Cairn-Vedanta deal gets Cabinet panel nod, but with riders

Our Bureaus New Delhi/Mumbai | Updated on March 12, 2018 Published on June 30, 2011




ONGC's royalty burden to come down

After a good 10 months of its announcement, the Cairn Energy-Vedanta Resources stake-sale deal has got the nod of the Cabinet Committee of Economic Affairs, but with riders.

Endorsing the recommendations of a Group of Mministers (GoM) that looked into the deal, the CCEA has said that Cairn and Vedanta will have to bear the royalty burden for the Rajasthan oil fields, and Cairn has to withdraw all ongoing cess arbitration cases, the Petroleum Minister, Mr S. Jaipal Reddy, said.

This vindicates ONGC's stand, which has been paying the entire royalty for the Rajasthan fields. ONGC, which owns 30 per cent of the field, started paying royalty from September 2009 when production began. The production sharing contract for the field runs till 2020. According to provisional calculation the total royalty burden over the project life 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 has been paying it under protest. The cess is to be paid 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.

Apart from these two contentious pre-conditions some of the other conditions include Cairn obtaining no objection certificates from partners; Vedanta getting approvals from regulatory bodies like SEBI; and Vedanta to provide performance and financial guarantee. Last August, Cairn Energy and Vedanta announced a deal according to which Cairn Energy proposes to sell a maximum 51 per cent stake in Cairn India to Vedanta for up to $8.48 billion. Both Cairn and Vedanta have till now been refusing to accept this pre-condition. However, the recent re-adjustment in the sale and purchase agreement between Cairn Energy and Vedanta is being seen as the pre-condition being acceptable to the two entities for taking the deal to the logical conclusion.

Cairn Energy and Vedanta Resources have agreed to remove the non-compete provision and related non-compete fee of Rs 50 a share from the sale and purchase agreement for Vedanta's purchase of 40 per cent stake in Cairn India Ltd.

This change meant that the deal size would come down by $628 million. After the removal of the non-compete fee, the effective sale price of Cairn India's shares would come down to $7.85 a share (Rs 355) as against $8.66 (Rs 405) a share earlier. Thus, the total consideration payable by Vedanta for the 40 per cent stake in Cairn India will now be reduced to $6.023 billion as against $6.65 billion. Vedanta and Cairn Energy have agreed that completion of the transaction will take place in two tranches. Vedanta will acquire a 10 per cent stake in Cairn India on or before July 11.

Following this, Vedanta's holding in Cairn India will stand at 28.5 per cent. Cairn Energy will continue to hold a controlling stake of 52.2 per cent. For acquiring the remaining 30 per cent stake the two needed consents and approvals from the Government.

Awaits official intimation

In a statement, Vedanta Resources plc said that “Vedanta awaits official intimation of the approval and details of the pre-conditions from the Government of India, in order to consider further course of action. Vedanta continues to work with Cairn Energy towards the successful completion of the transaction and a further announcement will be made in due course.”

At the London Stock Exchange at 8.45 PM IST, Vedanta's scrip was trading around 3 per cent higher since the announcement that the CCEA has given its approval to the deal, while Cairn Energy's scrip was trading around 2 per cent higher.

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Published on June 30, 2011
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