Decision on nod only after formal application: Govt to Cairn

Cairn's current application seeking government nod for the deal has left out the three producing properties, including the giant Rajasthan oilfields.

The government's insistence that a formal application must be made for each of the 10 properties, conveyed through a letter to Cairn this month, may delay the approvals till January-February next year.

The Ministry had earlier indicated that approvals could come by this year end. "We wrote to (Cairn Energy and Cairn India) a few days back reminding them of contractual requirement of seeking government consent in all the properties," Oil Secretary S Sundareshan said today. "We cannot consider their case unless they comply with this contractual requirement."

The Edinburgh-based firm, in its August 16 announcement of sale of its 40 to 51 per cent stake in Cairn India to London-listed Vedanta Resources for as much as USD 8.48 billion, did not say the deal was conditional on government approvals.

However, on being shown the relevant provisions of the contracts for exploration it has with the government, Cairn Energy about a month later made an application for permission that left out all of its three producing properties including its mainstay 6.5 billion barrels Rajasthan block.

"This position is not acceptable to us. They need to apply for all the blocks," Sundareshan said.

Cairn has so far maintained that it is not contractually bound to seek approval for sale of shareholding in the Indian unit in the Rajasthan block, the Cambay basin gas field and the eastern offshore Ravva oil and gas fields. But the latest missive from the Ministry is certain to force Cairn to revise its stand and formal applications are expected sometime next week.

Though the company looks set to concede ground on requirement of prior government consent, Cairn is unlikely to yield pre-emption rights to state-owned Oil and Natural Gas Corp (ONGC), which partners its Indian unit in most of its properties including the Rajasthan block.

The pre-emption is a natural extension of the requirement of government consent and the same has been upheld by Law Ministry and the Solicitor General of India, the nation's second highest law officer, in their separate opinions on the Cairn-Vedanta deal.

Sundareshan indicated that the delay on part of Cairn in seeking formal approval will lead to slippage in the Oil Ministry's previously stated year end deadline for making up its mind on giving approval for the deal. A decision on the deal may now come as late as in February 2011.

The Law Ministry in an opinion sent late last month had held that the share sale is nothing but transfer of control (in all of the 10 properties of Cairn India), necessitating government nod in all of them.

Previously, the Solicitor General had held the same view when he was approached for advice by ONGC.

Cairn India is primarily an aggregation of interests that it holds directly or indirectly through its subsidiaries in 11 blocks (in India and Sri Lanka). A transfer of controlling stake in Cairn India amounts to a transfer of the respective participating interests, therefore necessitating government approval, according to legal opinion.

And transfer/sale/assignment of interest to third party will trigger pre-emption rights of state-owned ONGC, which partners Cairn India in most of its properties.

Cairn says the Vedanta deal is only a corporate transaction involving share transfer which does not trigger issues like examination of new owners' technical capability and ONGC's pre-emption rights.

Both Oil Ministry and ONGC, which hold stake in most of Cairn India's properties, have contested this view and have got legal opinion backing their claim. They feel the deal is effective transfer of control and so ONGC's pre-emption rights are triggered.

Vedanta was to get shareholder nod for the deal by October 30 but has not yet posted a notice for a shareholders meet. Its mandatory open offer for additional 20 per cent stake in Cairn India, too, missed the October deadline as market regulator SEBI is yet to give its approval for the same.