New Delhi: More than 10 months after USD 9.6 billion-deal was first struck, the government on Thursday gave its approval to Cairn Energy for selling its Indian unit to Vedanta Resources, subject to the new owner agreeing to share royalty and pay oil cess on mainstay Rajasthan oilfields.

The Cabinet Committee on Economic Affairs (CCEA) headed by Prime Minister Manmohan Singh approved the sale with the preconditions that Cairn or its successor has to treat royalty payments on Rajasthan oilfields as recoverable from oil sales, Oil Minister S Jaipal Reddy told reporters here.

Also, Cairn India will have to withdraw the arbitration it has initiated disputing its liability to pay Rs 2,500 per ton oil cess on its 70 per cent share in the fields.

Besides, the approval will be subject to ONGC, which has a stake in all the three oil and gas producing properties and five out of seven exploration assets of Cairn India, waiving its pre-emption rights, which Reddy termed as the partner's no-objection certificate (NOC).

He said the deal would also need the security clearance.

"The CCEA endorsed the recommendation of a Group of Ministers headed by Finance Minister Pranab Mukherjee, which was asked to go into the transaction," he said.

Asked if the report of the Serious Fraud Investigation Office (SFIO), which had found Vedanta group firm Sesa Goa guilty of misconduct, would in anyway affect the government
approval, Reddy said he has communicated the decision taken by the CCEA.

Refusing to say if the SFIO report was discussed, he said "The CCEA records decision not the thoughts."

Last August, London-listed miner Vedanta proposed buying 51-60 per cent of oil and gas explorer Cairn India for up to USD 9.6 billion in cash, but the deal has been delayed due to a lack of government and regulatory approvals.

Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in Rajasthan oilfields.

ONGC owns a 30 per cent stake in Cairn India's Rajasthan oil field but pays the entire royalty on production under the government's previous policy of giving discounts to attract
investors.

ONGC had, much before the Cairn-Vedanta deal was announced, cited contractual provisions to demand that the royalty to be recovered as a cost from revenue.

The state-owned firm maintained that as a partner it has preemption or right of first refusal and the deal should not proceed without its concurrence, Reddy said.

Both Cairn and Vedanta disputed royalty being made cost recoverable as it would dent Cairn India profits. They also opposed the need for partner consent for the transaction.

The GoM held that ONGC's views were correct and recommended to the Cabinet that the deal be approved if Cairn or its successor agreeing to adding royalty to the project cost and recovered from oil sales besides agreeing to pay its share of Rs 2,500 per ton oil cess.

Sensing the mood, Cairn lowered the price it is demanding from Vedanta to make up for reduced profitability on acceptance of the preconditions. It removed a non-compete provision and related non-compete fee of Rs 50 per share.

Vedanta's total payment at the reduced price of Rs 355 per share for a 40 per cent stake in Cairn India will now be USD 6.02 billion instead of USD 6.84 billion previously.

Pranab lauds Cairn-Vedanta deal

Finance Minister Pranab Mukherjee said the government's decision to clear the long pending USD 9.6 billion Cairn-Vedanta deal will send good signals to foreign investors.

Mukherjee said the Cabinet cleared the recommendations on the deal given by a ministerial panel headed by him and the decision would "create appropriate sentiments in the market".

He said this while talking to reporters after meeting of the Cabinet Committee on Economic

JPN/Agencies