Cairn cannot sell stake to Vedanta without our consent: ONGC

ONGC's claim is based on what it called pre-emptive rights in oilfields like Rajasthan, where it is an equity partner with Cairn India.

In a letter to Cairn Energy Plc Chief Executive Bill Gammell, ONGC Company Secretary N K Sinha sought details of the Vedanta deal, saying the Edinburgh-based firm required "consent of ONGC besides other governmental approvals to consummate the proposed" sale of up to a 51 per cent stake in Cairn India to London-listed Vedanta.

The state-owned firm owns 30 per cent in the 6.5 billion barrels Rajasthan block that is at the centre of Cairn Energy Plc's USD 8.48 billion deal to sell its majority stake in Cairn India to Vedanta Resources. Cairn India, 62.37 per cent owned by Cairn Energy, is the operator of the block with a 70 per cent stake.

ONGC believes that by virtue of its stake in Rajasthan block, it has the pre-emption or right of first refusal to buy Cairn India in case the company's ownership changed. But the Joint Operating Agreement between Cairn India and ONGC gives partners pre-emption rights in case of sale of interest by either parties in the block, but not in the case of corporate ownership change, which is what is happening in the Cairn-Vedanta deal.

If Cairn Energy had offloaded its stake in the stock market, like it did when it in the past couple of years sold as much as 14 per cent in Cairn India to Petronas of Malaysia, ONGC couldn't have done much, industry observers said. The state-owned firm did not do anything when the stake was sold to Petronas in two tranches.

Upon exercising its pre-emption right, ONGC may end up paying between USD 12 to 13 billion at the Rs 355 a share price at which Vedanta is acquiring Cairn Energy's shares in Cairn India.

"ONGC has examined the relevant agreements signed by Cairn Energy Plc and/or its affiliates with government of India and inter-se with ONGC as one of the participating companies in the various oil blocks/fields and other related documents," Sinha wrote to Gammell today.

"Based on this documentary examination, it is noted that ONGC has, inter-alia, pre-emptive rights in relation to Cairn's participating interest under the various agreements with the government of India and ONGC and that Cairn Energy Plc and/or its affiliates require consent of ONGC besides other governmental approvals to consummate the proposed transaction," he wrote.

ONGC requested "full details along with copies of the agreements and other arrangements entered into between Cairn Enegy Plc and/or its affiliates and the proposed buyer."

At Rs 355 a share, Cairn India is valued at over Rs 67,355 crore, or USD 14.6 billion. Almost 90 per cent of this value is because of the Rajasthan block that can produce 240,000 barrels of oil per day (12 million tonnes per annum).

"Cairn India's stake in Rajasthan block will be valued at USD 13 billion," a source involved in the process said. ONGC believes that by virtue of holding 30 per cent in the Rajasthan block, it has the preemption or ROFR to buy Cairn India in case the company's ownership changed.

The Production Sharing Contract (PSC), which Cairn has signed with the government for the Rajasthan block, provides for explicit government approval only in case of a party selling its interest in the block, but does not make the nod mandatory in case of change of ownership at the corporate level.

The Joint Operating Agreement between Cairn India and ONGC gives partners preemption rights in case of sale of interest by either party, but not in case of a corporate ownership change.

Cairn Energy is selling up to a 51 per cent stake in Cairn India to Vedanta for USD 8.48 billion at Rs 405 per share, a price that includes a non-compete fee of Rs 50. The source said Rs 355 per share is the price at which Vedanta is making an open offer to buy 20 per cent shares from minority shareholders of Cairn India after excluding the non-compete fee.

ONGC would also have to pay a USD 100 million break-fee to Cairn Energy for breaking its deal with Vedanta. Even ONGC's ROFR can be challenged by Cairn Energy, as it is not selling its participating interest in the Rajasthan block and the deal with Vedanta is more of a corporate ownership change, the source said, adding the matter would in that case have to be sorted out in court.

Cairn maintains that the Vedanta deal was a controlling stake transfer and not an asset transfer, which would have required a government approval, but the oil ministry maintains that since the PSCs for some of Cairn's other blocks have a provision for prior consent, the whole deal is contingent on government approval, the source said.