It is just as well that the Cairn-Vedanta deal is finally out of the way. The soap opera has dragged on for too long, 10 months to be precise, and it has done nothing for the reputation of all those concerned with it — ONGC, the Government or Cairn Energy.
Of the three, the Government has probably come out the worst from the episode, not just because it has shoved an unpalatable deal down the throat of a reluctant Cairn Energy but also because of the way it went about its job as regulator of the industry ever since the deal was announced in August 2010.
If there is one fundamental problem that the Cairn-Vedanta drama has exposed, it is that of the government being the umpire and also a player in the oil industry. This was one instance where the conflicting rights and responsibilities of the two roles surfaced and worked to the disadvantage of Cairn and Vedanta.
The Government, as the dominant shareholder in ONGC, had to protect the interests of the company and also fight for it. As the regulatory authority for the industry, it also had to grant approval to the deal between two private companies. Rather disappointingly, the decision to grant conditional approval seems to have been influenced by the Government's position as owner of ONGC rather than by its larger role as industry regulator.
Unfair conditions
How else can one justify the two rather unfair conditions imposed on Cairn and Vedanta for approval of the deal? The dispute over royalty could have been settled legally and the Government could have cleared the deal while simultaneously directing ONGC to proceed against Cairn through the courts. Cairn India, after all, will continue to be a legal entity, albeit with a new owner, in Vedanta and will be answerable for all contracts signed in the past.
If this is bad, the condition that Cairn has to withdraw the arbitration cases it has filed, over the cess payable on the production from the Rajasthan field, is worse. These are cases filed long ago and Cairn India has been paying the cess of Rs 2,650 for every tonne of oil produced, under protest.
The Government has simply used its powers as regulator to push through conditions that will benefit ONGC, where it is the dominant shareholder. This is a misuse of its powers and this is not too different from what happens in Russia, where the government regularly bats for its companies, overturning otherwise perfectly legal contracts.
If the conditional approval is unpalatable in itself, the delay in granting it makes it worse. “In view of the huge implications, we took time…. We wanted to be fair to the investors without sacrificing the interest of the Government of India,” said Mr Jaipal Reddy, Petroleum Minister, on Thursday night. What “huge implications” is he talking about? This is, after all, a commercial deal between two companies, where the underlying assets — Rajasthan and other oilfields — will remain in India. It is not as if Cairn or Vedanta are going to deprive the country of the oil and gas from the fields.
The dispute was commercial in nature and, as with all such disputes, could have been settled through due process of law. That is no reason, though, to drag the approval process for almost a whole year. The decision that was conveyed to the two parties on Thursday could have been delivered many months ago.
Needless delay
Where was the need for the government, including a Group of Ministers and the Cabinet, to expend so much energy and time on what is a straightforward commercial deal? Surely, our senior, learned Ministers have more important matters to attend to than sit in judgement over the small issue of a dispute on royalty payment between two companies? Just imagine the impression we are conveying to the outside world, where an entire government sits in judgement over whether or not to approve a commercial deal for a whole year, and at the end delivers a judgment that is wholly in favour of itself!
One suspects that the Government may not have granted its conditional approval even now, but for the fact that ONGC's follow-on public offer is waiting for launch. Continued imbroglio over the deal would have surely cast a shadow over the pricing of the offer and also its subscription.
That said, Cairn Energy has also not played its cards well. The moment it sensed the Government's resistance a couple of months into the deal, it could have renegotiated with Vedanta, the way it did this week, and sacrificed a part of the valuation. The deal was certainly less than fair in terms of the non-compete fee which Cairn Energy stood to gain over other public shareholders. In the event, it is poetic justice that it has now been forced to forego this.
Yet, with some tactical thinking it could have arrived at such an arrangement much earlier and been richer by $6.02 billion by now. The Government's stance may have been unfair but once assumed in public, there was no chance of Cairn having its way on the dispute. One would have thought the Scottish company would have been wise to this.
As for ONGC, the less said the better. Company officials are crowing about the financial gain for ONGC from not having to bear the royalty but the fact is that it is not a benefit secured through fair means. One expected better from a $26-billion maharatna company than this.