London-listed mining group Vedanta Resources on Monday said it is working with Cairn Energy to 'satisfy' preconditions that the government has set for its takeover of Cairn India.

The billionaire Anil Agarwal-led group in a press statement said it has now received a formal notification from the government providing conditional approval for its acquisition of Cairn Energy stake in Cairn India.

Besides Vedanta furnishing financial and performance guarantee and an undertaking to keep Cairn India's technical capability undisturbed, the government wants Cairn Energy or its successor to share royalty and accept its liability to pay cess on the all important Rajasthan oilfields.

"Vedanta is working with Cairn Energy to satisfy these conditions and complete this transaction," the statement said.

Also included in the preconditions imposed by the cabinet for approving the USD 9-billion Cairn-Vedanta deal is Oil and Natural Gas Corp (ONGC) - Cairn India's partner in most of its 10 properties in India - giving a no objection as well as Home Ministry giving a security clearance to Vedanta.

Vedanta said Cairn India plans to seek a shareholder approval for the conditions imposed by the government.

Cairn India had on July 26 stated that its April-June quarter net profit will halve to Rs 1,435 crore if it is asked to share royalty on crude production from Rajasthan fields.

The board of Cairn India is opposed to accepting the government riders but its parent Cairn Energy wants the conditions to be voted on by the shareholders of the company.
Cairn Energy holds a 52.1 per cent stake in Cairn India and together with another 28.5 per cent held by Vedanta, can see any proposal through.

Since the Cairn-Vedanta deal was announced in August last year, Cairn India has been opposed to making royalty payments recoverable from the sale of oil and the company being made liable to pay a Rs 2,500 per tonne cess, as this was not in line with the Production Sharing Contract (PSC).

A change in the contract was neither in the interest of the company, nor its minority shareholders, it has maintained.

"It should be noted that if royalty were to be cost recoverable, it would lead to a decline in the revenues and profit-after-tax for the current quarter by Rs 1,291.6 crore," Cairn India said announcing its Q1 earnings on July 26.

Cairn India reported a 10-fold jump in net profit to Rs 2,726.6 crore for the April-June quarter.

ONGC owns a 30 per cent stake in the Rajasthan oilfield, but pays the entire royalty on production under the government's previous policy of giving discounts to attract investors.

Like royalty, Cairn India feels the cess is also a liability of ONGC even though the Production Sharing Contract (PSC) is absolutely silent on the issue.

Cairn India board had in February passed a resolution opposing the government preconditions but it did not reiterate the position at the July 26 meeting which was chaired by Cairn Energy Chairman Bill Gammell.

Last August, Vedanta proposed buying a 51-60 per cent stake in oil and gas explorer Cairn India for up to USD 9.6 billion in cash, but the deal has been delayed due to the lack of government and regulatory approvals.

Approval has been delayed over royalty payments that ONGC makes on behalf of Cairn India in Rajasthan oilfields.

ONGC had, much before the Cairn-Vedanta deal was announced, cited contractual provisions to demand that the royalty should be recovered as a cost from revenue.

The state-owned firm maintained that as a partner, it has the right of preemption or first refusal and the deal should not proceed without its concurrence.

Both Cairn and Vedanta disputed royalty being made cost-recoverable as it would dent Cairn India's profits. They also opposed the need for partner consent for the transaction.

A Group of Ministers headed by Finance Minister Pranab Mukherjee held that ONGC's views were correct and recommended to Cabinet that the deal should be approved if Cairn or its successor agreed to adding royalty to the project cost and recovered from oil sales, as well as agreed to pay its share of the Rs 2,500 per tonne oil cess.

Days before the Cabinet Committee on Economic Affairs (CCEA) accepted the GoM recommendation and gave conditional approval, Cairn Energy lowered the price it was demanding from Vedanta to make up for the reduced profitability from acceptance of the preconditions.

It removed a non-compete provision and related non-compete fee of Rs 50 per share.

Vedanta's total payment at the reduced price of Rs 355 per share for a 40 per cent stake in Cairn India will now be USD 6.02 billion, instead of USD 6.84 billion previously.

Cairn India in the July 26 statement said the government has approved the Cairn-Vedanta deal subject to certain conditions.

"The conditions include that in respect of the RJ-ON-90/1 block, the company must agree that the royalty payable is a contract cost eligible for cost recovery and that it shall withdraw the arbitration with respect to payment of cess," it said.