ONGC says Cairn obliged to share royalty
14 February 2011
Six months after the announcement of the $9.6-billion Cairn-Vedanta deal, ONGC has invoked a clause in the contract, that can derail the transaction. According to ONGC the clause clearly establishes that Cairn and the government also have to share the state firm's royalty payment.
Analysts say if Cairn is made to share the royalty burden, the value of the deal would stand reduced by $1.5 billion. Cairn Plc plans to sell a controlling stake in its Indian unit to London-listed metals and mining group, Vedanta Resources.
Currently Cairn does not pay any royalty in the Rajasthan field while ONGC with a 30-per cent stake in the block, pays entire royalty to the Rajasthan government, in line with the contract. The company says the expenditure has to be later recovered from the revenue of the field prior to the sharing of profits by the companies and the government.
In other words, ONGC, Cairn and the government will have to finally share the royalty burden.
According to Cairn which is in a hurry to obtain government approval, complete the mandatory open offer to shareholders and meet the 15April deal deadline royalty is not recoverable.
D K Sarraf, ONGC director (finance) said the clause 3.1.9 in the accounting procedure of the production sharing contract (PSC) explicitly states that all taxes and levies charged by the central or state governments, or any official agency, were ''cost-recoverable'', the only exception being corporate income tax.