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BW Businessworld

Govt Clears Cairn, Vedanta Deal With Riders

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The government said it granted Vedanta Resources conditional approval on Thursday to buy a stake in British oil explorer Cairn Energy's Indian business, in a deal valued at around $6 billion.

Cairn Energy agreed last week to sell a 40 per cent stake in Cairn India to Vedanta. The sale, one of the largest in India's energy sector, has been delayed for more than 10 months due to a disagreement over royalty payments.

The oil ministry has been pushing for Cairn India to share royalty payments with state-run Oil and Natural Gas Corp, which has a 30-percent holding in the Cairn-operated fields in western India but pays 100 percent of the royalties.

Cairn and Vedanta cut the price of the deal earlier this week in a move interpreted as bringing the pair closer to agreeing to India's demand that royalty payments be shared.

Treating royalty as a cost for developing the field would mean sharing the burden between the two partners, effectively reducing Cairn India's profitability.

"The (cabinet) gives conditional approval to the sale of Cairn to Vedanta," Oil Minister S Jaipal Reddy told reporters after a weekly cabinet meeting.

"Royalty should be treated as cost recoverable. The ongoing arbitration proceedings should be withdrawn. The companies will have to accept these conditions. Without that, they will not get approval," he added.

The total royalty burden over the life of the asset is estimated at 180 billion rupees ($4 billion).

Cairn India currently pays 70 percent of cess liability under protest and has filed an arbitration case. Cess liability is estimated at 130 billion rupees over the life of the asset.

The delay to the deal has been undermining investor sentiment in Asia's third-largest economy, where other foreign investors, including ArcelorMittal and South Korea's POSCO have also seen long delays to planned projects.

"The market was expecting this outcome and it would be happy that this issue is finally coming to an end but the royalty burden is certainly not a very positive development for Cairn," said Eric Mookherjee, the Paris-based chairman of fund management firm Shanti India.

Cairn, Vedanta Shares Rise

At 1537 GMT, Cairn Energy's shares were up 2.1 percent in London trade, while Vedanta rose 3.1 percent. Cairn India shares closed 2.2 percent higher, ahead of the announcement, in a firm Mumbai market.

Vedanta's move to acquire Cairn India is part of London-based mining magnate Anil Agarwal's plans to grab a slice of India's oil reserves and gain exposure to surging demand. The deal will help Cairn Energy fund its exploration needs in Greenland.

Earlier this week, Vedanta agreed to buy a 10 percent stake in Cairn India by July 11, and another 30 percent after the Indian government's approval, but cut the price tag by more than $600 million.

It already holds 18.5 percent stake in the firm from an open offer and a stake buy from Malaysia's Petronas, and will increase this to 28.5 percent by July 11.

It has already raised $1.65 billion through a private bond offering to help pay for the acquisition.

Vedanta said in a statement it had not received official intimation of the approval or the preconditions. "Vedanta continues to work with Cairn Energy towards the successful completion of the transaction," it said.

Cairn India issued a similar statement.

The conditional approval and likely reduction in royalty burden could also pave the way for Indian state-run ONGC to move ahead with an up to $2.8 billion follow-on share sale.

On Thursday, an oil ministry source said the company may file a draft prospectus for the long-delayed offer on July 5.