Ministry reduces pre-conditions for Cairn deal approval

The Petroleum Ministry has beaten a hasty retreat on some of contentious pre-conditions it had set for approving mining group Vedanta Resources' acquisition of Cairn India and will not play a spoiler to the$9.6 billion deal.

The ministry has watered down the 11 preconditions it had in January proposed for giving Vedanta nod to buy a 51 per cent stake from UK's Cairn Energy, officials with direct knowledge of the matter said.

It has completely withdrawn the precondition asking Cairn India to give up its legal rights on future disputes over its mainstay Rajasthan oilfield and abide by the government and oil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," one of the officials said. "The condition that Cairn has to forego its legal right shall be void under 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In a draft Cabinet note circulated for approving the deal, the oil ministry has almost withdrawn its precondition that Rs 21,802 crore in royalty and cess paid by state-owned ONGC on behalf of Cairn India on production from the Rajasthan oilfields should be equitably shared.

"In January, the Oil Ministry wanted the Cabinet to give 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.

The note lists two alternatives. In the first, it lists out five preconditions, instead of 11 it had originally proposed to Cairn/Vedanta in January.

The five preconditions include royalty being made cost recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC's no-objection and Vedanta providing performance and financial guarantees, another official said.

As an alternative to the precondition of royalty and cess, the ministry has suggested that government shall pursue all legal recourse for establishing its rights under the Production Sharing Contract (PSC) in the case of cess. On royalty, it shall take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable.

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. .