New Delhi (Agencies): London-listed mining group Vedanta Resources is running against time to close a USD 9.6 billion deal to acquire majority stake in Cairn India as government
approval for the transaction is held up due to issues raised by state-owned ONGC.

The deal, involving Vedanta acquiring 40 to 51 per cent stake from UK's Cairn Energy Plc and thereafter making an open offer to buy for an additional 20 per cent from minority
shareholders of Cairn India, is to be completed by April 15.

The approval is stuck as ONGC by virtue of its stake in 8 out of the 10 oil and gas properties held by Cairn India, claims pre-emption rights and wants the issue of excess royalty it has to pay on Cairn India's mainstay Rajasthan block to be addressed before giving its no-objection.

Sources said oil ministry has made resolution of the royalty issue one of the 11 pre-conditions for giving an in-principal nod for the transaction.

Oil Secretary S Sundareshan had on Sunday met chief executives of Vedanta and Cairn, who opposed three of the 11 conditions, they said.

Cairn/Vedanta is particularly opposed to ONGC's demand for recovering the royalty before profits from sale of Rajasthan oil as it will lower Cairn India's profitability and valuation.

The Rajasthan block, which gives Cairn India 90 per cent of its valuation, is a losing proposition for ONGC, as it has to pay 20 per cent royalty to the state government on the entire output from the field, even though its share from production is only 30 per cent.

Cairn India does not pay any royalty on the crude and has even contested the payment of Rs 2,500 per ton cess on its 70 per cent share.

Vedanta, which has no prior experience in oil and gas sector, was agreeable to other conditions like giving financial and performance guarantees and maintaining technical
capability of Cairn India.

Sources said the two sides stuck to their stand on the contentious issue of royalty at Sunday's 90 minute meeting, the first time when Sundareshan met Cairn Energy head Bill
Gammell, Cairn India CEO Rahul Dhir and Vedanta officials M S Mehta (Group CEO) and Tarun Jain (CFO) jointly.

A highly placed source in the oil ministry said it wants to expedite clearance to Cairn-Vedanta deal. However, it wants Oil and Natural Gas Corp's (ONGC) concerns to be addressed prior to that.

"We are for expediting the process (of approval) after addressing all the concerns particularly relating to (ONGC's liability) to pay royalty and cess on behalf of Cairn India,"
he said.

The source further informed that the ministry "doesn't want to stand in the way of the deal, but the two issues need to be addressed."

ONGC said it would be paying Rs 14,000 crore royalty on behalf of Cairn India over the life of Rajasthan fields and wants to recover it from the sale of oil.

Acceptance of the demand would impact Cairn India's valuation as its future profits will go down and the company says its minority shareholder interest will be compromised.

While Cairn had reluctantly agreed to the need for government approval on the deal, it has so far not accepted ONGC's pre-emption or the right of first refusal (ROFR), as has been held by Solicitor General of India (SGI).

Rajasthan block currently produces 125,000 barrels of oil per day and has potential to produce up to 240,000 bpd.

Cairn India acquired a stake in Rajasthan block RJ-ON-90/1 from Royal Dutch Shell Plc in 2002 and discovered oil in January, 2004.

In case of areas awarded under the New Exploration Licensing Policy (NELP) -- like the gigantic KG-D6 gas fields of Reliance Industries -- royalty can be added to the capital
and operating cost of the block, which as per law are deductible from revenues earned on the sale of oil or gas before calculating profits for all stakeholders.