Deal with Vedanta to cost Cairn Energy $1.5 billion as tax

Cairn Energy will have to fork out about $1.5 billion as tax for its stake sale deal with Vedanta Resources in Cairn India.

Cairn Energy is selling 40 per cent stake in its Indian arm, Cairn India, for $6.5 billion. The company has already sold 10 per cent holding in Cairn India to Vedanta and the remaining 30 per cent is awaiting final closing.

According to sources privy to the deal, taxes will be paid in India in the form of long-term capital gains tax.

The tax liability will be about 11 per cent of the gross sale proceeds. Simply put, the Edinburgh-based majority stakeholder in Cairn India will have to pay tax for the monetary gains it makes on the stake sale.

Last summer, Cairn Energy had announced its intention to dilute shareholding in Cairn India in favour of Vedanta Resources. On June 30, the Government approved the stake sale proposal with certain riders.

This required Cairn to seek the consent of ONGC, which is partner in most of its India assets including the premium Rajasthan oilfields, for the deal.

The ONGC board is expected to consider giving consent for transfer of control in Cairn India to Vedanta Resources on September 27.

Subsequent to its shareholders' nod on September 14 accepting the pre-conditions laid down by the Government for the proposed Cairn Energy-Vedanta Resources stake sale deal, Cairn India wrote to ONGC seeking No Objection Certificates.

The two conditions, which were a bone of contention between the Government and the companies, were – making royalty paid for Rajasthan oilfields cost recoverable and withdrawal of arbitration cases by Cairn India.

On June 30, the Government approved the stake sale proposal with certain riders.

Cairn has 10 oil and gas blocks in India – three pre-NELP and seven NELP. Of the 10 blocks, ONGC is Cairn's partner in eight blocks. However, NOC will not be sought for Ravva and CB-OS/2 (Cambay Basin) blocks.