DGH spells out pre-conditions for Vedanta-Cairn deal | business | Hindustan Times
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DGH spells out pre-conditions for Vedanta-Cairn deal

business Updated: Dec 07, 2010 17:46 IST

Government approval for Vedanta Resources' $ 9.6 billion deal to acquire Cairn India will hinge on the Anil Agarwal-led firm accepting certain pre-conditions, including retaining the entire management team of Cairn to make up for its lack of prior oil and gas experience. According to sources, the oil and gas upstream (exploration) sector regulator, the Directorate General of Hydrocarbons (DGH), had sought assurances from Vedanta that operations at Cairn's oil and gas assets would not be affected once it took control of the company, enumerating his opinion in a November 29 communique.

"Subsequent to the opinion, the oil ministry has now asked the DGH to detail specific guarantees that Vedanta would be required to execute," a source said. Since UK-based Cairn Energy, which is selling most of its 62.38% stake in Cairn India to Vedanta, insists that Cairn India's operations will not be affected by the corporate transaction -- which only involves the transfer of shares -- the ministry wants Vedanta to give a guarantee that it will not change the management team.

Furthermore, Vedanta will have to provide guarantees that Cairn India will continue to meet financial and other obligations under the Production Sharing Contracts (PSC) it signed for 10 oil and gas properties. Cairn India was allowed to take interest in the 10 properties on the basis of Cairn India group's (Cairn UK and affiliates) financial strength, technical capabilities and past experience, including operationship experience.

To bag the Rajasthan block -- which is at the heart of the $ 9.6 billion deal -- Cairn India had submitted documents attesting its parent firm's sound financial strength and technical competence, having prospected for oil in 17 countries worldwide in the last 10 years, sources said. "Had Vedanta bid or had it sought to buy Cairn India's stake in any of the properties individually, it would not have met the technical criteria. By undertaking the so-called corporate transaction, it will, in effect, circumvent the technical expertise criteria," a source said.

Cairn Energy, which is selling up to a 51% stake in the Indian unit to Vedanta, has provided a parent company guarantee for many of the properties. The PSCs clearly state that any firm taking over Cairn's interest in any or all of the 10 properties will have to be of "good standing, have the capacity and ability to meet its obligations" and "willing to comply with any reasonable conditions of the government." "Vedanta will be required to give a prior undertaking (that) the transaction will have no effect upon the knowledge and experience as a contractor of Cairn India Group or of Cairn Energy India Pvt Ltd operating to accepted international petroleum industry practices," the DGH advised the ministry in its November 29 opinion.