Govt can put preconditions on Cairn-Vedanta deal

In a setback to the Cairn-Vedanta deal, Solicitor General Gopal Subramanium has reaffirmed that the government can impose preconditions like equitable sharing of royalty in the all-important Rajasthan block for clearing Vedanta Resources' takeover of Cairn India.

Contrary to media reports, the nation's second highest law officer has reiterated his earlier opinion that Cairn or its successor should share cess and royalty with state-owned Oil and Natural Gas Corp (ONGC) in the Rajasthan block.

In his second opinion, which was sought by Finance Minister and head of a ministerial panel vetting the $ 9.6 billion deal Pranab Mukherjee, the SGI said, "The government is not bound to grant consent ipso facto or mechanically."

The precondition that Cairn/Vedanta agree to cost-recovery of Rs 18,000 crore (Rs 180 billion) in royalty that ONGC has to pay on the Rajasthan block would be "defensible on parameters of public and national interest," the SGI said in the second opinion.

In his first opinion on March 24, the SGI had categorically stated that transfer of Cairn India shares to Vedanta should be allowed only if the latter agrees to treat royalty paid by ONGC as cost-recoverable from its revenues.

ONGC owns a 30 per cent stake in Cairn India's mainstay Rajasthan block, but is liable to pay royalty on the entire output from the field.

Cairn is also contesting its liability to pay a Rs 2,500 per tonne cess on its 70 per cent share. But unlike royalty, it is treating cess as a cost-recoverable item.

All cost-recoverable items like capital and operating expenditure are first deducted from revenues earned from the sale of oil before profits are shared between stakeholders, including the government.

Cairn Energy, which is selling a 40 per cent stake in its Indian unit to Vedanta, and the London-listed mining group are opposed to making royalty cost-recoverable as it will lower the profitability of Cairn India.

"The purpose of consent is the provision of a power to regulate the performance of obligations which arise under a contract and not to defy them. Hence, consent can be conditional," the SGI said in the second opinion on April 6.

The government "cannot deny consent except on logical grounds. Such conditions as preserve many different components of public interest can be validly imposed. The conditions must be borne out of fairness, vigilance and public interest," he said.

The Group of Ministers headed by Mukherjee is slated to meet on May 27 to discuss imposing preconditions on approving the deal.

The GoM recommendation will go to the Cabinet Committee on Economic Affairs (CCEA), which had on April 6 asked the ministerial panel to vet the deal.

The SGI has also upheld the condition that Cairn should withdraw arbitration it has initiated in protest against the imposition of cess on it.

"Can Cairn be asked to withdraw the cess arbitration case? As a part of negotiation, it can be asked to withdraw the cess arbitration case," he opined.

Cairn Energy CEO Bill Gammell on April 18 sent a note to members of the GoM saying "royalty is the obligation of ONGC as the licensee (of the Rajasthan block) and hence is not cost-recoverable."

He quoted Article 16.4 of the Production Sharing Contract for the Rajasthan fields to say "Cairn shall not be liable to the government or a state government for payment of royalty... the cost of which shall be borne by the licensee (ONGC)."

But the SGI stated that Section 3.1 of Appendix C of the PSC provides that all costs incurred by the contractor in the form of duties, levies, fee, charges and any other assessments levied by the central or state government, are cost-recoverable.

"The term 'contractor' has been defined in Clause 1.19(b) of the PSC as the company (here Cairn India) and the nominee (i.e. ONGC), collectively. It is not disputed that ONGC, being the licensee/nominee, is a constituent of the contractor and therefore included within the meaning of term 'contractor'," he said.

In the note, Gammell stated that ONGC was relying on Section 3.1.9 of Appendix-C of the PSC to make its royalty claim, but "this is in conflict with the Article 16.2 of the PSC".

Section 16.4 exempts Cairn from payment of royalty. The state-owned firm is the licensee of the Rajasthan block and has the right to take 30 per cent interest upon any discovery.

"It is clear that ONGC as the licensee is liable to bear the cost of royalty. Even if ONGC has no participating interest (or stake) in the block, as the licensee, it would still be liable to bear the cost. Since ONGC is paying royalty in its capacity as licensee and not as a contractor, this expense is not cost-recoverable under the PSC," he wrote to Mukherjee, Oil Minister S Jaipal Reddy and Law Minister M Veerappa Moily.

The Law Ministry and Planning Commission have backed Reddy's first option of giving clearance to Vedanta only if it agrees to ONGC being allowed to recover the Rs 18,000 crore (Rs 180 billion) in royalty that the state-owned firm is liable to pay on behalf of Cairn India in the all-important Rajasthan oilfields.

The Finance Ministry is in favour of Reddy's second option of the government giving consent without any precondition and taking appropriate decisions to protect ONGC's interests.