India puts conditions on Cairn-Vedanta deal: sources

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An Indian ministerial panel wants conditions attached to a proposed $9.6-billion sale of Cairn Energy's Indian oilfields to Vedanta, sources said on Saturday, which could derail the deal.

Cairn Energy has called the government's final decision on the sale -- which would be one of the biggest takeovers in Indian corporate history -- a litmus test for the country as it seeks to woo foreign investors.

The ministerial panel met Friday to decide its recommendation to another federal cabinet body on the deal, in which Scotland-based Cairn Energy plans to sell Vedanta control of its Indian unit, which produces oil in Rajasthan state.

The panel did not disclose its stand, but a source familiar with the transaction told AFP the ministers want the sale's approval to be conditional on Cairn India agreeing to take on a share of the oil royalty payments currently made by its state-run partner Oil and Natural Gas Corp (ONGC).

ONGC owns a 30 percent stake in the Cairn-operated block but pays royalties on 100 percent of the output under a "royalty holiday" scheme dating from the 1990s aimed at promoting private oil exploration in energy-hungry India.

The two firms are locked in a bitter dispute over the issue, with ONGC pushing for the royalty burden to be shared along ownership percentages before the government approves the sale.

"The ministers have chosen to support ONGC's position," the source said.

A Cairn spokesman would not comment on the matter except to say it continued to work with London-listed Vedanta Resources "to secure the necessary consents" from the Indian government. Vedanta had no comment.

But Cairn has previously said the original royalty arrangements must be upheld, warning changing them would affect the valuation of the deal by hurting Cairn's profitability and could jeopardise the transaction.

Vedanta, in a January letter to the Indian government, said it was "not in position to accept" new royalty conditions as it would hurt Cairn India's value, according to local media.

The sources also said the ministerial panel upheld ONGC's argument that Cairn should pay tax on its output from the block.

The ministerial recommendations are "potentially a deal killer," said another source with knowledge of the transaction. "The whole world is watching this. Foreign investors are going to be very worried about investing in India."

Oil Minister S. Jaipal Reddy said late Friday the "outer limit" for the ministerial panel to submit its recommendations to India's Cabinet Committee on Economic Affairs for a final decision was two weeks.

The standoff comes at a bad time for India as foreign investment has plunged, with investors worrying about a slew of corruption scandals that have shaken the Congress party-led government.

In August 2010, Vedanta, owned by billionaire Anil Agarwal, said it would purchase a majority stake in Cairn India, adding to its aluminium, copper, iron ore and zinc assets.

The ministerial meeting came days after Cairn India reported a 10-fold leap in quarterly profit to a record 24.6 billion rupees ($543 million) thanks to a surge in crude oil prices and output.

© 2011 AFP

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