Channel: Corp Finance
November 18, 2010
Cairn Energy Deal: What’s next?
Decision on the Cairn India deal has been postponed till December end. While the government of India is on the forefront of this issue, the decision assumes significance in the wake of Vodafone tax case judgment requiring Company to pay huge tax amount.
It is clear now that the government will have the final say in the Cairn Energy deal and at least for now it looks very much unfazed with the growing cases of legal entangles in the M& A deal in India and its impact on the potential investment.Decision on the Cairn India deal has been postponed till December end. While the government of India is on the forefront of this issue, the decision assumes significance in the wake of Vodafone tax case judgment requiring Company to pay huge tax amount. It is noteworthy that Investor community seems to be getting more cautious in investing in India. The testimony to this is the drop in FDI by nearly a quarter in the first seven months of 2010.
The multi-billion dollar deal is contingent upon government nod as it involves a change of ownership of strategic assets like the giant Rajasthan oilfields. The deal came in light when UK's Cairn Energy announced sale of up to 51 per cent stake in Cairn India to Vedanta Resources and made formal applications for government nod about a month later. London-listed Vedanta is buying 40 to 51 per cent in Cairn India from Cairn Energy and up to 20 per cent from open market, in a deal worth USD 9.6 billion. Cairn Energy holds 62.38 per cent stake in its Indian unit. Cairn India, which has existed as an independently managed entity since 2007, holds 70 per cent in the Rajasthan block that holds 6.5 billion barrels of oil reserves besides two other producing properties and seven exploration areas.
The complexity of the deal is more as only companies that are technically capable of carrying out complex oil and gas exploration and production, are awarded blocks and Cairn Energy too was judged on this parameter when in 2002, it bought out Royal Dutch Shell in the Rajasthan block, which is at the centre of its deal with Vedanta.The certain production sharing contracts(PSC) entered into by Cairn India for exploring for oil and gas, have the parent company guarantees and some PSCs have explicit provision of prior government consent in case of change of ownership.With signs of discomfort at a non-oil firm taking control of a company whose main property is the Barmer district oilfields in Indian state Rajasthan, Cairn Energy said Vedanta has promised to keep Cairn India independent and meet all obligations.
The initial difference came on the issue of varied perception of petroleum ministry and Cairn energy. Ministry feels government approval is pre-requisite for the conclusion of Cairn-Vedanta deal. On the other hand, Cairn Energy feels the regulatory approval is not needed as the Vedanta deal is a corporate transfer and not a stake sale in an oil field. The PSC 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.
Similar is the case with its other producing properties - the Cambay basin block and eastern offshore Ravva oil and gas fields, but the seven exploration blocks Cairn won in Nelp rounds have provision for seeking prior government approval before ownership of a participating company is changed.
Earlier there were talks of ONGC putting a counter bid but such a decision has been put off. The government has sought the solicitor-general’s views on ONGC’s rights and trouble could still lie ahead if the law official finds that ONGC does have such a right. Petroleum ministry officials have indicated that they want Cairn and Vedanta to change the terms of the PSC, which was signed in the late 1990s casting the burden of paying royalty, a tax paid to state government, on ONGC even though the latter owns 30% of the JV. The government wants the new owner, Vedanta, to agree to pay royalty.
So once again it appears that M & A deal in India might be knocking the door of judiciary. The focus seems to very clear that Government wants its pie of revenue. Though the state sovereignty is supreme in these cases, but any bitter feeling for investor clearly dampens the prospect for an investor friendly climate in India. Foreign investor is surely critical for India and so wisdom clearly demands India to be far sighted.