Govt likely to clear Cairn-Vedanta deal tomorrow; gets SEBI nod

The government is likely to approve the takeover of Cairn India by UK-based Vedanta Group for $9.8 billion, following the green signal given to the deal by market regulator Securities and Exchange Board of India (SEBI).

"The cabinet committee on economic affairs (CCEA) has been scheduled for tomorrow afternoon... in all likelihood, it will give an in-principal approval to the Cairn-Vedanta deal," an official privy to the development said.

The official said the CCEA, headed by the prime minister, is likely to overrule the opinion of the solicitor general of India that Vedanta must agree to equitably share royalty on oil produced from Cairn India's mainstay Rajasthan oilfields before the government nod.

"The pre-condition will be overruled by arguing that the government's take from Rajasthan oilfields will be impacted if Rs18,000 crore royalty ONGC will pay, in excess of its share in the oilfields, is cost recovered from revenues," the official said, adding, "The government revenues will be dented by $1 billion."

As per provisions of Production Sharing Contract (PSC), all cost - capital and operating expenditure, and central and state levies are first deducted from revenues earned from selling oil and gas. Profits between stakeholders, including the government, are divided thereafter.

If 20% royalty is also cost recovered - deducted from revenues like other project cost, profits left for all stakeholders to share will be lower.

So if government, over the life of the field was earning certain amount as its profit share, the cost recovery of the royalty will lower it by $1 billion.

The official said CCEA may, however, ask Cairn to seek ONGC's no-objection.

Meanwhile, Vedanta Group chairman Anil Agarwal said in Mumbai today that the SEBI has approved the acquisition and the company would soon come out with an open offer.

"We have already received SEBI's approval for an open offer. The issue will open very soon. Within the next one to two days, we will send out the mails regarding this to all concerned," he said.

The Vedanta chief also appeared confident that the deal to acquire the majority stake in Cairn India, promoted by Edinburgh-based Cairn Energy Plc, would soon receive the government approval.

"We have a deadline of April 15 and I believe the government will give its approval before that," Agarwal said.

Asked about the ONGC issue, Agarwal said that the issue can be dealt with later on.

"The royalty issue has to be sorted out with the government and the ONGC. We can take up that issue later," he added.

Incidentally, the government is committed to reimbursing in full the royalty ONGC pays in excess of its 30% share in Rajasthan oilfields in case it is not cost recovered.

Cairn India, which holds 70% stake in the 6.5 billion barrels Rajasthan block, does not pay any royalty and is opposed to making it cost recoverable as it will dent its profits.

The cabinet panel includes finance minister Pranab Mukherjee, home minister P Chidambaram, oil minister S Jaipal Reddy, environment minister Jairam Ramesh, law minister M Veerappa Moily and corporate affairs minister Murli Deora among others.

Besides opposing cost recovery of royalty, Cairn Energy has maintained that its stake sale to Vedanta does not require the government nod and had, through its Indian unit, made a conditional application in November-end on insistence of the oil ministry.

The application also rejected rights of ONGC, which has stake in eight out of 10 properties of Cairn India.

The oil ministry's cabinet note lists royalty being made cost-recoverable as a pre-condition for approval as an option. Alternatively, it has suggested that the government gives its consent to the deal without any pre-condition and "appropriate decision" will be taken to enforce ONGC's right.

ONGC is also partner in eight out of the 10 properties of Cairn India.

However, due to delay in getting regulatory clearances, the Vedanta Group will have to announce fresh schedule for the open offer.

On August 17, 2010, just two days after the announcement of the deal, the Vedanta group had offered to acquire up to 20% stake from public shareholders for a price of Rs355 per share.

The Rs13,631-crore open offer was then scheduled to open on October 11 and close on October 30.

Any deal involving acquisition of 15% or more stake in a listed company requires the acquirer to make an open offer for 20% stake purchase from public shareholders and this offer needs to be approved by Sebi.