Cairn Energy set to hold out for full price in Indian deal

Fears arose that Vedanta Resources would go back to the bargaining table after a panel of Indian government ministers gave the deal to sell a stake in Cairn India the green light subject to conditions which would reduce the Rajasthan-based company's value.

It has been estimated ministers' demands to make royalties paid by Cairn India's state-owned partner "cost recoverable" would hit revenues by an estimated $908 million a year.

It is thought Vedanta Resources, which last year offered to buy a majority stake in Cairn India for 5.6bn, will consider making a revised bid for a 40 per cent stake in the firm from Edinburgh-based Cairn. However, some analysts believe the Indian mining firm could easily swallow the increased royalty costs as oil prices have risen significantly since the deal was initially struck in August.

The Indian government has so far refused to lend its support to the deal as it upholds demands by the state-owned Oil and Natural Gas Corporation (ONGC) that Cairn India pays the royalties. It is also understood the ministers have demanded Cairn India drop a long-running court dispute over taxes on crude oil production known as cess fees.

Though ONGC holds 30 per cent in the fields operated by Cairn India, it is required to pay 100 per cent royalty on production, since it is the licensee of the block.

On Friday, a panel of ministers set the conditions and said it would pass its report on to the Indian cabinet committee on economic affairs in two weeks.

Analysts warned that the demands would have a "significant impact" on Cairn India's value.

In a note, Phil Corbett, an analyst with Royal Bank of Scotland, said: "To this point, Cairn's position is the purchase-price is non-negotiable, and our gut feel is Vedanta will swallow any negative impact."

Vedanta already owns 18 per cent of Cairn India.

Cairn Energy declined to comment.