After eight months of stalemate, there is finally a ray of hope for Vedanta's deal to buy a majority stake in Cairn India, with the oil ministry agreeing to dilute its pre-condition that the royalty burden be equitably shared between Cairn, ONGC and the government.
ONGC owns a 30 per cent stake in the Rajasthan block it shares with Cairn but pays royalty on the entire crude oil produced from the fields. Vedanta had proposed to buy a 51 per cent stake in Cairn India for $9.6 billion in the middle of last year. The Cabinet Committee on Economic Affairs is expected to take up the issue next week.
Sources familiar with the developments said the petroleum ministry had now accepted that it would instead opt for arbitration to settle the issue of royalty sharing and not insist on it being a pre-condition.
This will make it easier for Cairn-Vedanta to accept the government's terms.
"Even though arbitration will mean that the royalty issue is still left hanging, that's a risk both the parties have taken into consideration," said an official involved in the negotiations.
Both Cairn and Vedanta did not want to make any comment on the matter.
The result of the arbitration may even go against Cairn-Vedanta and that in turn will impact the deal valuation. It is expected that part-sharing of royalty will mean a $1.8-billion revenue hit for Cairn. It will also mean a $2.6-billion hit for the government's share of profit.
"But the right to arbitrate is a fundamental one. The government stand now is a blinding glimpse of the obvious," the official added, but did not want to be identified as the matter is still under discussion.
Cairn and the government are already engaged in a dispute over cess payments. Cairn has disputed payment of Rs. 2,500 per tonne cess on its 70 per cent share of production from the Rajasthan blocks.
Sources say Cairn-Vedanta believe that based on the production sharing contract, they are legally on a stronger wicket and, therefore, may agree to the arbitration route.
Moreover, the law ministry has also made it clear that the oil ministry's insistence on Cairn forfeiting its legal rights to arbitrate is legally untenable. This was another pre-condition the petroleum ministry had set for clearing the deal.
However, the oil ministry now wants Vedanta to make appropriate disclosures to the market regulator when it makes an open offer for acquiring an additional 20 per cent stake in Cairn India, according to the takeover rules.
Many see this diluted stand of the petroleum ministry as a face saver. But these revised terms will also put the onus on Cairn and Vedanta to take the deal forward.
Though Cairn Energy and Vedanta have time will April 15 to close the transaction, they may seek extension from shareholders if the cabinet clears the deal without pre-conditions.