HOME > BUSINESS > Cairn says no confirmation of deal approval from Government

Cairn says no confirmation of deal approval from Government

Cairn India, the company whose sale has apparently been approved by the Indian government today, said it has not received any intimation on sharing the production royalty arising from its production in the Rajasthan field — India’s biggest onshore oil field.

“Cairn has not yet received formal confirmation of any decision that has been made by the Government of India,” a Cairn spokesperson said.

The Cabinet approved the deal under which Cairn Energy’s India unit — one of the biggest producers of oil in India — is being acquired by Vedanta Resources, a London-listed minerals company owned by Bihar-born Anil Agarwal.

In a note, the Government said the approval is subject to the condition that Cairn must obtain a ‘No Objection Certificate’ from ONGC and must agree with ONGC that the latter is eligible to recover its costs incurred in paying royalty to the government on Rajasthan production.

Cairn also has to withdraw its Court case in which it has argued that the extra Rs 900 per barrel Cess also comes under the broad definition of levies that have to be paid by ONGC and that it will not pay the same.

Two days ago, in anticipation of the deal being approved, Cairn had reduced the price of 30% of its Indian subsidiary from $6.6 billion to around $6 billion, indicating that both the seller and buyer knew that the asset is likely to hampered in some way when the sale is approved by the government.

Under its original contract with the Government owned Oil and Natural Gas Corp (ONGC), the latter will pay the entire royalty arising out of the sale of crude oil from Rajasthan despite owning only 30% of the block.

The agreement meant that while ONGC was entitled to get 30% of the profit from the oil sales, it had to fork out 20% of the revenues as cess and royalty.

ONGC had complained to the government, its owner, that there was hardly any difference between 30% of the profit and 20% of the revenue and it didn’t get any money in return for investing thousands of crores to develop the field as the 30% partner. The royalty agreement was thrown in as an allurement for foreign investors when the block was originally put up for sale in the 1990s.

The stipulation, that ONGC will henceforth only pay 30% of the royalty burden, is unlikely to stand the scrutiny of law, if Cairn India or its new owner Vedanta chooses to challenge the condition in India’s courts. However, Vedanta may or may not follow the legal option as it has already got a 10% discount on the initial price from Cairn — amounting to $600 million or Rs 2,700 crore.

Follow ULTRA.news