The Cairn Vedanta deal will, in all likelihood, not be a template for future deals involving Indian oil and gas assets. There are two reasons for this, despite Thursday?s Cabinet clearance for it. One is the difference in the production sharing contracts between the pre- and post-NELP phase. The other is, of course, the shortage of oil-bearing assets from the pre-NELP days. So there is little that can be taken forward from this deal, except the most critical point, which concerns the 11 months taken to approve the deal. Delays can often be part of mergers and acquisitions deals. But that a group of ministers should be involved to sort out a corporate battle is a new pattern that has been established by the Indian government. This, of course, opens up massive arbitrage opportunities. In terms of money, on a head-to-head comparison, the gain was insignificant. Allowing ONGC?s royalty payment to be considered as an expense will lower profits and so cut government?s share as well, by $800 mn. At net present value, the cost of royalty over the lifetime of the project will be around $2 bn on the revenue stream of Cairn. This means the net difference the government has earned for itself and ONGC is about $1.2 bn or R5,000 crore. This is something the public sector company could possibly have gotten even through an arbitration award, which it was strangely reluctant to pursue. Instead, by acting the local toughie on ONGC?s behalf, the government has shown how Indian business conditions are to be negotiated. In fact, by asking Cairn to drop its arbitration proceedings against ONGC on cess payments, the government has sort of underlined how the equation stands between itself and the courts.
As the Indian economy expands, the scope of buyouts will obviously rise. The best role the government could enact in the face of growing deals would be that of a scrupulously standoff player. Instead, by getting involved in commercial disputes, it has opened up unsavoury possibilities. Cross-country deals are, in any case, difficult to do from India. The telecom sector, for instance, found out that restrictions on dual listing make the cost of deals higher. As a result, companies have resorted to off-border shell companies to route such deals, which, in turn, necessarily raises costs. The Cairn-Vedanta deal will now also travel to the Competition Commission of India for clearance; but this, as well as Sebi and home ministry clearances, will obviously come through more smoothly. But at a time when the India story is suddenly looking less bright, the prospect of the government playing the heavy is not a happy one.
