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Oil ministry gives approval of deal to Cairn-Vedanta

More than three weeks after the Cabinet Committee on Economic Affairs gave a conditional nod to the $9-billion Cairn-Vedanta deal, the oil ministry today sent a formal letter to the companies informing of the decision.

business Updated: Jul 26, 2011 18:59 IST

More than three weeks after the Cabinet Committee on Economic Affairs gave a conditional nod to the $9-billion Cairn-Vedanta deal, the oil ministry on Tuesday sent a formal letter to the companies informing of the decision.

"The letter was collected by Cairn India representatives this afternoon," an oil ministry official said.

Cairn Energy Plc, which is selling 40% out its 62.4% stake in its Indian unit to London-listed, India-focused mining group Vedanta Resources, was eagerly awaiting the formal letter so that it can quickly conclude the transaction.

Sources said the letter was immediately faxed to Edinburgh, where the board of Cairn India, whose chairman is Bill Gammell (the head of Cairn Energy), was meeting to approve earnings for the first quarter ended June 30.

Cairn Energy wants the approval letter to be taken up by the Cairn India board at today's meeting itself, they said.

The CCEA had on June 30 given its approval to Cairn Energy for selling its Indian unit to Vedanta subject to the new owner agreeing to share royalty and pay oil cess on mainstay Rajasthan oilfields.

Sources said since the approval involved conditional access, the oil ministry sent the letter informing of the decision to the law ministry for vetting.

Law minister Salman Khurshid on Monday approved the draft and on Tuesday, the oil ministry sent the letter to Cairn India, which is the company that applied for permission for change of control in its 10 properties, including the crown-jewel Rajasthan oilfields.

Government's nod to the transaction is subject to Cairn or its successor agreeing to treat royalty payments on Rajasthan oilfields as recoverable from oil sales.

Also, Cairn India will have to withdraw the arbitration it has initiated disputing its liability to pay Rs 2,500 per tonne oil cess on its 70% share in the fields.

Besides, the approval will be subject to ONGC, which has a stake in all the three oil and gas producing properties and five out of seven exploration assets of Cairn India, waiving its pre-emption rights, which CCEA termed as the partner's no-objection certificate (NOC).

The deal would also need the security clearance, they said.

Last August, London-listed miner Vedanta proposed buying 51-60% of oil and gas explorer Cairn India for up to $9.6 billion in cash, but the deal has been delayed due to lack of government and regulatory approvals.

Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in Rajasthan oilfields.

ONGC owns a 30% stake in Cairn India's Rajasthan oil field but pays the entire royalty on production under the government's previous policy of giving discounts to attract investors.

ONGC had, much before the Cairn-Vedanta deal was announced, cited contractual provisions to demand that the royalty to be recovered as a cost from revenue.

The state-owned firm maintained that as a partner it has preemption, or right of first refusal, and the deal should not proceed without its concurrence, Reddy said.

Both Cairn and Vedanta disputed royalty being made cost recoverable as it would dent Cairn India profits. They also opposed the need for partner consent for the transaction.

A Group of Ministers headed by finance minister Pranab Mukherjee, which was asked by CCEA to vet the deal, held that ONGC's views were correct and recommended to the Cabinet that the deal be approved if Cairn or its successor agreeing to adding royalty to the project cost and recovered from oil sales besides agreeing to pay its share of Rs 2,500 per tonne oil cess.

Sensing the mood, Cairn last month lowered the price it is demanding from Vedanta to make up for reduced profitability on acceptance of the preconditions. It removed a non-compete provision and related non-compete fee of Rs 50 per share.

Vedanta's total payment at the reduced price of Rs 355 per share for a 40% stake in Cairn India will now be $6.02 billion instead of $6.84 billion previously.

First Published: Jul 26, 2011 17:49 IST