Cairn India down on Vedanta deal

Shares in Cairn India opened down before reversing losses on Monday after ONGC has revealed a new weapon from its armoury that can derail the transaction—a clause in the contract, which it says establishes without doubt that Cairn and the government also have to share the state firm's royalty payment.

Amidst uncertainties surrounding its acquisition by Vedanta, Cairn India posted a strong December 2010 quarter result, which was substantially better than September 2010 quarter’s numbers. Higher production and higher oil prices enabled it to become cash surplus during the quarter. The company is readying for higher production from its Rajasthan fields, while investing in exploration of other blocks.

Loading some of the royalty burden on Cairn can deflate the value of the deal by $1.5 billion, bankers said, a contentious issue for the transaction in which Cairn Plc agreed to sell the controlling stake in its Indian unit to
London-listed metals and mining group, Vedanta Resources.

Cairn does not pay any royalty in the Rajasthan field. ONGC holds 30% in the block but pays the entire royalty to the Rajasthan government, as per the contract. It says this expenditure has to be later recovered from the revenue of the field before the companies and the government share profit. In other words, the royalty burden will have to be eventually shared by ONGC, Cairn and the government.

At 11.58 a.m., they were down at Rs 329.75 each.