings) has been unanimous that the company will not share the royalty burden of the Rajasthan oilfields or give up its right to contest the cess claim as that would lower the value of the assets held by Cairn India and have negative implications for minority shareholders. This position is unlikely to change, sources told Business Line . The parent company, Cairn Energy Plc, proposes to sell majority stake in Cairn India to Vedanta Resources. Cairn Energy and Vedanta Resources needed Government nod for acquiring 30 per cent stake in Cairn India.

Further, the Government has a production sharing contract (PSC) with Cairn India and any changes to this PSC can be carried out only with the consent of the company's board, they point out. On the other hand, Vedanta, before the Cairn India is complete, cannot give any assurances on behalf of the company.

Estimates show that if royalties paid by ONGC, partner in Rajasthan oilfields, are made ‘cost recoverable', Cairn India will take a hit of $1.6 billion depending on oil price and other things. Sharing of royalty was not part of the disclosures made when Cairn India went public four years ago, based on which many of them subscribed to the issue. Acceptance of any of these proposals is likely to be challenged by Cairn India's minority shareholders under the Companies Act.

ONGC, as the licensee of the Rajasthan block, bears the entire royalty burden. According to provisional calculations, the total royalty burden over the project life (the current PSC is valid till 2020) is Rs 18,000 crore. Of this, ONGC has to bear Cairn's share of approximately Rs 12,600 core.

As for the cess, Cairn India has been paying it under protest, at the rate of Rs 2,650 a tonne of crude oil. The cess has to be borne by the producer, which in this case is Cairn India. However, according to Cairn's interpretation, the Rajasthan PSC is ambiguous about who will be paying it. At a crude oil price of $70 a barrel, the company was projected to pay Rs 9,202 crore towards its share of cess and Rs 3,944 crore towards ONGC's share. Rajasthan crude price is at 10-15 per cent discount to Brent average of the previous year.

Vedanta and its group company currently hold 18.5 per cent in Cairn India. Vedanta will acquire another 10 per cent on or before July 11 from Cairn Energy, following which the Edinburgh-based company's stake in Cairn India will stand at 52.2 per cent from the current 62 per cent.

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