MUMBAI, India (AP) -- India has given final approval for Cairn Energy's $6.5 billion sale of a majority stake in its Indian assets to London-based mining firm Vedanta Resources, Cairn said.
The long-delayed deal has served as a reminder of just what many foreign investors don't like about India. Over 15 months of negotiations resulted in a punishing contractual change over royalty payments.
"Vedanta has confirmed that it has now satisfied the conditions under the Sale and Purchase Agreement for the acquisition of a controlling shareholding in Cairn India," Cairn India said in a filing to Indian stock exchanges Wednesday.
Vedanta is paying $6.5 billion for 58 percent stake in Cairn India. The London-listed parent company, Cairn Energy Plc, will retain a 22 percent stake.
The companies announced the sale back in August 2010, but wrangling over royalties and government approvals threatened to sink the deal in India's notorious bureaucracy.
To win government approval, the companies agreed to alter their production sharing contract.
Under the original contract, state-run Oil and Natural Gas Corp. bore full responsibility for royalty payments from a key field in the north Indian state of Rajasthan, even though its ownership of the field was just 30 percent. Those generous terms were negotiated back when investor interest in the unproven oil and gas assets of the Rajasthani desert was scant and the government was eager to attract foreign capital and expertise.
Royalties will now be split, with Cairn India paying 70 percent and ONGC paying 30 percent.
Cairn India also agreed to make a payment for back royalties of $545 million.
Analysts said privately that such a contractual change was unprecedented and would have been difficult for the government to extract if it hadn't been linked to the deal approval.
Company officials said that Vedanta has received a security clearance from the Ministry of Home Affairs and a certificate of no objection from ONGC, which were the final two procedural hurdles.
The deal gives mining giant Vedanta exposure to its first oil and gas assets, while freeing up cash for Cairn Energy, whose push on Greenland exploration has yet to bear fruit.
"It is in the interests of Cairn and the country to get the deal done with and move ahead with increasing production from the block," said Bhaskar Chakraborty, an oil and gas analyst at IIFL Capital in Mumbai.
That, too, will require a government approval.
Cairn India has said it can ramp up production to 240,000 barrels per day from 125,000 barrels per day.
"Our policies have been designed to attract international companies," petroleum minister Jaipal Reddy said at a conference in Qatar this week. "The recently formed consortia such as Reliance-BP and Vedanta-Cairn are telling examples of investment in India. We are yearning for many such ventures."
India has been at pains to bolster flagging investment, which helped drive growth to a two-year low of 6.9 percent in the September quarter. It is also trying to attract more foreign investment to help reverse a punishing spiral in the value of the rupee, which recently hit a lifetime low.
The stock rose 2.6 percent in early trade in Mumbai before closing flat.