GoM likely to take call on Cairn-Vedanta deal on Friday
A ministerial panel is likely to decide tomorrow if the government should approve Cairn Energy Plc's sale of stake in its Indian unit to mining group Vedanta Resources with conditions or without any precondition.
A ministerial panel is likely to decide tomorrow if the government should approve Cairn Energy Plc's sale of stake in its Indian unit to mining group Vedanta Resources with conditions or without any precondition.
The Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee is scheduled to hold its first meeting at1630 hours on May 27, an Oil Ministry official said on Thursday.The Cabinet Committee on Economic Affairs (CCEA) had on April 6 asked the GoM to vet the USD 9.6 billion deal, but the panel has not held a single meeting in seven weeks since then.Earlier, the then Oil Minister Murli Deora was accused of delaying approval for the transaction, but he moved to the Corporate Affairs Ministry in late January and there is still no sight of a decision.Industry sources said they were apprehensive about the prospects of the GoM arriving at any decision tomorrow as key Oil Ministry officials -- Special Secretary P K Sinha and Joint Secretary Exploration D N Narasimha Raju -- who have been dealing with the subject for the past nine months, are on
official tour abroad.Oil Secretary G C Chaturvedi, who came to the Ministry of Petroleum and Natural Gas only this month, is still grappling with the subject, while Oil Minister S Jaipal Reddy too is relatively new to the job.Sources said things have also become complicated for the GoM after Solicitor General Gopal Subramaniam reaffairmed his earlier opinion that the government can impose preconditions like asking Cairn or its successor to share cess and royalty with state-owned Oil and Natural Gas Corp (ONGC) in the all-important Rajasthan block.In his second opinion, which was sought by Mukherjee, the SGI said, "The government is not bound to grant consent ipso facto or mechanically." The precondition that Cairn/Vedanta agree to cost-recovery of Rs 18,000 crore in royalty that ONGC has to pay on the Rajasthan block would be "defensible on parameters of public and national interest," the SGI said in the second
opinion.Sources said the GoM itself is split in the middle on the issue of treating royalty paid by ONGC as cost-recoverable from its revenues. While Reddy has played it safe by giving an alternative to ONGC's demand, which was orginally made a month before the Cairn-Vedanta deal was announced in August last year, the Law Ministry and Planning Commission have backed
making cost-recovery of royalty a precondition for approval.The Finance Ministry is in favour of Reddy's second option of the government giving consent without any precondition and taking appropriate decisions to protect ONGC's interests. It remains to be seen if Mukherjee will sideline the SGI opinion in approving the deal.In his first opinion on March 24, the SGI had categorically stated that the transfer of Cairn India shares to Vedanta should be allowed only if the latter agrees to preconditions on the deal.ONGC owns a 30% stake in Cairn India's mainstay Rajasthan block, but is liable to pay royalty on the entire output from the field. Cairn is also contesting its liability to pay a Rs 2,500 per tonne cess on its 70% share.But unlike royalty, it is treating cess as a cost-recoverable item. All cost recoverable items like capital and operating expenditure are first deducted from revenues earned from the sale of oil before profits are shared between stakeholders, including the government.Cairn Energy, which wants to sell at least a 40% stake in its Indian unit to Vedanta, and the London-listed mining group are opposed to making royalty cost-recoverable as it will lower the profitability of Cairn India."The purpose of consent is the provision of a power to regulate the performance of obligations which arise under a contract and not to defy them. Hence, a consent can be conditional," the SGI said in the second opinion on April 6. The government "cannot deny consent except on logical grounds. Such conditions, as preserve many different components of public interest, can be validly imposed. The conditions must be borne out of fairness, vigilance and public interest," he said.Sources said the recommendation of the GoM, whose other member is Telecom Minister Kapil Sibal, will go to the CCEA for final approval. The SGI has also upheld the condition that Cairn should withdraw the arbitration it has initiated in protest against the imposition of cess on it."Can Cairn be asked to withdraw the cess arbitration case? As a part of negotiation, it can be asked to withdraw the cess arbitration case," he opined. Cairn Energy CEO Bill Gammell on April 18 sent a note to members of the GoM saying, "royalty is the obligation of ONGC as the licensee (of the Rajasthan block) and hence is not cost-recoverable."He quoted Article 16.4 of the Production Sharing Contract for the Rajasthan fields to say, "Cairn shall not be liable to the government or a state government for payment of royalty...the cost of which shall be borne by the licensee (ONGC)."But the SGI stated that Section 3.1 of Appendix C of the PSC provides that all costs incurred by the contractor in the form of duties, levies, fee, charges and any other assessments levied by the central or state government, are cost-recoverable."The term 'contractor' has been defined in Clause 1.19(b) of the PSC as the company (here Cairn India) and the nominee (i.e. ONGC), collectively. It is not disputed that ONGC, being the licencee/nominee, is a constituent of the contractor and herefore included within the meaning of term 'contractor'," SGI said.In the note, Gammell stated that ONGC was relying on Section 3.1.9 of Appendix-C of the PSC to make its royalty claim, but "this is in conflict with the Article 16.2 of the PSC".Section 16.4 exempts Cairn from payment of royalty. The state-owned firm is the licencee of the Rajasthan block and has the right to take 30% interest upon any discovery."It is clear that ONGC as the licencee is liable to bear the cost of royalty. Even if ONGC has no participating interest (or stake) in the block, as the licencee, it would still be liable to bear the cost. Since ONGC is paying royalty in its capacity as licencee and not as a contractor, this expense is not cost-recoverable under the PSC," he wrote to Mukherjee, Oil Minister S Jaipal Reddy and Law Minister M Veerappa Moily. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
