Imposing pre-conditions can kill Cairn-Vedanta deal

For the same reason,requiring any of these matters to be accepted as a condition of approval would also inevitably cause the proposed transaction to fail, says Gammells letter to GoM chairman and finance minister Pranab Mukherjee,law minister M Veerappa Moily and petroleum minister S Jaipal Reddy.

The April 18 letter cites acceptance of ONGCs claim to cost recovery of royalty as Cairns key concern followed by withdrawal of arbitration proceedings relating to cess payments and acceptance as final of the governments decisions on litigation related to Rajasthan block.

The letter also gives an ultimatum to the GoM that the deadline for the open offer that would follow sale of 40-51 per cent stake in Cairn India to Vedanta would not be stretched beyond the extended deadline of May 20.

By that date,some nine months will have elapsed since the original agreement of the proposed transaction. During this time,uncertainty has resulted in the strategic development and businesses of all three of Cairn Energy,Cairn India and Vedanta essentially being frozen, it says.

Accordingly,the Board of Cairn Energy will not countenance any further extension. I am therefore writing to you to stress the importance that a decision by the government,and where necessary,its nominees and licensees,is reached by May 20.

Gammell had earlier said that the original deadline would not be changed and that the company wouldnt go back to shareholders asking for an extension.

Sources said that the first meeting of the GoM has been scheduled for Monday evening.

Gammell,for the first time,claims that ONGCs liability for royalty was not cost recoverable and says that the share sale and the settlement of disputes between Cairn and ONGC were two distinct issues that should be settled following due process.

The sanctity of these contracts production sharing contracts,including their provisions for dispute resolution,must be maintained and the approval of the proposed share sale cannot be intermingled with the settlement of disputes which are unrelated, he writes.

In February,Reddy told Gammell that his ministry would support the deal in-principle,but some of the concerns of ONGC need to be addressed before clearing the deal.

One such concern is ONGC demand that the royalty it pays on crude oil produced from Rajasthan block be included in the project cost for purposes of profit calculation. ONGC woe is that it shoulders 100 per cent of the royalty burden despite holding only 30 per cent of the stake in the Rajasthan block.

Vedanta has already expressed its inability to continue with the deal if they are asked to share the royalty burden.