The Union Cabinet is all set to clear the deal on Wednesday, notwithstanding the adverse opinion of the Solicitor General of India and the Law and Justice Ministry that London-based Vedanta Resources must agree to equitably share royalty on oil produced from Cairn India's mainstay Rajasthan oilfields before the government nod.

At the same time, the Home Ministry felt that the security vetting process will have to be undertaken, if desired, as foreign investors and corporates are involved in the $9.6-billion Cairn Energy and Vedanta Resources deal. “The security vetting of the purchaser, if required, has to be done by a process which the Ministry of Petroleum and Natural Gas is aware of. Processing of security vetting uses established formats and in case the Petroleum Ministry desires such a security getting then the same may be sought independently. It may be noted that the security vetting process will involve six to eight weeks as foreign investors and corporates are involved in the proposal. Action has since been initiated on the issue,'' the Cabinet note states.

The Cabinet Committee on Economic Affairs (CCEA) is scheduled to meet on Wednesday under the leadership of Prime Minister Manmohan Singh.

Given the interest shown by the Prime Minister’s Office (PMO) in the deal, the CCEA is likely to given an in-principle approval to the deal overruling the opinion of the Solicitor General of India Gopal Subramanium, and endorsed by the Law and Justice Ministry, that Vedanta must agree to equitably share royalty on oil produced from Cairn India's mainstay Rajasthan oilfields before the government nod.

“The pre-condition is all set to be overruled by arguing that the government's take from Rajasthan oilfields will be impacted if Rs.18,000 crore royalty ONGC will pay in excess of its share in the oilfields is cost recovered from revenues. The government revenues will be dented by $1 billion,'' a senior Ministry official stated.

ONGC had in July 2010 cited provisions in the field contracts to say royalty, like any other levy, is cost recoverable. Cairn India, which holds 70 per cent stake in the 6.5 billion barrels Rajasthan block, does not pay any royalty and is opposed to making it cost recoverable as it will dent its profits. The CCEA could ask Cairn India to seek ONGC’s no-objection for the deal.

The Cabinet note of the Petroleum and Natural Gas Ministry, accessed by The Hindu, lists royalty being made cost-recoverable as a pre-condition for approval as an option. In the other option, it has suggested that the government give its consent to the deal without any pre-condition and appropriate decision will be taken to enforce ONGC's right.

Mr. Subramanium has opposed the second option saying the second option which has been suggested in the Cabinet note, that is, pursuing rights under the production sharing contract to recover the rightful dues of ONGC, would involve an undesirable amount of time and resources to be spent and would be contrary to the public interest.

The Petroleum Ministry is likely to push for Cairn to accept the ONGC’s views on royalty and withdrawing litigation on cess as ‘reasonable conditions’ for approving the deal. The Ministry has further stated in the note that the Cabinet could clear the deal without asking Cairn India to accept the Ministry’s conditions but in that case, the government would pursue all legal recourses for collecting cess, which Cairn disputes in an arbitration proceeding. Further, the government should take ‘appropriate decision’ to enforce the provision of the production sharing contract which says that royalty is cost-recoverable.

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