Tuesday is going to be crucial for Cairn India Ltd as its board meets for the first time since the Government's conditional nod for the Cairn Energy-Vedanta Resources deal.

The board, in its earlier two meetings (held on February 10 and May 25), was unanimous that the company would not share the royalty burden of the Rajasthan oilfields or give up its right to contest the cess claim. If this is any indication, there is unlikely to be any change in its stance at the meeting, which will be held in Edinburgh to approve its first quarter results. The board meet is certain to test the persuasive skills of Sir Bill Gammell, Chairman, Cairn Energy, as well as Cairn India.

Further, any changes in the production sharing contract (PSC) can be carried out only with the consent of the company's board. The Government has set certain pre-conditions, including the issue of royalty raised by ONGC – royalty to be shared by all stakeholders – and Cairn to withdraw all arbitration cases.

Cairn Energy Plc proposes to sell majority stake in Cairn India to Vedanta Resources. Cairn Energy and Vedanta Resources needed the Government's nod for selling and acquiring, respectively, 30 per cent stake in Cairn India. Vedanta and its group company currently hold 28.5 per cent in Cairn India. Cairn Energy's stake in Cairn India stands at 52.2 per cent.

Further, Cairn India, in its annual report for 2010-11, has said that it may initiate proceedings in relation to royalty and cess for the production of crude oil from the Mangala field in Rajasthan. Cairn India, with 70 per cent stake in the Rajasthan block (RJ-ON-90/1), is also the operator. ONGC holds the remaining 30 per cent. In Cairn India's view, under the PSC for this block, royalty and cess are payable by ONGC as it is the licensee, and these should not form part of the contract cost.

Though ONGC has been paying royalty to the Rajasthan Government for crude production every month, it has contended that the royalty payable should be considered as a contract cost.

“…to date, Cairn India has no formal intimation from the Government or ONGC of any dispute, demand or allegation of royalty being part of contract cost for cost recovery purpose. Cairn India has secured legal opinions in its favour and believes that it has a strong case,” its annual report says.

“In the event that royalty is considered to be part of contract cost for cost recovery or Cairn India is held liable to pay its 70 per cent share of cess, there would be a material adverse effect on its business, financial condition and results of operations,” it says.

Estimates show that if royalties paid by ONGC 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.

As regards cess, Cairn India has been paying it under protest, at the rate of Rs 2,650 a tonne of crude. It has initiated arbitration proceedings against the Government of India and ONGC on the issue.

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