In a blow to Cairn Energy, the government's law officers have held that Edinburgh-based firm needs state-owned Oil and Natural Gas Corporation's consent to sell its majority stake in Cairn India to Vedanta Resources.
More than three months after announcing the sale of its up to 51 per cent stake in the Indian unit to Vedanta, Cairn Energy Plc on November 23 last year had made a conditional application to seek government's nod but refused to accept partner ONGC's rights.
Sources in the know of the development said the Cabinet Committee on Economic Affairs may decide on giving in- principle approval to the $9.6 billion deal subject to Cairn making an unconditional application to the government and seeking no-objection from partner Oil and Natural Gas Corporation.
The equitable sharing of the royalty that ONGC pays on behalf of Cairn India on oil produced from Rajasthan fields will be decided post completion of the transaction, they said.
Also, Cairn's refusal to accept the government's position that it must pay Rs 2,500 per tonne cess on its 70 per cent share of crude oil produced from Rajasthan fields will be enforced after the deal.
Sources said a legal view was sought as finance ministry wanted law ministry opinion on royalty that ONGC pays on behalf of Cairn India in Rajasthan oilfields.
The legal opinion stated that the change of control of Cairn India amounts to an indirect assignment or transfer of participating interest in its 10 blocks and so there is a need of the government as well as the partner's nod.
ONGC holds stakes in eight out of Cairn India's 10 assets, including the mainstay Rajasthan oilfields.
The precondition that Rs 21,802 crore (Rs 218.02 billion) in royalty and cess paid by ONGC on behalf of Cairn India on the Rajasthan oilfields should be equitably shared has been watered down and the approval to the deal will not be conditional to the fullfilment of it.
The Cabinet note on the issue lists two alternatives.
In the first, five preconditions including 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 have been listed.
The alternative to the precondition of royalty and cess suggests that the government shall pursue all legal recourses for establishing its rights under the Production Sharing Contract in the case of cess.
On royalty, it should take appropriate decision to enforce the provisions of PSC to make royalty cost- recoverable. In both the options, ONGC's consent or no-objection is a pre-requisite.
Sources said that it was unlikely that the Cabinet would go with the first option, as the second one was easier and least controversial option.
Cairn India has been seeking the government's nod by making conditional applications, which have come in for questioning following a Delhi high court ruling.
The Delhi high court had earlier this month upheld the state's sovereignty on the grant of consent in case of 'any material change in the status of the companies or their shareholding'.
This allowed the government to terminate Canoro Resources' contract for the Amguri oilfield in Assam, where the operator, a Canadian firm, had sold shares to Barbados- based MASS Financial Corp without seeking prior government nod.
Sources said Cairn, after repeated reminders, had on November 23 applied for government approval for the sale of a 51 per cent stake to Vedanta.
It, however, carried a rider that government consent was not mandatory and that the corporate deal involving a share transfer did not trigger partner state-owned ONGC's preemption rights.
This was contrary to the Delhi high court stand, according to which the government has a right to approve transactions, which result in a change in the status of companies, the source said.
They add that after the deal, Vedanta will have a 60 per cent stake in Cairn India, a material change in a firm that controls the nation's largest oilfield.
The Oil Ministry had opposed the conditional application, which is mentioned in the note for Cabinet seeking approval for the $9.6 billion deal.
This was also cited in the draft note sent to the Prime Minister's Office for inclusion in his reply to UK Prime Minister David Cameron's letter alleging delays in approval of the deal.
"The question before us is if we can apply different standards to Canoro and Cairn," a source said. Cairn's application stated, "No consent is required or contractually called for," and it was seeking the nod as a responsible citizen, who fully respects sovereignty.
The Delhi high court in its ruling said: "An interpretation, either of a law or a contract, which impinges on the sovereign power of the state to safeguard its vital and strategic interests (and not just commercial interests), would be eschewed by the court to save the law, or the contract, from being void on the ground of it being opposed to public policy."
"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," the source said.
"The condition that Cairn has to forego its legal right shall be void under the Indian Contract Act."
ONGC owns 30 per cent stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields.
Over the life of the field, the royalty burden works out to be Rs 18,000 crore (Rs 180 billion), of which ONGC also has to bear Cairn's share of about Rs 12,600 crore (Rs 126 billion).
Cairn has also disputed any liability to pay Rs 2,500 per tonne cess on its 70 per cent share of production from the Rajasthan blocks, which totals Rs 9,202 crore (Rs 92.02 billion) for ONGC over the life of the field.
Sources said ONGC wants royalty and cess to be cost- recoverable, like capital and operating expenses.
Under the PSC, capital and operating expenses are first deducted from the sale of oil and the profits shared between the stakeholders, including the government, thereafter.
Cairn and Vedanta are opposed to the move as it would lower Cairn India's profitability.
Sources said all that Oil Ministry now wants is for Vedanta to make appropriate disclosures to Securities and Exchange Board of India when it makes an open offer for acquiring an additional 20 per cent stake in Cairn India, as per takeover rules.
Though Cairn Energy and Vedanta have a timeline of April 15 to close the transaction, the deal will go through even if the Cabinet was to give its nod by the month-end.
After the clearance by the government, the two firms can approach their shareholders seeking an extension of the April 15 deadline, saying the conclusion now remains a mere formality.
Sources said that in all likelihood, the deal can be closed by May-end.
The note states that Vedanta Resources had only 'very recently' informed the ministry through a letter dated January 28 that the transaction needs to be closed by April 15.