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BW Businessworld

Mystery And Suspense

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C. Northcote Parkinson, British Naval Historian and author of myriad observations about public administration, once said that delay is the deadliest form of denial.

It is an epigram that many observers are applying to Vedanta Resources' $9.6-billion takeover deal of Cairn India that has hit its latest roadblock eight months after the deal was announced. They believe the deal will fall through, perhaps even die.

Petroleum and natural gas minister S. Jaipal Reddy passed on the onus of approving the deal to the Cabinet Committee on Economic Affairs, which in turn has referred it to a group of ministers (GoM) headed by finance minister Pranab Mukherjee. And since he is in West Bengal campaigning in the state elections, a decision on the matter is likely to be deferred till after the elections are over.

Both Cairn Energy and Vedanta Resources have extended the deadline for closing the deal  from 15 April to 20 May, and this after Bill Gammell, chairman of Cairn energy, said there would be no extensions. "Cairn and Vedanta continue to work with the government of India to secure the necessary consents and approvals," said a Cairn Energy statement.

As readers will recall, a conclusion to the deal is stuck on the critical issue of royalty: as of now, ONGC, which is a 30 per cent partner with Cairn Energy in developing the oilfield in Rajasthan, has been paying royalties to the government; the royalty is high, at 20 per cent, but this deal was struck with the government's approval in 1998, much before the New Exploration and Licensing Policy was formulated.

In a newspaper interview some months ago, former ONGC chairman R.S. Sharma said that Barmer in Rajasthan in one of 28 such blocks on which operating agreements were entered into by ONGC (on behalf of the government); at that time, the production sharing contract (PSC) — the model on which financial terms for oil exploration are structured today — was not in wide use.

The regime then was that ONGC and Oil India, the other government company that exploration companies had to partner with, had fixed rates of return. And, as Sharma pointed out in his interview, the royalty terms were different in different exploration blocks.
ONGC claims that the royalties it pays should be included as costs of development — the so-called recoverable costs that exploration companies use to recover their high-risk investment. In most PSCs, exploration companies calculate recoverable costs after royalty payments. In a way, ONGC was a representative of the government, which was using the oil company to pay itself the royalties.

And to be fair to ONGC, it has been in discussion with the government since 1997 on ‘suitable compensation', meaning recovering costs that the government asks it to bear during the exploration phase, a part of which constitutes royalties. The petroleum ministry may have sought this arrangement, but the finance ministry — which authorises any such recoveries — has been asking why royalties cannot be made cost-recoverable. With the Cairn-Vedanta deal, all of these issues have come to a head.

Analysts say that international investors are getting nervous. What seems to be a difference of opinion between two ministries of the same government is holding India's attractiveness as a investment destination hostage to bureaucratic rivalry. But the petroleum minister disagrees. "There are some complex issues. The cabinet committee felt such a decision should not be taken in a hurry," he said at a press meeting.

Cynics are not convinced; they refer to another Parkinson, to describe what has happened to the government in this case: difficulties with movement and coordination that stem from a brain disorder, called Parkinson's disease.

(This story was published in Businessworld Issue Dated 18-04-2011)