The Cairn-Vedanta Deal: Ball in CCEA's court

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At stake is India's reputation as an investment destination and the PSCs signed before the NELP regime.

When three listed companies — ONGC, Cairn, and Vedanta — are involved in the biggest acquisition proposal in the country's petroleum sector and there are political undercurrents as well, public attention is inevitable.

As the Petroleum Ministry seeks the Cabinet Committee on Economic Affairs (CCEA) nod for the proposed stake sale by Cairn Energy Plc in Cairn India Ltd to Vedanta Resources Plc, the pressure is mounting from all quarters — including from the British Prime Minister, Mr David Cameron, who has written to Dr Manmohan Singh for an early decision. At stake is India's reputation as an investment destination and the production sharing contracts (PSCs) signed before the NELP regime.

The CCEA will need to take a call on some major issues, including royalty, being borne by ONGC for the pre-NELP Rajasthan oil fields and the dispute on cess being paid under protest by Cairn for the fields. The Petroleum Ministry wants Cairn to withdraw all existing arbitration — two in Ravva and one in Rajasthan. Further, CCEA consent could also be sought on the financial guarantees by the prospective buyer for the seven NELP blocks which Cairn India and its subsidiaries own. For the other two pre-NELP blocks — Ravva and Cambay — the Ministry would also seek a financial guarantee.

After much deliberation and inter-ministerial consultations, the Petroleum Ministry has circulated a draft Cabinet note seeking their views and comments. While the options suggested by the Petroleum Ministry are being interpreted as a watered-down version from its earlier posturing, the final call rests with the Cabinet.

The approvals for the seven NELP blocks is not much of an issue as the production-sharing contracts (PSC) signed for exploration and production of these blocks clearly spell out the requirements for an exit option.

Bone of contention

The bone of contention is for the three pre-NELP blocks, particularly Rajasthan oil fields, which is the premium asset of Cairn India. The Petroleum Ministry has proposed that in the case of Rajasthan block: RJ-ON-90/1, the consent may be granted subject to conditions. These conditions are cost recovery of royalty to be agreed to by Cairn India, according to the PSC; Cairn India and its subsidiary to withdraw cess arbitration case; Cairn India to get a no-objection certificate from its partner in the block — in this case ONGC.

As an alternative to this, the Ministry has proposed that consent may be granted, but the Government will pursue all legal recourses for establishing its rights under the PSC in the case of cess, and will take appropriate decision to enforce provisions of the PSC in case of cost recovery of royalty by ONGC. It further says that Cairn Energy, Cairn India, and Vedanta Resources will be asked to make appropriate disclosures to SEBI on this. This option by many is being seen a softening of stance by the Ministry. The Petroleum Minister, Mr S. Jaipal Reddy, has been maintaining that “There are issues relating to royalty and cess. We cannot sacrifice our position completely just to facilitate the deal.”

Cess issue

Cairn and Vedanta have indicated that royalty and cess issues could be resolved at an appropriate forum provided under the PSC. Further, the Law Ministry is understood to have held a view that the condition that Cairn should forego its legal right shall be void. It is in this context that the Petroleum Ministry has proposed that the Government may consider granting its consent to the proposed sale of shareholding and explicitly inform Cairn and Vedanta that it reserves its rights on the issue of cost recovery of royalty by ONGC and cess.

Another argument is that, initially, Cairn did agree to make royalty cost recoverable, but subsequently changed its stance. However, Cairn maintains that it is a departure from the terms of the existing PSC entered into by Cairn India and the Government. These would have a material adverse impact on Cairn India's value and, thus, negatively impact the interests of all shareholders including the minority shareholders. Cairn has not agreed to give any undertaking to accept the decisions

ONGC is a partner in eight out of the 10 blocks that Cairn owns. For Rajasthan fields, ONGC pays 100 per cent royalty, though its share in the field is 30 per cent. It wants royalty paid for the fields to be included in the project cost for purposes of profit petroleum calculation. Thus, the royalty burden would be shared by all the stakeholders.

 

Published on March 11, 2011

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