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'ONGC's consent needed in
01 April, 2011
In a blow to Cairn Energy, the
government's law officers have held that Edinburgh-based firm
needs state-owned ONGC'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 (CCEA) may decide on giving
in-principle approval to the USD 9.6 billion deal subject to
Cairn making an unconditional application to the government
and seeking no-objection from partner Oil and Natural Gas Corp
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 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 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. The
first one has 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 (PSC) 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
Sources said it was unlikely that the Cabinet would go with
the first option, as the second one was easier and least
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
percent 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'spreemption
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
They add that after the deal, Vedanta will have a 60 percent
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 USD 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 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
"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."