ONGC claims first right to Cairn India stake

Vedanta Resources was in the news for being denied permission by the government to mine bauxite in Niyamgiri hills in Orissa. Just when the dust was settling on that episode, its proposed acquisition of a majority stake in Cairn India has come under a cloud. Government-owned oil company Oil and Natural Gas Corporation has claimed pre-emptive rights over Cairn India and asked for documentation before giving a go-ahead to the transaction. The company owns a 30% participating interest or stake in the Rajasthan oil block operated by Cairin India.

When Cairn India’s parent company, UK-based Cairn Energy Plc announced the sale of a majority stake in Cairn India Ltd to Vedanta, the Indian government was taken by surprise. Cairn Energy’s action cannot be called unusual as it is a listed company, and would be required to disclose any material information to its board and then the stock exchange and shareholders first.

After announcing the deal, Cairn Energy’s top management did say that they would inform the Indian government, but appeared confident about the deal passing muster. They did mention about needing SEBI and RBI approval for the transaction, but were not explicity about needing government approval for selling their stake. No mention of a first right of refusal was made either. Meanwhile, the issue became political with a demand from some ministers that the government should acquire the company instead. Rumours even made the rounds that oil PSUs would form a consortium to make a counter offer, though nothing of that sort materialised.

Today, ONGC, which has a stake in the exploration blocks operated by Cairn India, made an announcement. It said it was informed by Cairn Energy about the transaction on August 16. After examining existing documents, it has claimed pre-emptive rights in Cairn’s participating interest under agreements between the company and the Indian government and ONGC. It has also claimed that Cairn Energy and its affiliates require ONGC’s consent, apart from other government approvals to complete the transaction.

ONGC has asked Cairn Energy to provide it with details of the transaction, including documentation between the company and Vedanta on this particular transaction. Though not wholly unexpected, this will be a stumbling block to Vedanta’s acquisition of Cairn. Already, it is facing issues with some shareholders filing a suit against the usage of Sesa Goa’s cash surplus to fund the open offer to Cairn India’s minority shareholders. ONGC’s request may delay the process further.
What can happen from here? First, ONGC will have to establish that it has a first right of refusal over Cairn Energy’s stake in Cairn India. In a transaction of this size, both Vedanta and Cairn would have taken enough legal advice on whether there was an obligation to do so. Since Cairn India is the operator for the oil exploration blocks, the other participating parties would normally have the first of refusal, if it wants to sell its participating interest.

Cairn India’s status is unchanged, after the transaction. Whether a change in ownership of Cairn India will trigger a first right of refusal is the key question? If not explicit, is there an implicit obligation on Cairn Energy to offer its stake to ONGC or the government first? If Cairn refuses to part with its documentation or if, after doing so, refuses ONGC’s offer to buy its stake, will ONGC be willing to go to the courts and battle it out? Will all this lead to some across the table negotiation, as is being speculated in some news reports, which will culimnate in ONGC renegotiating its existing royalty and cess terms pertaining to the Rajasthan oil block. Too many questions have been raised by ONGC’s action and have created uncertainty. But ONGC’s latest action will delay the closure of the deal.

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