ONGC likely to file papers for FPO after Cairn verdict

ONGC is in dispute with Cairn India over royalty payments on the later's showpiece Rajasthan oilfields and the government is expected to give its verdict when Cabinet decides on UK's Cairn Energy selling stake in its Indian unit to London-listed mining group Vedanta Resources.

Informed sources said ONGC has to mention about its dispute with Cairn in the red herring prospectus (RHP) it will file for sale of 5 per cent, or 427.77 million shares, through a follow-on public offer. It will add the government stand along with the dispute in the RHP, likely to be field next month.

The Cabinet Committee on Economic Affairs (CCEA) may decide on the USD 9.4 billion Cairn-Vedanta deal next week and state that it backs ONGC's claim of royalty paid on crude oil from Rajasthan oilfields being cost recovered.

ONGC owns 30 per cent interest in the Rajasthan oilfields, but has to pay royalty at the rate of 20 per cent of the crude oil price realised on all of the 240,000 barrels per day of peak output expected from the fields.

It had cited provisions in the Production Sharing Contract (PSC) in July last year, more than a month before the Cairn-Vedanta deal was announced, to demand that royalty like other taxes and levies should be deducted (recovered) from the sale proceeds of oil before the profits were split between partners and the government.

Cairn as well as Vedanta have opposed ONGC's demand.Sources said a Group of Ministers headed by Finance Minister Pranab Mukherjee has backed ONGC's claims and has suggested to the CCEA that approval to the deal be given only if Cairn or its successor agrees to cost recovery of royalty.

ONGC is likely to file RHP after the June 30 meeting of the CCEA which is expected to consider the Cairn-Vedanta deal.

At a USD 70 per barrel oil price, ONGC will pay Rs 12,600 crore in royalties on Cairn India's 70 per cent share in the oilfield, making India's largest onland fields a losing proposition for it.

Sources said Cairn has also disputed its liability to pay oil cess at the rate of Rs 2,500 per tonne on its 70 per cent share in the Rajasthan fields, saying ONGC is also liable to pay cess on its behalf, like in the case of royalty.

The government has rejected this position as the PSC imposes the royalty liability on ONGC, but is silent on cess, meaning partners have to pay in proportion to their share. Cairn has disputed this and initiated arbitration.

The GoM has recommended that Cairn withdraw the cess arbitration and agree to pay its share of cess as the second pre-condition for Cabinet approval.In the two-part deal, Vedanta is to buy 40 per cent stake in Cairn India from its Edinburgh-based parent firm at Rs 405 per share, including a non-compete fee of Rs 50 per share.

In the second part, its subsidiary Sesa Goa was to make an open offer to buy as much as 20 per cent from minority shareholders of Cairn India at Rs 355 per share (offer price minus the non-compete fee).

Sesa Goa in April got only 8.1 per cent in the open offer and separately acquired a 10.4 per cent stake from Malaysia's Petronas.

Cairn Energy currently owns 62.1 per cent in Cairn India.Sources said Besides royalty, Cairn had also contested its liability to pay Rs 2,500 per tonne cess on its 70 per cent share in Rajasthan oilfields.

But unlike royalty, it is treating cess as a cost-recoverable item after paying it under protest.

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.

Earlier this week, the government appointed former RBI Deputy Governor Usha Thorat, former Finance Secretary Arun Ramanathan and Deepak Nayyar, ex-Vice Chancellor of the Delhi University, as part-time or independent directors ONGC Board.

This enabled ONGC to meet market regulator Sebi's listing requirement of having equal number of executive and non-executive directors, paving the way for the FPO.

The government plans to sell its 5 per cent interest in ONGC through the FPO which has been pushed back thrice because of the company not meeting Sebi's listing norm.

The share sale was originally planned to happen in 2010-11 but was deferred to April 5. It was then deferred to July 5 and even this timeline is not likely to be met.

ONGC has six functional directors, besides the chairman. It also has two government-appointed nominee directors, taking the total strength of functional/promoter directors to nine. In comparison, it has five independent directors and needs four more to meet the Sebi's listing norm.

But since the company does not have a full-time chairman and director (human resources), appointment of three directors would help ONGC meet Sebi norm, sources said.

Post-FPO, the government's stake in ONGC would come down to 69.14 per cent from existing 74.14 per cent.

ONGC in February had received the report of independent auditors, who certified the company's oil and gas reserves, a mandatory requirement for explorers making public offers.

Bank of America Corp, Nomura Holdings, HSBC Holdings Plc, JM Financial Services, Citigroup Inc and Morgan Stanley are managing the FPO.