analysts caution that this investment in Cairn will not be in Vedanta’s area of expertise, and hence may not be fruitful.

The LSE-listed diversified FTSE 100 metals and mining company – Vedanta Resources Plc – has acquired a majority stake in Cairn India in a deal valued at $8.5-9.6 billion. The Edinburg-based oil producer will part with 51-61% out of its kitty of 70% shareholding in Cairn India, while 20% is currently held by Petronas, Malaysia.

Click here to read Jagannadham Thunuguntla , Equity Head, SMC Capitals’ view on the deal

In the entire acquisition, while Vedanta will take 31-40% shareholding, 20% will be acquired by Sesa Goa (Vedanta Group company) that can easily fund the acquisition given the reserves of over Rs 7,000 crore as at the end of FY10. However, analysts caution that this investment in Cairn will not be in Vedanta’s area of expertise, and hence may not be fruitful. The impact was felt immediately post announcement, as the scrip corrected nearly 9% by close of trade to Rs 321 after opening at Rs 355 levels today.

Although analysts remain divided on the valuation of deal at Rs 405/share, Vedanta plans going ahead with open offer of 20% shareholding, which comes at Rs 355/share considering the Rs 50/share being paid as non-compete fee.

In the near-term, experts suggest that Cairn may see stock price movement move closer to the open offer price, but is a good long-term bet. The company has crude production potential of 2,40,000 barrels/day that can take care of 25% of India's requirement, and its new mentor (Vedanta) has sound track record of acquisitions and developing companies.

Going ahead, what also remains to be seen is whether Sebi accepts the non-compete fee of Rs 50, or approves open offer price at Rs 405 providing an upside to stock price. Another interesting factor to be watched is whether Petronas will part with its shareholding in the open offer.

Cairn India slumped 6.4% over its previous close post the deal announcement to end the day at Rs 332 levels, and trades 14.8x FY11E and 7.1xFY12E earnings estimates.

This article examines various Bilateral Investment Treaty claims that India can face due to the delay

and pre-conditions in the Cairn-Vedanta deal.

Introduction

India Inc.’s approach towards entry and exits of foreign investments may invite investor protection

claims. Particularly, the Cairn-Vedanta fiasco may turn into a battle of many investor-State arbitration

claims.

The GoM are due to decide on the deal and have been warned by the foreign affairs ministry about the

violations of India’s Bilateral Investment Promotion and Protection Agreement (BIPA) obligations.

Background Of The Deal

The deal involves three foreign entities – Cairn Energy, Vedanta Resources and its subsidiary Twin Star

Holdings, a holding company incorporated in Mauritius.

Cairn Energy decided to sell its stake to Vedanta Resources and Twin Star Holding. Due to its PAC’s

with the government and the involvement of ONGC in its Gujarat project, it had to take permission

from the government before going through such a deal. The government has put five pre-conditions to

sanction the deal.

One of the conditions is that the arbitration, which is on-going between Cairn India and the ministry of

petroleum in the UK (Cess Arbitration) is to be withdrawn by Cairn India, and Cairn India has to agree

to pay the entire cess tax, which annually is around Rs 250 crore. Cairn India has been paying the

same, but claims that ONGC should bear equal burden. The second condition is to concede to ONGC’s

stand that the royalty to be paid for the Gujarat project should be equally borne by Cairn India (Royalty

Argument). This may further increase the burden by Rs1,400 crore.

Possible Claims Against India

Article 3 of the India-UK BIPA requires India to give a fair and equitable treatment to all foreign

investments by the UK nationals and companies.

Article 7 also provides for easy transferability of investment. India’s rigid pre-conditions and delay in

giving approval to the transaction may be a potential violation of these Articles in letter and spirit.

Although Vedanta Resources has not yet made investments here, as defined under the India-UK BIPA,

it can claim protection under Article 3(1) of Indian-UK BIT – claiming failure to provide favourable

conditions to make investment. Twin Star holding being legally a separate entity and a corporation

under the Mauritian law can make a similar but independent claim under the India-Mauritian BIPA.

By asking Cairn India to drop Cess Arbitration and accept the Royalty Argument, India has invited

several legal hiccups on its shore. For example, Cairn Energy may bring a claim of denial of justice,

which is well-protected by India-UK BIPA.

Also, if the pre-conditions are agreed, it will, in turn, amount to an increase in annual burden of about

Rs 16,500 crore on Cairn India’s profit post takeover by Vedanta Resources. It may, in turn, lead to

depreciation in offer price by Vedanta to buy the Cairn Energy stake. It can be argued by Cairn Energy

that this may amount to a loss of profit, leading to a possible claim of indirect expropriation against

India.

Another important aspect is that further delay may lead to Vedanta Resources calling off the deal,

which may be a situation where Cairn Energy can make claims against India under the India-UK BIPA.

One more issue which seems crucial, although conceded by the parties, is the direction of SEBI to

remove the call option from the agreement. Call options are a common practice and have successfully

been exercised by many foreign investors previously. This can lead to claims of breach of legitimate

expectation and differential treatment on behalf of Cairn Energy.

Remarks

Overall, the situation is graver than one can imagine and India Inc. is sitting on a potential powder keg

due to delays in decisions and imposition of unreasonable conditions on the entry and exit of foreign

investment.

MUMBAI: Minority shareholders of Cairn India used the occasion of the company's annual general

meeting, on Thursday, to express deep skepticism about the final terms of the $6.4-billion transaction

for which it is being acquired by mining giant, Vedanta, from its parent company, Cairn Energy Plc, a

British company.

They were expressing disappointment on the decision of the two major shareholders - Cairn Energy Plc

and Vedanta Resources - agreeing to government terms that Cairn India pay taxes in proportion to its

70% holding in a key oilfield in Rajasthan. Independent directors expressed sympathy for the

sentiments of minority shareholders but said that the government was adamant that the deal would

not go through if its terms were not met. Further the day-to-day functioning of the company was

becoming difficult.

"If we had not accepted the royalty sharing burden it is almost a certainty that no permissions from

the government would be forthcoming for our projects, we agreed to the royalty burden because

functioning in the existing environment was getting tough," said Omkar Goswami an independent

director on the Cairn India board. "We were not getting approvals for our field development plans for

several months, so we could not stagnate and had to ramp up and thus had to accept the conditions

imposed by the government."

"What do you expecta¦of course the mood of most shareholders at the AGM was lowa¦ we had already

decided and told them the details of the entire voting pattern including how many promoter

shareholder votes and how many minority shareholder votes will be submitted for everyone to see on

September 14. We cannot express our view on the government's pre-conditions as we are on the

company board," Naresh Chandra, non-executive and independent director on Cairn India's board told

ET.

NEW DELHI: The government today said its share of revenue from Cairn India's Rajasthan oilfields will

fall by Rs 5,032 crore if royalty payments are made cost- recoverable as part of Vedanta Resources'

plan to acquire the company.

Cairn India at present does not pay any royalty on its 70 per cent interest in its mainstay Rajasthan

oilfields. The royalty is paid by state-owned ONGC, which got a 30 per cent stake in the 6.5 billion

barrel field for free.

Minister of State for Petroleum and Natural Gas R P N Singh said the government has approved UK's

Cairn Energy Plc selling 40 per cent stake in its Indian unit to Vedanta Resources subject to the

buyer/seller agreeing to treat royalty paid by ONGC as cost recoverable.

Cairn is allowed to recover all project cost (capital, operating expenditure and taxes) from revenues

earned from selling oil before splitting the profits with the government. Making royalty cost

recoverable means it will be considered as project cost and subsequent revenues left for splitting

between Cairn India, ONGC and the government will be lower.

"As per projections made on the basis of assumptions on production, crude oil price, exchange rate

etc, in Net Present Value (NPV) terms, the Government of India's share of profit petroleum is reduced

by Rs 5,032 crore, that of Cairn India's by Rs 6,272 crore and ONGC by Rs 2,688 crore over the life of

the project ie till 2020," Singh said.

"However, in this situation, ONGC would recover the cost of royalty paid by them to the state

government on behalf of themselves and Cairn, amounting to Rs 13,995 crore in NPV terms, over the

life of the project," he said in a written reply to a question in Lok Sabha here today.

He said as per the Production Sharing Contract (PSC), ONGC as licensee has the obligation to bear 100

per cent royalty burden. However, as per the Accounting Procedure prescribed in the PSC, royalty paid

is cost recoverable by ONGC as contract cost.

"Government granted consent to the proposed Cairn-Vedanta deal by stipulating a condition that the

parties shall agree and give an undertaking that the royalty paid by ONGC in the RJ-ON-90/1

(Rajasthan) block is cost recoverable by ONGC as contract costs, as per the provisions of the PSC," he

said.

After initially resisting, Cairn Energy has said it will accept the rider set by the government.

Cairn Energy Chairman Bill Gammell, who had till recently maintained that making royalty cost

recoverable and asking Cairn India to pay cess on its share in Rajasthan block was against the signed

contract and would hurt minority shareholder's interest, on August 3 wrote to Oil Secretary G C

Chaturvedi saying all the preconditions set by the government were acceptable to the company and

Vedanta.

LONDON: British oil explorer Cairn Energy expects to finalise a long-awaited deal to sell control of its

Indian business by mid-September, bringing to conclusion a process that has dragged on for almost a

year.

India in June granted conditional approval for Vedanta Resources to buy a stake in Cairn India in a $6

billion deal that was first announced in August 2010.

Cairn India is currently seeking approval from its shareholders on the conditions imposed by the Indian

government via postal ballot.

"Cairn Energy has set out a timetable for shareholder approval by September 14," a source close to

the company told Reuters on Wednesday.

Analysts expect Cairn India shareholders to approve the conditions, following which Cairn and Vedanta

will be able to complete the deal. Cairn originally predicted that the sale of its stakes to Vedanta would

be finalized by the end of 2010.

The mid-September timetable for shareholder approval is in line with what Vedanta officials indicated

in late July when they said they expected the deal to complete within six weeks to two months.

The parties had agreed to satisfy India's conditions by the end of August, including an undertaking

from Cairn India that it and state-controlled ONGC would share the burden of royalty payments that

are currently only paid by ONGC.

"Cairn Energy is working to satisfy the conditions set by the government of India to the agreed

timetable," said a spokesman for Cairn Energy.

Vedanta declined to comment.

NEW DELHI: After pooh-poohing for almost a year, UK's Cairn Energy Plc has said it will accept all riders

the government has attached for giving approval to its stake sale in Cairn India to mining group

Vedanta Resources.

Cairn Energy Chairman Bill Gammell, who had till recently maintained that forcing Cairn India to pay

royalty and cess on the mainstay Rajasthan oil block was against the signed contract and would hurt

minority shareholder's interest, on August 3 wrote to Oil Secretary G C Chaturvedi saying all the

preconditions set by the government were acceptable to the company and Vedanta.

To get USD 6.02 billion from the sale of a 40 per cent stake, Gammell said Cairn Energy and Vedanta

will vote at a shareholders' meet for acceptance of the royalty and cess riders, ignoring the resolution

passed by the Cairn India board in February opposing the value demolishing preconditions.

"Cairn UK Holdings Ltd (a wholly owned subsidiary of Cairn Energy), holding 52.11 per cent of the

issued share capital of Cairn India, and Vedanta Resources Plc Group, holding an aggregate of 28.5 per

cent of the issued share capital of Cairn India, shall both be voting in favour of acceptance" of these

conditions, Gammell wrote.

Cairn India had on July 26 stated that its April-June quarter net profit would halve to Rs 1,435 crore if it

was asked to share royalty on crude oil produced from the Rajasthan fields.

The company currently does not pay any royalty on its 70 per cent interest in the Rajasthan fields. The

royalty, as per the contract, is paid by state-owned ONGC, which got a 30 per cent stake in the 6.5

billion barrel field for free.

The Cabinet Committee on Economic Affairs (CCEA) on June 27 gave consent to the Cairn-Vedanta

deal, but subject to Cairn or its successor agreeing to charging or deducting the royalty paid by ONGC

from revenues earned from sale of oil before profits are split between the partners.

This cost recovery of royalty will lower Cairn India's profitability.

Also, the CCEA said Cairn India must pay a Rs 2,500 per tonne cess on its 70 per cent share of oil

production. Cairn maintains that cess, like royalty, is a liability of ONGC and had initiated arbitration

against the government on being forced to pay cess.

Gammell said Cairn Energy and Vedanta will vote in a postal ballot being conducted among Cairn India

shareholders for withdrawal of the cess arbitration.

Cairn Energy, together with Vedanta, has 80 per cent voting rights in Cairn India and can overrule the

objections of minority shareholders to see any proposal through.

"We expect the results of the shareholder vote to be announced in September and hope thereafter to

be in a position to comply with all of the conditions set," he wrote, seeking an extension of the one-

month deadline the government has set for acceptance of the conditions.

Since the board of Cairn India, which Gammell chaired on February 10, opposed accepting the

government preconditions, Cairn Energy wants these conditions to be voted on by the company

shareholders.

NEW DELHI: Cairn Energy Chairman Bill Gammell has promised to withdraw arbitration over cess

payment and share ONGC's royalty burden in the oil-rich Rajasthan block, accepting the government's

conditions for the $9 billion Cairn-Vedanta deal.

Gammell has sought time till the end of next month to complete the formalities for the deal that was

announced a year ago. In a letter to Petroleum Secretary GC Chaturvedi last week, he said that Cairn

UK Holdings, the promoter of Cairn India with 52.1% stake and Vedanta Resources with 28.5%

shareholding in the firm, would vote in favour of accepting these conditions. Gammell said that Cairn

would not be able to meet the government's deadline of one month to complete the formalities as

shareholders approval would require more time.

"... a circular will shortly be posted to shareholders of Cairn India Ltd seeking their votes as to their

acceptance of such conditions," he said in the letter. Gammell had earlier opposed these conditions.

Spokesmen of Cairn Energy and Cairn India did not respond to ET's email queries.

On June 30, the Cabinet Committee on Economic Affairs had cleared the multi-billion dollar deal with

certain riders. Cairn has to share royalty with partner ONGC in the Rajasthan oil field, withdraw cess

arbitrations, take a no objection certificate from ONGC and Vedanta would get security clearance from

the home ministry.

The government formally communicated its conditional approval to the deal to Cairn Energy on July 26

and gave the company a one-month time to comply. In the letter to the oil secretary, Gammell has

asked the government to extend the one month deadline to formally accept conditions and secure

necessary approvals such as no-objection certificate from ONGC and security clearance from the home

ministry.

Gammell said, "We are working towards the one-month timeline noted in the consent letter in respect

of those items that are within our control, but would request that this timeline be amended" to get

shareholders approval and "consents and approvals from parties who are not under our control, viz

ONGC and the ministry of home affairs."

1 aug

LONDON: UK-listed miner Vedanta Resources confirmed on Monday that it has received conditional

approval from the Indian government for its acquisition of a stake in Cairn India, subject to conditions

on royalty payments and regulatory go-aheads.

Conditions on the long-delayed sale include an undertaking from Cairn India that it and state-

controlled ONGC will share the burden of royalty payments which are currently only paid by ONGC.

"Vedanta is working with Cairn Energy to satisfy these conditions and complete this transaction," the

miner said.

"Vedanta notes that Cairn India plans to seek a shareholder approval for the conditions imposed by the

government of India."

A source at Cairn India said the process of getting approval through a ballot would start immediately

and should be completed in a month. Analysts expect Cairn India shareholders to approve the

conditions.

Cairn India's annual shareholder meeting is set for Aug. 18. Vedanta officials indicated last week they

expected the deal to complete within six weeks to two months.

27 julyNEW DELHI: More than three weeks after the Cabinet Committee on Economic Affairs gave

conditional nod to the $9-billion Cairn-Vedanta deal, the oil ministry on Tuesday sent a formal letter to

the companies informing of the decision.

"The letter was collected by Cairn India representatives this afternoon," an oil ministry official said.

Cairn Energy, which is selling 40% out its 62.4% stake in its Indian unit to London-listed, India-focused

mining group Vedanta Resources, was eagerly awaiting the formal letter so that it can quickly

conclude the transaction.

26 jul

NEW DELHI: More than three weeks after the Cabinet Committee on Economic Affairs gave conditional

nod to the USD 9-billion Cairn-Vedanta deal, the Oil Ministry today sent a formal letter to the

companies informing of the decision.

"The letter was collected by Cairn India representatives this afternoon," an oil ministry official said.

Cairn Energy Plc, which is selling 40 per cent out its 62.4 per cent stake in its Indian unit to London-

listed, India-focused mining group Vedanta Resources, was eagerly awaiting the formal letter so that it

can quickly conclude the transaction.

Sources said the letter was immediately faxed to Edinburgh, where the board of Cairn India, whose

chairman is Bill Gammell (the head of Cairn Energy), was meeting to approved earnings for the first

quarter ended June 30.

Cairn Energy wants the approval letter to be taken up by the Cairn India board at today's meeting

itself, they said.

The CCEA had on June 30 given its approval to Cairn Energy for selling its Indian unit to Vedanta

subject to the new owner agreeing to share royalty and pay oil cess on mainstay Rajasthan oilfields.

Sources said since the approval involved conditional access, the oil ministry sent the letter informing

of the decision to the law ministry for vetting.

The Law Minister Salman Khurshid yesterday approved the draft and today the oil ministry sent the

letter to Cairn India, which is the company that applied for permission for change of control in its 10

properties, including the crown-jewel Rajasthan oilfields.

Government's nod to the transaction is subject to Cairn or its successor agreeing to treat royalty

payments on Rajasthan oilfields as recoverable from oil sales.

Also, Cairn India will have to withdraw the arbitration it has initiated disputing its liability to pay Rs

2,500 per tonne oil cess on its 70 per cent share in the fields.

Besides, the approval will be subject to ONGC, which has a stake in all the three oil and gas producing

properties and five out of seven exploration assets of Cairn India, waiving its pre-emption rights, which

CCEA termed as the partner's no-objection certificate (NOC).

The deal would also need the security clearance, they said.

Last August, London-listed miner Vedanta proposed buying 51-60 per cent of oil and gas explorer Cairn

India for up to USD 9.6 billion in cash, but the deal has been delayed due to lack of government and

regulatory approvals.

Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in

Rajasthan oilfields.

ONGC owns a 30 per cent stake in Cairn India's Rajasthan oil field but pays the entire royalty on

production under the government's previous policy of giving discounts to attract investors.

ONGC had, much before the Cairn-Vedanta deal was announced, cited contractual provisions to

demand that the royalty to be recovered as a cost from revenue.

The state-owned firm maintained that as a partner it has preemption, or right of first refusal, and the

deal should not proceed without its concurrence, Reddy said.

Both Cairn and Vedanta disputed royalty being made cost recoverable as it would dent Cairn India

profits. They also opposed the need for partner consent for the transaction.

22 jul NEW DELHI: More than three weeks after the Cabinet approved UK-based Cairn Energy's

proposal to sell its Indian unit to Vedanta Resources, Oil Minister S Jaipal Reddy today said a formal

letter communicating the decision will be sent to the companies within "next few days."

The Cabinet Committee on Economic Affairs (CCEA) had on June 30 approved Cairn Energy selling 40

per cent stake in Cairn India to Vedanta with certain riders but the decision has not yet been

communicated to Cairn/Vedanta.

"In next few days, decision will be formally communicated to them," Reddy told reporters here.

Law Ministry is vetting the letter communicating the preconditions. "We have been told that the

vetting in the law ministry is nearing completion. We should be able to communicate the decision in

next few days," he said.

Officials in his ministry said the Law Ministry is likely to send its response by early next week and the

same will be communicated to Cairn/Vedanta in the next day.

The CCEA, headed by Prime Minister Manmohan Singh, had on June 30 the Cairn-Vedanta deal subject

to the buyer/seller agreeing to cost recovery of royalty in Cairn India's mainstay Rajasthan fields.

Sources said although Cairn India will not have to pay any royalty, and state-owned ONGC will continue

to pay royalty on its behalf to the state government, the levy will be added to project cost that is first

deducted from oil sale revenues before profits are split between partners and the government.

Cairn also has to agree to ending arbitration proceedings against the government disputing its liability

to pay cess, or tax, on its 70 per cent share of oil from the Rajasthan fields. Cairn India currently pays

Rs 2,626.5 per tonne cess under protest but unlike royalty, treats it as a cost recoverable item.

ONGC pays royalty on its 30 per cent share of oil from Rajasthan fields as well as on operator Cairn

India's 70 per cent stake. It will contractually continue to pay royalty on all the oil produced from

Rajasthan but this will be added to project cost.

Also, the deal has to be approved by Oil and Natural Gas Corp (ONGC), which has a stake in all three of

Cairn India's producing assets and five of its seven exploration assets, waiving its pre-emption rights.

And finally, the acquisition will need security clearance.

20 jul

NEW DELHI: In first signs that Cairn India may do a somersault so that its parent Cairn Energy Plc can sell stake to Vedanta Resources, the company has gone silent on the government preconditions that it had so far been bitterly opposing.

Cairn India, whose board had on February 10 passed resolutions opposing change in contract to make the company liable for payment of royalty and cess on oil produced from its showpiece Rajasthan fields, does not mention a word in its annual report on the same being made a precondition by the government for approving Cairn-Vedanta deal.

The company has so far maintained that Oil and Natural Gas Corp (ONGC) which got 30 per cent stake in the prolific Rajasthan oil fields for free, is contractually liable to pay royalty and cess on the entire production.

Besides the board resolution, Cairn India had since its parent Cairn Energy announced sale of 40 per cent interest in the company to Vedanta in August last year, written letters opposing it being asked to pay Rs 2,500 per tonne cess and making royalty cost recoverable.

But now that the Cabinet Committee on Economic Affairs (CCEA) has actually made cost recovery of royalty and payment of cess as preconditions for approval of the USD 9-billion deal, Cairn India Managing Director and CEO Rahul Dhir in the annual report for 2010-11 did not mention a word on it.

"What ought to have been a straightforward transaction subject to shareholder approval has now been drawn into the government's decision-making ambit," he said, adding Cairn India has not been informed of CCEA decision till now.

Analysts tracking the deal said it was strange for a company, which was 'out-of-turn' so vocal, to have suddenly gone silent.

"Acceptance of the preconditions were for the current owner (Cairn Energy) and the new owner (Vedanta) to decide. Yet Cairn India out-of-turn passed board resolution opposing it saying they were not in the interest of the company and its shareholders," an analyst said.

"If the silence is a sign of its acceptance of the preconditions, Cairn India will have to explain at least to the minority shareholders what changed for it to suddenly accept the riders. Can it compromise on minority shareholder interest to facilitate one shareholder to exit," another analyst asked.

The CCEA decision imposing preconditions was announced by the Oil Minister S Jaipal Reddy at a press conference.

Dhir in the annual report said, "the long hiatus starting from mid-August 2010, when the deal was announced, has caused delays and uncertainty in managing a business that necessarily has to deal with the government and the Rajasthan joint venture partner, ONGC."

Though Dhir did not elaborate on the "hiatus" in decision making, he may have made an apparent reference to delay in government approval for raising output from Mangala oilfield in the Rajasthan block to 150,000 barrels per day from current 125,000 bpd.

In the section 'Management Decision & Analysis', Cairn India said it in 2010-11 fiscal "faced considerable uncertainty arising out of the proposed transaction between Cairn Energy PLC and the Vedanta Resources Plc."

"Unfortunately, the transaction has been dogged by serious delays, objections by ONGC and major interventions by the Ministry of Petroleum and Natural Gas. These have been escalated to the level of the CCEA, which then sought the views of a Group of Ministers (GoM) of the Government of India (GoI)," it said.

Even before Vedanta made its move, ONGC had demanded that royalties it pays on its and Cairn India's share in the Rajasthan fields be added to costs and recouped through sales, citing provisions in its contract. After the deal was announced, it maintained it had pre-emption rights and that the acquisition could not go ahead without its agreement.

19jul

NEW DELHI: In signs of a souring relationship, state-owned Oil and Natural Gas Corp (ONGC) has withheld consent for internal restructuring of Cairn India Ltd for the past one year.

Cairn wants the stakes that its different subsidiaries, including some registered abroad, hold in various oil and gas properties, including the showpiece Rajasthan oilfields, to be transfered into one India-based company.

Since ONGC is partner in six of those properties, Cairn procedurally sought a no-objection from ONGC, but the state-run oil giant has so far not agreed to the proposal, sources privy to the development said.

The restructuring is separate from London-listed mining group Vedanta Resources' USD 9 billion buyout of Cairn India. While the Vedanta deal, where Edinburgh-based Cairn Energy Plc is selling 40 per cent of its interest in Cairn India, was announced in August, 2010, the restructuring began in 2009.

When contacted, two top ONGC officials were not aware why the consent was withheld.

Sources said the restructuring, which was approved by the board of Cairn India and boards of its subsidiaries in December, 2009, has no bearing on the Vedanta deal.

In December, 2009, itself, Cairn got no-objection certificates for the restructuring from the National Stock Exchange (NSE) and Bombay Stock Exchange, where it is listed, and the company's shareholders approved the scheme in February, 2010. In April last year, the Chennai High Court approved the scheme of restructuring and the Bombay High Court sanctioned the scheme in June, 2010.

But ONGC, which holds up to 90 per cent interest in the Cairn properties, has not given its no-objection certificate yet, they said.

Cairn wants the interest held by its unit, Cairn Energy India Ltd, and other group companies in six assets to be transferred to Cairn India Ltd.

The objective behind this exercise is to bring the Indian oil and gas exploration and production business of some of its group firms incorporated abroad directly into Cairn India.

Cairn India, spun off from Cairn Energy Plc, listed on the Indian stock exchanges on January 9, 2007, although a number of its Indian assets were still held by overseas subsidiaries.

The restructuring proposed would do away with the existing multi-layered structure, involving various foreign subsidiaries and Cairn India Ltd, which is avoidable and administratively burdensome.

Cairn said the proposed scheme and assignment of participating interest would have no impact on any of its joint venture partners in the relevant blocks as the process was merely an internal reorganisation and there is no third party involved.

19 jul

BHUBANESWAR: The Orissa High Court Tuesday dismissed a petition of Vedanta Aluminum Ltd which sought to quash the central government's notification stalling expansion of its refinery project in the state, a lawyer said.

The environment and forests ministry had stalled the expansion of the Vedanta alumina refinery project in Lanjigarh in Kalahandi district from one million tonnes capacity to six million tonnes per annum and of the captive power plant from 75 to 300 MW capacity.

A high court bench comprising Chief Justice V. Gopala Gowda and Justice B.N. Mohapatra delivered their verdict at Cuttack, about 26 km from here, after hearing all parties concerned.

"The court dismissed the petition filed by Vedanta. It upheld the argument of the

environment ministry," Manoj Mishra, a lawyer associated with case, told IANS.

13 julNEW DELHI: Mining group Vedanta Resources has completed the first tranche of its purchase of Cairn Energy's Indian subsidiary after acquiring a 10% stake for $1.5 billion.

Vedanta acquired 191.92 million equity shares of Cairn India at Rs. 355 per share. The total cash payout worked out to Rs. 6,813.16 crore. While Vedanta's statement put the acquisition price at $1.505 billion, Cairn Energy in a separate statement put it at $1.36 billion.

The difference may be due to the different exchange rates the two companies may have taken. Cairn Energy will sell another 30% of its interest in Cairn India "subject to the necessary consents and approvals from the government of India," the firm said.

"Vedanta continues to work with Cairn Energy to secure the necessary consents to complete the purchase of a further 30% of the fully diluted share capital of Cairn India and a further announcement will be made in due course," a Vedanta statement said.

12 jul

LONDON: British oil explorer Cairn Energy on Tuesday announced that it had sold 10 percent of its Indian unit to Vedanta Resources for a net cash sum of $1.362 billion (978 million euros).

India had last month given conditional clearance to the sale of Cairn Energy's Indian oilfields to mining group Vedanta.

In a statement issued on Tuesday, Cairn said it "completed the sale of... 10 percent of the fully diluted share capital in Cairn India," adding that it planned to offload a further 30 percent to Vedanta subject to "approvals from the Government of India."

Following the sale of the 10-percent stake on Monday, Cairn remains the majority shareholder of Cairn India with a 52.2 percent shareholding. Vedanta now owns 28.5 percent of Cairn India.

Cairn had agreed to sell a 40-percent stake in Cairn India to Vedanta nearly a year ago, but the deal had become bogged down in a dispute over royalties.

7jul

NEW DELHI: In fresh confrontation, the Oil Ministry has blocked Cairn India's plans to begin crude oil production from the Bhagyam oilfield, the second biggest find in the prolific Rajasthan block.

Cairn had plans to put the Bhagyam oilfield into production by October to take total output from the Rajasthan block to 175,000 barrels per day.

Sources privy to the development said the ministry, however, at the June 10 meeting of the panel that oversees operations of the block, stonewalled FY12 production rate, work programme and budget for the Bhagyam field.

The ministry wants Cairn to calculate profit from the Rajasthan block after treating royalty as cost recoverable item. Cairn believed that royalty, which is paid by state-owned Oil and Natural Gas Corp (ONGC), is a licensee obligation and hence not cost recoverable from revenues.

4july

BHUBANESWAR: In what appears to be technological break, Vedanta Aluminium Limited (VAL), the Indian arm of London based Vedanta Resources Ltd, is recovering import-substitute Vanadium from

effluent red-mud from its alumina refinery project at Lajigarh minting gold from its mud-to-money (MTM) programme.

The company has so far been successful in producing 17-18% grade Vanadium, a soft, silvery gray, ductile transition metal used for producing specialty steel alloys such as high speed tool steels. The market price of per ton of 100% grade Vanadium is pegged at around Rs five lakh, while VAL has been selling at Rs on lakh per ton Vanadium, according to VAL refinery project president and chief operating officer (COO), Dr Mukesh Kumar

Vandium is recovered as Vanadium Penta Oxide from Alumina Refinery liquor and sold to various Ferro Alloys manufacturers who mainly meet their requirement by import.

"The red-mud disposed in the red-mud stacking area contains 35-45% iron, 10-12% titanium, 10-14% alumina, 7-8% silica and less than one per cent vanadium. By using an internally developed technology, we are separating vanadium," Dr Kumar, told "The ET" on Monday.

He further added, "This is part of our zero waste project. We were able to recover about 100 tons of vanadium last month and we plan to further scale it up. So far we have sold 300 tons of 17-18% grade vanadium to the State Pollution Control Board (SPCB) authorised companies at an average price Rs one lakh per ton."

A large number of companies like Jaiswal Oxides and Pigments, Star Alloys Corporation and others have evinced interest to buy the product, informed the COO.

On the recent allegation that its alumina refinery plant in Orissa is posing a major threat to crops in Srikakulam district, Dr Kumar made it clear that the union ministry of environment and forest has already made it clear that there is no discharge from Red Mud Pond in Lanjigarh. "A high level technical committee from the Central Pollution Control Board along with representatives of the State pollution Control Board visited the site on 25 April 2011 and 17 May 2011 and collected samples from all the surrounding water bodies and from the Red Mud Pond to check for the presence of toxic substances.

Their report categorically says that there has been no discharge from the red mud pond or water pond or any outlet of the industry to Bamsadhara River".

This view has been contested by the ministry, which has made cost recovery of royalty as a precondition for allowing UK's Cairn Energy to sell 40 per cent stake in Cairn India to London-listed mining group Vedanta Resources, they said.

The Cabinet Committee on Economic Affairs had last month agreed to making this a precondition for approving the USD 9-billion deal and so, the ministry now insists that it will not approve further programme on Bhagyam unless Cairn calculates profits to be divided among stakeholders and the government after adding royalty to the cost.

All project cost are first deducted from revenues earned from oil sales and then profits split between partners Cairn India, ONGC and the government. Cairn holds 70 per cent interest in the fields, while ONGC has the remaining 30 per cent.

Cairn on June 21 wrote to the Oil Ministry saying the issue of profits entitlement "should not be linked to production from Bhagyam field and Bhagyam production should be allowed to commence from October 2011, as per schedule."

"It will be appreciated that increasing crude production at this juncture is in the best interest of all stakeholders and the nation when crude has to be imported at exorbitantly high prices," it wrote.

Currently, Mangala, the biggest of the 18 oil discoveries in the Thar desert block, is producing 125,000 bpd but has potential to do "much more".

Bhagyam is targeted to produce a peak output of 40,000 bpd by the year-end.

Cairn said it had executed Bhagyam field development in line with approved development plan. "So far the contractor has committed more than USD 250 million towards the development cost against approved Field Development Plan estimate of USD 470 million."

4jul

NEW DELHI: UK's Cairn Energy or its successor Vedanta Resources may have to bulldose Cairn India board if they were to accept conditions set by the government to clear their USD 9-billion deal.

The board of Cairn India (CIL) has on two occasions rejected oil ministry conditions that royalties paid by ONGC on its all important Rajasthan oilfields, be cost recoverable from oil sales saying this was against contractual provisions and not in the interest of the company and its shareholders.

Also, CIL is against Rs 2,500 per tonne cess being imposed on it saying contractually ONGC, like in case of royalty, is responsible for payment of the levy. Cost recovery of royalty and payment of cess are preconditions Cabinet set last week for approving Cairn Energy selling sake in CIL to Vedanta.

But now if the its parent (Cairn Energy) or Vedanta were to accept these condition, a serious corporate governance issue will arise for CIL, analysts tracking the deal said.

"Can CIL compromise other shareholders' interest just because one shareholder (Cairn Energy) is selling its stake to other (Vedanta)," one of them asked.

"I think there is a larger corporate governance issue involved. It is true that it is a corporate transaction involving share transfer between two entities. But can someone sell a majority stake in a company without taking that company into confidence," another person asked.

Accepting the royalty condition alone would mean about USD 900 million dent in revenues of Cairn India annually, they said, adding either Cairn Energy will have to convince CIL board into accepting the conditions or Vedanta when it takesover the company overrule the board.

Cairn Energy had publicly voiced concern over both the preconditions and Vedanta opposed them in a January 28 letter to the then Oil Secretary S Sundareshan.

Stating that acceptance of the conditions could be challenged by CIL's minority shareholders under provisions of the Companies Act, Vedanta CEO M S Mehta wrote Vedanta would become just a shareholder of CIL after completion of the deal.

"CIL and its subsidiaries are the signatories to and counterparties to the various Production Sharing Contracts (PSCs) entered into the Government of India. As Vedanta would not be a party to any of these contracts, and would be merely a shareholdes of CIL, it would be neither possible nor appropriate for Vedanta to agree to any conditions which directly impacs their terms, particularly as this impacts the rights of minority shareholders," he wrote.

Emphasing that CIL was an independently run listed entity with an independent board that was duty bound to act in the interests of all shareholders, he said the riders "would involve a signi

"We also understand that these (conditions) would have a material adverse impact on CIL's value and thus negatively impact the interests of all shareholders, including the minority shareholders. Acceptance of any of these proposals is likely to be challenged by CIL's minority shareholders under the provisions of the Companies Act. As such, you will kindly appreciate that we are not in a position to accept these," Vedanta Resources CEO M S Mehta wrote in the two-page letter.

4jul

MUMBAI: The controversial Cairn-Vedanta deal, approved by the government after 11 months of twists and turns, may see more drama ahead as minority shareholders may legally challenge stringent government conditions that directly eat into the company's profit and erode the value of the deal, a source close to the company's board told ET.

Cairn India's board is also expected to scrutinise the government conditions and assess their implications, the source said. While Cairn India's shares gained nearly 5% on Friday, responding to the deal's approval, some shareholders were not ready to accept conditions such as Cairn withdrawing arbitration proceedings over cess payment of 2,626.50 per tonne, which Cairn pays under protest. The other contentious condition is that Cairn must accept, without legal recourse, ONGC's view on the royalty payment mechanism, which in effect reduces Cairn's profit from the field.

"This is the first instance in India's corporate history when the government of India is denying judicial remedy to a private company and its shareholders, but this is not binding on individual shareholders who could seek legal recourse, stating that their equity value has been eroded," said the source.

Morgan Stanley has raised a similar note of caution and said in a report: "Although the deal is approved conditionally, Cairn India's board is yet to decide on whether to accept these conditions. While Cairn

Energy and Vedanta control 80% of voting rights, we believe that Board of directors and minority shareholders may not accept these conditions," it said.

"We will be discussing the entire transaction in our upcoming board meeting and will take account of all contentious views," the source close to the board said.

Cairn India itself is not comfortable with the conditions being imposed by the government and all directors on its board may not endorse the deal without raising concerns, a source close to the top management of the company said. However, the views of the major shareholders, Cairn and Vedanta, which have been pushing hard for the deal, are likely to eventually prevail.

Minority shareholders would also have other points to contest the action of the government of India. "Also, if you look at corporate laws in the UK, given that the government of India and Vedanta are partners in a lot of other companies locally, this would be termed as a related-party transaction, especially, as being the owner of ONGC, the government is acting to protect its own business interest and thus cannot be seen as an objective regulator," added the source.

Late on Thursday, the Cabinet Committee of Economic Affairs (CCEA) finally cleared the 11-month old deal along with tough conditions involving the finances of India's largest onshore oilfield. Cairn India derives 90% of its revenue from these fields and holds a 70% stake.

ONGC, which pays the entire royalty on crude output from these fields, had been objecting to the Cairn-Vedanta deal, saying that its approval is a must for Cairn to sell a controlling stake of its Indian arm to Vedanta. The government supported state-run ONGC's demand that royalty paid by ONGC should be made 'cost-recoverable', which means royalty costs would first be deducted (recovered) from the sale proceeds of oil before profits are split between partners and the government. In effect, this reduces the profit available for sharing. Cairn has argued that ONGC, which pays the royalty on the entire output, should be allowed to recover this cost from the revenue of the field.

In a move that seemed to accommodate this particular condition, Vedanta recently agreed to buy another 10% in Cairn India as part of a restructuring that will result in a $600 million reduction in the price tag. The two sides agreed to drop a controversial non-compete fee under which Cairn was due to earn the equivalent of 405 per share, while the minority shareholders of Cairn India were only offered 355 a share under a mandatory open offer that closed in April this year.

2jul

BARMER (RAJASTHAN): For Sonaram Chaudhary, life hasn't changed much. Except that his camel cart has been replaced by a Mahindra Scorpio and his bank account boasts of a deposit of Rs 3 crore. A small-time farmer in Kapurdi hamlet, 30 km from Barmer district, Rajasthan, Chaudhari still enjoys his puff of beedi and his usual shot of 'desi' drink at his ancestral house.

Chaudhary is one of the 1,500 farmers in and around Kapurdi and Sondri villages of Barmer whose bank balances swelled to eight digits.

SUVs appeared outside their houses after oil major Cairn India and two other companies bought 54,000 bighas of their land. More landowners could join them.

A Cairn-Vedanta deal, which is finally close to consummation, will expedite the setting up of an oil refinery in the vicinity.

The Rajasthan government has identified 7,200 bighas of land for the project and expressed its willingness to pick up 26% in it.

If it materialises, it will mark the final contour of one of the state's most ambitious projects and pump in more moolah into Barmer's simmering economy. The economic boom triggered by the land sale in these sleepy, dusty villages, which started with Cairn in 2004, is shifting to a higher trajectory involving two other industrial projects.

The first is the 1,080 MW power project by Jindal's Raj West Power.

The second is the lignite-mining arm of Raj West, Barmer Lignite Mining Corporation (BLMC), a joint venture with state-owned mining company Rajasthan State Mines and Minerals. Both are fuelling wealth creation by acquiring large stretches of irrigated and unirrigated land across Kapurdi, Jalipa and Sonadi villages.

The Origin of Money

This wealth creation is, however, restricted to a few landowners.

The disparity can be gauged from the per capita income of the people in Barmer, which was just Rs 8,932 in 1999-2000; even in 2006-07, it was only Rs 13,224.

Their net worth aside, nothing much has changed even for these overnight millionaires, whose aspirations stop at owning a four-wheeler and a tractor. "We are losing our roots for money. If we spend it recklessly, we will be uprooted," says Chaudhary.

Lifestyle Remains Despite Cash Flow

"The moment a farmer gets his share of acquisition award, he returns home on a SUV. The other thing he does is buy property. The lifestyle, however, remains the same."

The sandy and porous soil of Barmer is not suited for agriculture, and water is scarce here. But companies want this land. The Rajasthan government has acquired 54,000 bighas of irrigated and non-irrigated land for Cairn India, Raj West Power and BLMC, paying Rs 1,100 crore to farmers.

It plans to acquire another 2,800 bighas for the power project. In addition, Cairn India intends to acquire 400-500 bighas for operational expansion and, if the refinery takes shape, another 7,200 bighas. "There were no takers before these projects," says land acquisition officer Mahendra Singh. "Now, land is money in Barmer."

Property Boom

Stretched across the Thar Desert, Barmer was dismissed as the 'dust bowl' of Rajasthan. In January 2004, Cairn India, an arm of the UK oil exploration company, struck oil in the Mangala fields, about 40 km from Barmer, and changed its fate.

Cairn India has acquired about 6,500 bighas of land and invested $1.8 billion in the oilfields. Its presence in Barmer is spread over 3,111 sq km, with an estimated potential of 6.5 billion barrels of oil equivalent to the three oil fields of Mangala, Bhagyam and Aishwariya. The company forecasts that at their peak production of 175,000 barrels a day, they will account for about 20% of India's crude oil.

The oil discovery, the largest onshore discovery in India in about 20 years, has created an oasis in the ocean of sands. Besides creating job opportunities for locals, the oil project changed the rules of the property business in Barmer city.

2 jul

NEW DELHI: Cairn India's profit share from Rajasthan oilfields will fall by $1.68 billion in case riders imposed by the government for approving its parent Cairn Energy selling stake to Vedanta Resources are accepted. The Cabinet had on Thursday approved Cairn Energy selling 40% stake in Cairn India to Vedanta subject to the buyer/seller agreeing to cost recovery of royalty in the Rajasthan fields. Sources said while Cairn India will not have to pay any royalty and state-owned ONGC will continue to pay royalty on its behalf to the state government but the levy will be added to project costs which are first deducted from oil sale revenues before profits are split between partners and the government.

Acceptance of this condition by Edinburgh-based Cairn Energy or its successor Londonlisted miner Vedanta will lower Cairn India's profit over the approved life of lasting till 2020 from $7.43 billion to $5.75 billion. Sources said the lower profits have been calculated at approved peak output of 175,000 barrels a day and considering a crude oil price of $70 per barrel. The present net value of Cairn India's loss of profitability is $1.39 billion, a little more than the $800 million concession in the purchase price that Vedanta has already got from Cairn Energy.

Cairn also has to agree to end arbitration against the government, disputing its liability to pay cess on its 70% share of oil from Rajasthan fields. Cairn currently pays Rs 2,626.5 per tonne cess under protest but unlike royalty, treats it as a cost-recoverable item.