The Petroleum Ministry may have watered down its preconditions for approving mining group Vedanta Resources' acquisition of Cairn India, but the $9.6 billion deal will still hinges on no-objection from partner ONGC.
The ministry has watered down the 11 preconditions it had in January proposed for giving Vedanta the nod to buy a 51 per cent stake from UK's Cairn Energy, officials with direct knowledge of the matter said.
"But the condition that Cairn India will have to obtain no objection certificate (NOC) from its partner (ONGC) has been retained," one of the officials said.
State-owned Oil and Natural Gas Corp (ONGC) holds a stake in eight out of 10 properties held by Cairn India in the country.
The ministry is of the view that the change of control of Cairn India amounts to an indirect assignment or transfer of participating interest in the blocks and so there is a need for the government as well as the partner's nod.
He said this position has also been upheld by the law ministry and the nation's second highest law offer, the SGI.
The ministry has, however, completely withdrawn the precondition asking Cairn India to give up its legal rights on future disputes over its mainstay Rajasthan oilfield and abide by the government and oil regulator DGH's diktat.
"The Law Ministry, in its opinion on the preconditions, stated that any terms and conditions to be stipulated should be mutually agreed and they cannot be unilaterally imposed," the official said. "The condition that Cairn has to forego its legal right shall be void under the Indian Contract Act."
In a draft Cabinet note circulated for approving the deal, the Oil Ministry has almost withdrawn its precondition that Rs 21,802 crore (Rs 218.02 billion) in royalty and cess paid by state-owned
"In January, the Oil Ministry wanted the Cabinet to give its nod only after Cairn India agrees to equitable sharing of royalty and paying its sharing of cess," an official said.
"However, in the note that was finally circulated to the ministries of finance, law, home, environment and corporate affairs for comments, the Petroleum Ministry has given an alternative that it will continue to legally pursue equitable sharing of royalty and cess, but will not make it a precondition for approval of the deal," the official said.
Sources said it was unlikely that the Cabinet will go with the first option when an easier and least controversial option has been given in the second.
ONGC owns a 30 per cent stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields.
Over the life of the field, the royalty burden works out to Rs 18,000 crore (Rs 180 billion), of which ONGC has to also bear Cairn's share of about Rs 12,600 crore (Rs 126 billion).
Cairn has also disputed any liability to pay Rs 2,500 per tonne cess on its 70 per cent share of production from the Rajasthan blocks, which totals Rs 9,202 crore for ONGC over the life of the field.
Under the PSC, capital and operating expenses are first deducted from the sale of oil and the profits shared between the stakeholders, including the government, thereafter.
Cairn and Vedanta are opposed to the move as it would lower Cairn India's profitability.
Once the government's nod is obtained, the two firms can approach their shareholders seeking an extension of the April 15 deadline, saying the conclusion now remains a mere formality. Sources said that in all likelihood, the deal can be closed by May-end.
