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TMI Blog2013 (5) TMI 270X X X X Extracts X X X X X X X X Extracts X X X X ..... ion taken by the ONGC not to exercise its RoFR was taken after an elaborate and due deliberations. The report of SBI Caps, after making a detailed financial analysis also supported the decision taken by the ONGC. The decision to grant no objection to the transfer of shares of CEIL from Cairn to Vedanta was also on the basis that the proposed share price of share was at 355 per share, was well in excess of its intrinsic value as were evaluated by SBI Caps. SBI Caps report evaluated each share of CEIL at 291 with the highest production profile under normal circumstances. It was concluded that even considering various other scenario makes possible value at 331 per share. UOI also endorsed the decision taken by the ONGC after due deliberations. The matter was finally placed before the Cabinet Committee of Economic Affairs, which placed the matter before the Group of Ministers who on 27.5.2011 granted its approval, based on certain conditions. The same was conveyed to the parties and the Vedanta Resources conveyed its acceptance to the conditions imposed by CCEA. Cairn also indicated to ONGC that CEIL Board had also accepted the conditions imposed upon it and that the cess arbitration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss royalty paid by ONGC from Cairn India - Held that:- Article 2.6 of PSC permits extension of the exploration period for three years from the end of the seven year period prescribed in Article 2.2. The period extended in pursuance to Article 2.6 expired on 14.5.2005. The CAG, it is seen, has assumed that any exploration carried out beyond the period was beyond the provision of PSC. Article 2.6 specifically contemplates extension of the exploration phase pursuant to the terms of the PSC. The last part of Article 2.6 to Article 2.9, however, permits further extension of the exploration period for a period of 30 months, therefore, it is factually and legally incorrect to suggest that any exploration carried out beyond 14.5.2005 was beyond the provision of PSC. CAG views on that aspect cannot be accepted. No merits in the writ petition. X X X X Extracts X X X X X X X X Extracts X X X X ..... ange. CAIRN Energy PLC UK (CAIRN) is incorporated under the laws of UK, listed on London Stock Exchange and is a majority shareholder in CIL having 62.4% equity stake in it through its wholly owned subsidiary, CAIRN UK Holdings Limited. Upon its acquisition of 50%, Shell's interest under the contract, CEIL became the operator under the operating agreement with effect from 1.1.2000. 5. CIL and its subsidiary have interests in the seven exploratory blocks (out of which Block VN-ONN-2003/1 has already been relinquished) and three producing fields in India and another exploration block in Sri Lanka as per the following details: -70% Participating Interest (PI) & operatorship in producing Development Areas of RJ-ON-90/1 (ONGC 30%), -22.50% PI in producing Ravva Field & Operatorship (ONGC 40%), -40% IP & Operatorship in producing fields of CB-OS/2 Block & (ONGC 50%); and -PI in eight other Blocks in India and Sri Lanka where there is currently no production; out of these ONGC has PI in 5 Blocks. 6. CAIRN, vide its letter dated 16.8.2010, informed ONGC that it had announced disposal of its substantial shareholding in CIL to Vedanta. ONGC had a PI in number of blocks/fields where CAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without limitation, the value assigned to PI in each PSC, to enable ONGC to decide on its future course of action. 8. CAIRN vide its letter dated 29.10.2010 provided a copy of the share purchase deed for the proposed transaction and reiterated its position that the provisions of the JOA do not apply in respect of the proposed sale of shares in CIL. 9. ONGC's, later, sought the opinion of the Solicitor General of India, who vide his letter dated 5.10.2010 opined that the Government of India's consent would be required as the acquisition of majority stake and consequent change in control of CIL would amount to an indirect transfer of the PI. 10. The Government of India, it may be noticed, had signed 28 PSCs in respect of pre-NELP exploratory blocks prior to the implementation of NELP. Under the terms of such PSCs, depending on the bargain amongst the parties, statutory levies (royalty and/or cess) on the entire production of oil and gas, including on the share of other partners, are to be borne by National Oil Companies, who are sole licenses in respect of the PEL/ML under those contracts. In view of the above contractual provisions, ONGC has been paying royalty and/or cess on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived a letter dated 16.8.2011 from CEIL in which it was stated that the Government of India vide its letter dated 26.7.2011 had granted a conditional consent for the proposed sale of shareholding to the extent of 51% to 60% in CAIRN India Ltd. by CAIRN Energy Plc to Vedanta Resources Plc in respect of the NELP and pre-NELP blocks. The Government of India, however, insisted that CIL and its affiliates shall provide No Objection Certificate (NOC) obtained from their consortium partners. MoPNG granted the approval for the proposed transaction on the following conditions: a) Parent financial and Performance Guarantees furnished by CAIRN Energy Plc in pursuance of relevant applicable Article(s) of abovementioned 7 NELP PSCs and 3 pre-NELP PSCs, shall be substituted by Parent Financial and Performance Guarantees to be furnished by Vedanta Resources Plc. which needs to be acceptable to the Government and should be in a form and substance set out in the PSC. b) Vedanta Resources Plc to guarantee that the technical capability of CAIRN India is and shall be kept undisturbed and ensure continued production of oil and gas as per approved Field Development Plan (FDP) from time to time. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oil reads as follows:- Case-I As per Approved JV case for Brent Crude Price of US$100/bband WACC o 12%, Cess Rs.2626.50/MT MC Approved JV case - Peak Production 175 kbopd PSC Term Recoverable Reserves (MMBBLS) Capex US$ Million Opex US$ Million NPV US$ Million CAIRN INDIA Share Price - Rs/Share 2020 372 4625 2467 6414 153 2025 458 4625 3434 6768 161 2040 579 4625 6027 6948 165 16. SBI Caps also worked out valuation of CIL based on futuristic estimated production profile keeping other assumptions i.e. price, royalty rate, cess, WACC same as above. It was opined, under the most likely case, i.e. production profile of 228 kbopd which includes EOR also, the NPV of CIL valuation till 2040 works out to be $10695 MM and the share price is Rs.254. The details of Production, CAPEX, OPEX, Crude Price considered are as under:- CIL-Likely CaseCase-IV As per 2P CIL Production cases for Brent Crude Price of US$100/bbl and WACC o 12%, Cess Rs.2626.50/MT CIL Profile -Peak Production 228 kbopdWF+EOR PSC Term Recoverable Reserves(MMBBLS) CapexUS$ Million Opex US$ Million NPV US$ Million CAIRN INDIA Share Price - Rs/Share 2020 737 6055 5482 9820 234 2025 90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the NOC to the proposed transaction be granted to CAIRN with a condition that CAIRN, Vedanta and their associates should enter into an agreement with ONGC to protect ONGC's interest so that royalty and cess in respect of block RJ-ON-90/1 would be binding on Cairn, Vedanta and their future assignees etc. in alignment with MoPNG direction dated 26.7.2011. 21. ONGC Board then met on 27.9.2011 and, after due consideration of the Agenda item, the recommendations of the PAC as well as presentation made by M/s SBI Caps, approved the proposal and passed the following resolutions: "RESOLVED that ONGC may not exercise its pre-emptive rights with reference to the offer made by CAIRN and its associates to Vedanta and its associates, for the Proposed Transaction of sale of shares of CIL at the rates of Rs.355/- per share as the same is more than the value evaluated by SBI CAPs. RESOLVED FURTHER that NOC to the Proposed Transaction be granted to CAIRN and its associates for the five blocks as mentioned in Para 5 above with a condition that CAIRN, Vedanta and their associates should enter into an agreement with ONGC to protect ONGC's interest so that royalty and Cess are binding on CAIRN, Veda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in relation to Cairn-UK's PI under various agreements with the Government of India and ONGC, and that Cairn UK and/or its affiliates required consent of ONGC, besides other governmental approval to consummate the proposed transaction. Cairn UK took up the stand that the transaction was only a sale of shares of CIL rather than assignment of any PI under various PSCs and JOAs and that there would be no change to PI in any of the PSCs in which Cairn India group was a party. ONGC had two disputes in RJ-ON-90-1 block, between ONGC and CEIL/CEHL which had huge financial implications for ONGC with regard to royalty and cess. Further, there was another dispute under the PSC on the issue of liability of cess. CEIL and CEHL took the stand that they were not liable for payment of cess and hence had initiated arbitration proceedings in London against Union of India and ONGC. All these issues were placed before the ONGC Board on 29.1.2011 and also on 27.9.2011 and after due consideration of the Agenda item and noticing the presentation made by SBI caps, finally decided to go for the proposed transaction between Cairn UK and Vedanta UK. Learned senior counsel submitted that the above decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he right to explore the oil and natural gas making huge investment and that exploration costs would be recoverable only if oil was discovered. Shri Salve pointed out, initially, Shell had 100% IP in the PSC, but it failed to make any commercial discovery even after investing US$ 9 million and, then, CAIRN took up the challenge. Learned counsel submitted that Cairn gave up two of its rights to secure government permission, that is, it had agreed to make royalty cost recoverable and withdrew its claim that the burden of cess would be borne by the Government of India. Learned senior counsel submitted that assigning of a PI is a well defined concept and, referring to the judgment of this Court in Vodafone International Holdings v. Union of India (2012) 6 SCC 613, learned senior counsel submitted that the transfer of a share does not result in transfer of underlying assets. Learned senior counsel submitted that various decisions taken in this case either from the side of Union of India, ONGC or by respondent nos. 3 and 4, were commercial decisions based on which the parties have acted and this Court, sitting in its jurisdiction, shall not interfere with such commercial decisions. Referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CEHL. The following chart produced by ONGC would give a broad picture of the share holding of the various companies prior to transfer and after its transfer: [pic] 33. The above chart will indicate that CEIL and CEHL, subsidiaries of Cairn, have succeeded Shell as parties to the PSC and together they became holder of 70% of the PI and later Vedanta Resource Ltd. purchased CIL's shares through CAIRN. 34. CEIL is a company incorporated under the laws of India and listed at Bombay Stock Exchange and National Stock Exchange. Cairn Energy is incorporated under the laws of (UK) and listed in London Stock Exchange and the majority share-holders in CEIL having a 64.2% equity stake in it through its wholly owned subsidiary, Cairn UK Holdings Limited. Upon acquisition of 50% of the Shell's interest under the contract CEIL became the operator under the operating agreement w.e.f. 1.1.2000. Cairn later announced on 16.8.2010 a disposal of its substantial shareholding in CEIL to Vedanta. ONGC had reviewed the various agreements signed by Cairn and/or its affiliates with the Government of India and inter se with ONGC as one of the participating companies in various oil blocks/fields. ONGC had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by the ONGC not to exercise its RoFR was taken after an elaborate and due deliberations. The report of SBI Caps, after making a detailed financial analysis also supported the decision taken by the ONGC. The decision to grant no objection to the transfer of shares of CEIL from Cairn to Vedanta was also on the basis that the proposed share price of share was at Rs.355 per share, was well in excess of its intrinsic value as were evaluated by SBI Caps. SBI Caps report evaluated each share of CEIL at Rs.291 with the highest production profile under normal circumstances. It was concluded that even considering various other scenario makes possible value at Rs.331 per share. 37. The Union of India also endorsed the decision taken by the ONGC after due deliberations. The matter was finally placed before the Cabinet Committee of Economic Affairs, which placed the matter before the Group of Ministers and Group of Ministers on 27.5.2011 granted its approval, based on certain conditions. The same was conveyed to the parties and the Vedanta Resources conveyed its acceptance to the conditions imposed by CCEA. Cairn also indicated to ONGC that CEIL Board had also accepted the conditions impose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment are not subject to our judicial review. It is only its palpably arbitrary exercises which can be declared void." In Life Insurance Corporation of India v. Escorts Ltd. and others (1986) 1 SCC 264 this Court held "that the Court will not debate academic matters or concern itself with intricacies or trade and commerce. The Court held that when the State or its instrumentalities of the State ventures into corporate world and purchases the shares of the company, it assumes to itself the ordinary role of shareholder, and dons the robes of a shareholder, with all the rights available to such a shareholders and there is no reason why the State as a shareholder should be expected to state its reasons when it seeks to change the management by a resolution of the company, like any other shareholder." In Liberty Oil Mills and others v. Union of India and others (1984) 3 SCC 465, this Court held that expertise in public and political, national and international economy is necessary, when one may engages in the making or in the criticism of an import policy. Obviously, courts do not possess the expertise and are consequently, incompetent to pass judgments on the appropriateness or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich will have to be taken note of while accepting the bid offer. In such a case, unless the court is satisfied that the allegations levelled are unassailable and there could be no doubt as to the unreasonableness, mala fide, collateral consideration alleged, it will not be possible for the courts to come to the conclusion that such a contract can be prima facie or otherwise held to be vitiated so as to call for an independent investigation, as prayed for by the appellants……." 40. The MoPNG on 26.7.2011 conveyed to Cairns UK and its affiliates and Vedanta UK that the Government of India was pleased to grant its consent for the Cairn -Vedanta -- subject to fulfilment of the certain conditions i.e. they had to give an undertaking that in the royalty paid in the ONGC was cost recoverable by ONGC as contract cost and to withdraw the arbitration case relating to cess. The dispute on royalty and cess was bothering ONGC for quite some time and ONGC was facing a claim running into several million US Dollars in an arbitration proceeding in London. Union of India and ONGC, in their wisdom could make Cairn agree to those conditions, it gave an undertaking that in the royalty pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner has placed considerable reliance on the Comptroller and Auditor General ("CAG") Report. Some of the comments in the CAG Report were highlighted by counsel appearing for the petitioner to contend that the declaration of fresh discoveries during the appraisal/development phases within delineated discovery/development areas amounted to irregular extension of exploration activities, which is not in consonance with the terms of the PSC. 45. The petitioner has also sought a direction to CAG/Government of India to calculate the alleged losses from payment of 100% royalty and cess by ONGC before the Cairn-Vedanta deal and for a direction to ONGC/Government to recover the excess royalty paid by ONGC from Cairn India. 46. CAG may be right in pointing out that public monies are to be applied for the purposes prescribed by Parliament and that extravagance and waste are minimized and that sound financial practices are encouraged in estimating and contracting, and in administration generally. 47. We have come across several instances where considerable reliance has been placed on the CAG Report and projecting it as gospel truth. Let us examine the role of the CAG under our Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted to the Governor, who shall cause them to be laid before the Legislature of the State, as per Article 151(2) of the Constitution. When reports are received in the Parliament, they are scrutinized by the Public Accounts Committee ("PAC"). The PAC is established in accordance with Rule 308 of the Rules of Procedure and Conduct of Business in Lok Sabha. The function of the PAC is to examine the accounts of the Union and the report of the CAG. The PAC shall be principally concerned whether the policy is carried out efficiently, effectively and economically, rather than with the merits of government policy. Its main functions are to see that public monies are applied for the purposes prescribed by the Parliament, that extravagance and waste are minimized and that sound financial practices are encouraged in estimating and contracting, and in administration generally. The PAC also has the power to receive evidence, the power to send for persons, papers and record and can receive oral evidence on solemn affirmation. Once the report is prepared, the report of the PAC is presented to the House. 51. Durga Das Basu in Commentary on the Constitution of India 8th Edition 2009 at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mittee for a year is constituted, it selects paragraphs from the reports of the Comptroller and Auditor General that were presented after the last selection of subjects by the Committee for in-depth examination during its term of office. Assistance by Comptroller and Auditor General The Committee is assisted by the Comptroller and Auditor General in the examination of Accounts and Audit Reports. …… Calling for Information from Government The Committee calls for, in the first instance, background note and advance information from the Ministries/Departments concerned in regard to subjects selected by it for examination. ……. Evidence of Officials The Committee later takes oral evidence of the representatives of the Ministries/Departments concerned with the subjects under examination. …… Report and Minutes The conclusions of the Committee on a subject are contained in its Report which, after its adoption by the Committee, is presented by the Chairman to the Lok Sabha. Minutes of the sittings of the Committee form Part II of the Report. A copy of the Report is also laid on the Table of Rajya Sabha. The Reports of the Committee are adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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