ONGC kept out of Cairn-Vedanta meeting

The government has kept state-run Oil and Natural Gas Corporation out of the much-talked about Sunday's meeting called to deliberate approval for the Vedanta Resources' $9.6 billion acquisition of Cairn India.

Bill Gammell, CEO, Cairn Energy, which is selling most of its 62.4 per cent stake in the Indian unit to Vedanta, and Cairn India CEO Rahul Dhir will be attending the meeting, while Vedanta will be represented by CEO M S Mehta and CFO Tarun Jain, sources said.

ONGC, which has stake in most of the 10 oil properties held by Cairn India, including its mainstay Rajasthan block, and has asked the government not to approve the sale unless its concerns are addressed, has not been invited for the meeting.

The meeting could be stormy as independent director of Cairn India Omkar Goswami, who is part of a two-member committee of independent directors constituted to look into the interest of minority shareholders in the proposed stake sale, would be present, sources said.

The government is prepared to give approval to the deal subject to Cairn/Vedanta meeting certain conditions, including agreeing to ONGC's demand for recovering the Rs 14,000 crore royalty the state firm will have to pay over and above its 30 per cent share from the Rajasthan fields from sale of oil.

Acceptance of the demand would impact Cairn India's valuation as its future profits will go down.

Vedanta in a January 28 letter has already sounded oil ministry about it being "challenged by Cairn India's minority shareholders".

While ONGC has been kept out of the meeting, Vedanta has been invited for deliberations even though the London-listed mining group has clearly stated that it cannot agree to any condition as it will be "merely a shareholder" of Cairn

India after completion of the transaction, sources said.

ONGC being partner in most of the 10 properties held by Cairn India, including the giant Rajasthan block, has claimed pre-emption rights or right of first refusal, a demand that has been backed by the Solicitor General of India.

Sources said while Vedanta is agreeable to most of the 11 pre-conditions that oil ministry is setting for giving approval, it is particularly opposed to royalty being made cost recoverable and Cairn India giving up its rights in present and future disputes.

"Cairn India and its subsidiaries are the signatories to and counter-parties in the various Production Sharing Contracts entered into with Government of India."

Mehta wrote to Oil Secretary S Sundareshan, who will chair the Sunday meeting.

"As Vedanta would not be a party to any of these contracts, and would be merely a shareholder of cairn India (after completion of the deal), it would be neither possible nor appropriate for Vedanta to agree to any conditions," said Mehta.

In the letter to the Oil Secretary, he said some of the pre-conditions being set would involve a significant departure from the terms of the existing contracts entered into by Cairn India and Government of India.

"We understand that these (pre-conditions) would have a material adverse impact on Cairn India's value and thus negatively impact the interest of all shareholders, including the minority shareholders," he wrote.

"Acceptance of any of these proposals is likely to be challenged by Cairn India's minority shareholders under the provisions of the Companies Act," he added. "As such, you will kindly appreciate that we are not in a position to accept these."

ONGC says Vedanta's acquisition of up to 51 per cent in Cairn India triggers its pre-emption rights.

While Cairn had reluctantly agreed to seek the government's consent for a change in ownership in all 10 properties, it has refused to recognize ONGC's pre-emption rights.

ONGC board had at its meeting on January 29 passed a resolution asking the government not to approve the Cairn-Vedanta deal until the issue of excess royalty it pays on Rajasthan crude oil is sorted out.

It wants the 20 per cent royalty paid to be added to the project cost, which can be recovered from the sale of oil. The move is being opposed by Cairn, as it will lower its profits from the field that it says has potential to produce 240,000 barrels per day.

Mangala field in the Rajasthan block is at present producing 125,000 bpd and there are a dozen more fields in the area.

Vedanta, a mining company controlled by billionaire Anil Agarwal, agreed in August last year to buy at least 40 per cent and as much as 51 per cent stake in Cairn India from London-listed Cairn Energy Plc.

The Indian Government is reviewing the bid for Cairn India. Vedanta expects to get state approval for the transaction in February. Cairn Energy said it expects to conclude the sale by April 15.

Cairn India acquired a stake in the Rajasthan block RJ-ON-90/1 from Royal Dutch Shell Plc in 2002 and discovered oil in January 2004.

In case of areas awarded under the New Exploration Licensing Policy - like the gigantic KG-D6 gas fields of Reliance Industries - royalty can be added to the capital and operating cost of the block that as per law are deductible from revenues earned on the sale of oil/gas before calculating profits for all stakeholders.