In the first such move in the petroleum sector, the government on Thursday asked Cairn India to accept five conditions before its majority sale to Vedanta Resources can go ahead.
Cairn India will have to allow cost recovery of royalty on Barmer crude from the revenue it earns from the field. It will also have to withdraw the arbitration case against the government.
As cost recovery will reduce the revenue from the field, the two companies this week announced waiver of the non-compete fee that Vedanta had agreed to pay Cairn Energy in August 2010.
This helped Vedanta save $840 million by bringing down the deal size to a little over $6 billion.
Making royalty cost-recoverable and withdrawal of arbitration cases will protect the interests of government-owned ONGC, which is planning to launch a follow-on public offer.
In addition to royalty, the cess of Rs 2,500 per tonne on Barmer output that Cairn India is paying under protest has also been made cost-recoverable.
Allowing the royalty of Rs 18,000 crore (Rs 180 billion) and cess of Rs 13,000 crore or Rs 130 billion (over the life of the field) to be taken as cost will reduce the government's share of profit from the country's biggest on-land oil field.
Announcing the decision taken by the Cabinet Committee on Economic Affairs, Petroleum Minister S Jaipal Reddy told reporters the 'CCEA has endorsed the group of ministers' recommendation and granted conditional approval to the sale of stake in Cairn India to Vedanta Resources'.
He said no further litigation on these issues could be initiated by the company on the above two issues.
Reddy said the issues related to royalty and arbitration were the 'only two bones of contention' but other conditions such as no-objection certificates from Cairn India partners, approvals from regulatory bodies such as the Securities and Exchange Board (Sebi)
Vedanta's wait for Cairn gets longer
Cairn extends Vedanta sale deadline
Sebi nods Cairn takeover, open offer soon
ONGC overstated reserves in KG basin: Cairn
It's time for India to step on the gas