In a blow to Cairn Energy, the government's law officers have held that Edinburgh-based firm needs state-owned ONGC's consent to sell its majority stake in Cairn India to Vedanta Resources.
More than three months after announcing the sale of its up to 51% stake in the Indian unit to Vedanta, Cairn Energy Plc on November 23 last year had made a conditional application to seek government's nod but refused to accept partner ONGC's rights.
Sources in the know of the development said the Cabinet Committee on Economic Affairs (CCEA) may decide on giving in-principle approval to the USD 9.6 billion deal subject to Cairn making an unconditional application to the government and seeking no-objection from partner Oil and Natural Gas Corp.
The equitable sharing of the royalty that ONGC pays on behalf of Cairn India on oil produced from Rajasthan fields will be decided post completion of the transaction, they said.
Also, Cairn's refusal to accept the government's position that it must pay Rs 2,500 per tonne cess on its 70 % share of crude oil produced from Rajasthan fields will be enforced after the deal.
Sources said a legal view was sought as finance ministry wanted law ministry opinion on royalty that ONGC pays on behalf of Cairn India in Rajasthan oilfields.
The legal opinion stated that the change of control of Cairn India amounts to an indirect assignment or transfer of participating interest in its 10 blocks and so there is a need of the government as well as the partner's nod.
ONGC holds stakes in eight out of Cairn India's 10 assets, including the mainstay Rajasthan oilfields.
The precondition that Rs 21,802 crore in royalty and cess paid by ONGC on behalf of Cairn India on the Rajasthan oilfields should be equitably shared has been watered down and the approval to the deal will not be conditional to the fullfilment of it.
The Cabinet note on the issue lists two alternatives. In the first, five preconditions including royalty being made cost-recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC's no-objection and Vedanta providing performance and financial guarantees have been listed.
The alternative to the precondition of royalty and cess suggests that the government shall pursue all legal recourses for establishing its rights under the Production Sharing Contract (PSC) in the case of cess.
On royalty, it should take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable.
In both the options, ONGC's consent or no-objection is a pre-requisite.
Sources said that it was unlikely that the Cabinet would go with the first option, as the second one was easier and least controversial option.