Vedanta's wait for Cairn gets longer

In a new twist to Vedanta's plan to acquire Cairn India, the Union Cabinet today referred the $9.6-billion deal to a group of ministers (GoM).

An undeterred Vedanta, however, decided to go ahead with its open offer to acquire 20 per cent in Cairn India through the open market. Vedanta has the Securities and Exchange Board of India (Sebi) approval for this.

It is not clear what will happen if the open offer is completed before the government approves the deal.

Vedanta-controlled Sesa Goa said the open offer would begin on April 11 and close on April 30. Sesa Goa could not meet the earlier date of October 11, 2010, for the offer.

This was because Sebi held up the approval following a petroleum ministry letter that the deal required its consent. It is not clear how Sebi has now approved the offer without the government go-ahead.

Consultants questioned the wisdom of going ahead with the offer. "In my view, Vedanta cannot and should not go ahead with the offer. Where is the trigger when it has not bought the 15 per cent stake from Cairn Energy?" said investment advisor S P Tulsian.

A senior oil company executive said Vedanta would be left with shares bought in the open offer if the government disallowed Cairn from going ahead with the deal.

"The GoM will broadly look into matters related to royalty and cess. Its view will be considered by the CCEA (Cabinet Committee on Economic Affairs," said Petroleum Minister S Jaipal Reddy. It will be headed by Finance Minister Pranab Mukherjee.

Though the GoM had not been given any time-frame, Reddy said it would give a quick report.

The petroleum ministry referred the issue to the CCEA due to the dispute over payment of royalty on production from the Barmer block. Though ONGC is a 30 per cent partner in the block, it pays the entire royalty.

The ministry gave the CCEA an option between conditional clearance and absolute clearance while leaving legal recourse open for both Cairn and ONGC.

Though Reddy claimed "nuanced differences" in the reactions of the various ministries, he admitted the issue was complex and the CCEA did not want to take any decision in a hurry.

He, however, added there was "no difference" over making the royalty cost re-coverable. Cost recoverability will reduce the burden on ONGC, though it will also reduce Cairn India's share in the profit portion of production.

For the open offer, the company has agreed to change the shareholder agreement and make disclosures regarding the possible impact of decisions on cess and royalty payments.

The agreement between Cairn and Vedanta had clauses to ensure that Vedanta would have got more shares from Cairn if the open offer was not fully subscribed. Sebi had objected to this stating that it amounted to forward contracting.

Tulsian said investors should wait till April 15 before tendering shares. By then the fate of the deal will be known as the approvals given by Cairn Energy and Vedanta shareholders expire on April 15. "They (Cairn shareholders) will still have time till April 30 to subscribe to the offer," he added.

The deal, announced on August 16 last year, ran into hurdles after the petroleum ministry said the companies needed its clearance.

ONGC also opposed the deal. This is because it pays the entire royalty on Barmer's production, even though it is entitled to 30 per cent of the revenue. ONGC took a legal opinion and claimed the royalty was cost-recoverable.

There is also a separate issue of cess on production from the block that is under arbitration.