TMI Blog2013 (5) TMI 270X X X X Extracts X X X X X X X X Extracts X X X X ..... 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the conditions imposed upon it and that the cess arbitration, which had been initiated by Cairn against ONGC was also withdrawn.Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia - 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. - Writ Petition (Civil) No. 69 of 2012 - - - Dated:- 9-5-2013 - K. S. Radhakrishnan And Dipak Misra,JJ. JUDGMENT K. S. Radhakrishnan, J. 1. Petitioner, through this Public Interest Litigation, has challenged the approval granted by the Government of India dated 24.1.2012 for the acquisition of majority stake in Cairn India Limited (CIL) for US $8.48 billion and also for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Stock Exchange and the National Stock Exchange. 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. ON ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the proposed transaction, including, 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing their part of the Cess under protest. 13. ONGC received 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 appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share price if Rs.165. Details of production capex, opex, crude 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the above report of the SBI Caps was placed before the 109th Project Appraisal Committee meeting held on 27.9.2011, wherein after detailed deliberations, the PAC resolved for consideration and approval of the ONGC Board that ONGC might 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 rate of Rs.355/- per share as the same was more than the value estimated by SBI Caps. It further resolved that 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly granted extension to Cairn India Limited for carrying out exploration activities beyond the period framed by the Rajasthan Block PSC, which has been commented upon by the Comptroller and Auditor General (CAG). 25. Shri Mukul Rohatgi, learned senior counsel appearing for the respondent, assisted by Shri R. R. Sasiprabhu explained to the Court in detail the main features of PSC dated 15.5.1995 as well as the transaction entered into between Cairn and Vedanta. Learned senior counsel pointed out that ONGC has, inter alia, pre-emptive rights 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 anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led on 3.10.2012, explained the circumstances under which the transaction was entered into by it with Vedanta. Learned counsel submitted that the third respondent is not a party to any of the PSCs and, prior to the completion of the transaction, had taken all reasonable steps to ensure that CEIL and its subsidiaries comply with all applicable laws and contractual obligations in India. 29. Shri Harish Salve, learned senior counsel appearing for the fourth respondent, submitted that it was up to the competitive bidding operator who was granted the 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the Judgment. The Rajasthan Block, which is the subject matter of the present writ petition, was offered in the 4th round of pre NELP (New Exploration Licensing Policy) by competitive bidding mechanism which culminated in the execution of PSC Contract on 15.5.1995. Shell was a party to the agreement to the PSC dated 15.5.1995 and even after seven years of Contract Shell could not make any commercial discovery, though large amounts were invested between 1999 and 2003. Consequently, it had to transfer its Participating Interest (PI) to CEIL and 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-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arbitration against Union of India and ONGC in relation to the cess was withdrawn since the Government of India and ONGC had accorded their consent for the deal with Cairn and Vedanta. Further CEIL and its affiliates had also agreed to treat royalty paid as cost recoverable by ONGC as contract costs. ONGC had already derived financial benefit to the tune of US $970,881,838 towards royalty paid by it till June 2012 and would continue to derive similar benefits during the currency of the contract i.e. upto 2020. 36. We notice the decision 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 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 poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, its validity cannot be tested on any rigid a priori considerations or on the application of any straight jacket formula. In Metropolis Theatre Co. v. State of Chicago 57 L Ed 730 the Supreme Court of the United States held as follows: The problem of government are practical ones and may justify, if they do not require, rough accommodation, illogical, if may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not discernible, the wisdom of any choice may be disputed or condemned. Mere errors of government 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional legislation, should interfere only in those few cases where the view reflected in the legislation is not possible to be taken at all. In Centre for Public Interest Litigation and Another v. Union of India and Others (2000) 8 SCC 606, this Court held as follows: 20. It is clear from the above observations of this Court that it will be very difficult for the courts to visualise the various factors like commercial/technical aspects of the contract, prevailing market conditions, both national and international and immediate needs of the country etc. which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IL , in other words, with the acquisition of 30% shares in CEIL, State of Rajasthan Block would remain unchanged and hence ONGC could not have got any increase in shares in the profits much-less any increase in profits by 40%. 43. We are of the view that on facts, as well as on law, the ONGC and the Government of India have taken a prudent commercial and economic decision in public interest. We are not prepared to say that the decision is mala fide or actuated by any extraneous or irrelevant considerations or improper motive. C A G Report 44. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority which governs it. The CAG has to satisfy himself that the rules and procedures designed to secure an effective check on the assessment, collection and proper allocation of revenue are being duly observed under Section 16. The CAG also has to examine decisions which have financial implications including the propriety of the decision making. 50. The Reports of the CAG are required to be submitted to the President, who shall cause them to be laid before each House of Parliament, as provided under Article 151(1). In relation to the States, reports are 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 function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here of industry and enterprise. 52. In this connection is useful to refer to the practice of the PAC, as set out in a note found in the website of the Lok Sabha which states as follows: Selection of Subject for Examination: As the work of the Committee is normally confined to the various matters referred to in the Audit Reports, and Appropriation Accounts, its work normally starts after the Reports of the Comptroller and Auditor General on the accounts of the Government are laid on the Table of the House. As soon as the Committee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various issues. For instance, we cannot as such accept the CAG report in the instance case. 57. 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. 58. In such circumstances, we find no merits in the writ petition which was filed without appreciating or understanding the scope of the decision or the making process concerning economic and commercial matters which gives liberty to States and its instrumentalities to take appropriate decision after weighing advantages and disadvantages o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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