GoM for conditional approval for Cairn-Vedanta deal

Cairn should also withdraw arbitration proceeding it has initiated,disputing its liability to pay Rs 2,500 per ton cess on its 70 per cent share in the Rajasthan block.

The recommendation of the GoM headed by Finance Minister Pranab Mukherjee will go to the Cabinet Committee on Economic Affairs (CCEA) in two weeks time,Oil Minister S Jaipal Reddy told reporters after the 75-minute long meeting.

“It (GoM) has looked at various aspects of the (USD 9.6 billion) deal. It has taken a view on the matter. This view will be presented to the CCEA. GoM is not going to meet again,” he told reporters here. “The recommendation was unanimous.”

He refused to any details of deliberations at the GoM.

Cairn will also have to seek consent of state-owned Oil and Natural Gas Corp’s (ONGC),which holds stake in 8 out of the 10 properties held by Cairn India in the country.

Also,Vedanta will need a security clearance from the Ministry of Home Affairs.

Cairn holds 70 per cent interest in the Rajasthan block but does not pay any royalty. It is opposed to cost recovery of royalty payments that ONGC makes on its behalf.

Meanwhile,ahead of the GoM meet,London-listed mining group Vedanta Resources said it has raised USD 1.65 billion (Rs 7,425 crore) through private placement of bonds to part-finance its USD 9.4 billion acquisition of Cairn India.

Vedanta had in August agreed to buy at least 40 per cent stake in Cairn India from its parent Cairn Energy Plc.

Cairn has refused to accept the requirement of partner consent even though five oil blocks it won under New Exploration Licensing Policy (NELP) explicitly provides for obtaining no objection from partners in case of change of ownership.

It holds 70 per cent interest in the Rajasthan block but does not pay any royalty. It is opposed to cost recovery of the Rs 18,000 crore royalty payments that ONGC has to make on its 30 per cent,as well as Cairn’s share of production. ONGC made the demand a month prior to the announcement of the Cairn-Vedanta deal in August 2010.

The CCEA had on April 6 constituted a GoM to look into the issue of conditional or unconditional consent to the Cairn-Vedanta deal.

Today was the first meeting of the GoM which also comprised of Law Minister M Veerapa Moily,Telecom Minister Kapil Sibal,Commerce Minister Anand Sharma and Planning Commission Deputy Chairman Montek Singh Ahluwalia.

Sharma was unable to attend the meeting.

“We have taken up the matter in right earnest. We have taken a view at our level. The decision has to be taken by CCEA,” Reddy said.

Solicitor General Gopal Subramaniam had in March opined that the government should not give unconditional nod to the deal and reaffirmed its views in a second opinion on April 6.

ONGC owns 30 per cent stake in Cairn India’s mainstay Rajasthan block,but is liable to pay 20 per cent of crude oil price as royalty on the entire output from the field. This liability has made the project economically unviable for ONGC.

Cairn is also contesting its liability to pay a Rs 2,500 per tonne cess on its 70 per cent share.

But unlike royalty,it is treating cess as a cost-recoverable item.

All cost-recoverable items like capital and operating expenditure are first deducted from revenues earned from the sale of oil before profits are shared between stakeholders,including the government.

Cairn Energy,which wants to sell at least a 40 per cent stake in its Indian unit to Vedanta,and the London-listed mining group are opposed to making royalty cost-recoverable as it will lower the profitability of Cairn India.