Indian finance chiefs hint Cairn is a step closer to Vedanta deal

India's finance ministry is believed to have warned its own government against using its veto on Cairn Energy's deal with Vedanta to settle disputes with the Scottish exploration company.

Cairn, which reports full year results today, agreed in August to sell a controlling stake in its Indian oilfield business to Vedanta for up to $9.6 billion (5.9bn).

But the deal has been delayed by regulatory matters and issues around royalty payments from a field it shares with state-run Oil and Natural Gas Corp (ONGC).

In a contract signed with Cairn to attract oil heavyweights to the Rajasthan state, ONGC agreed to pay Cairn 100 per cent of the royalties on its 30 per cent stake in the fields. But when the fields began producing hundreds of thousands of barrels of oil, this became a massive liability and the state-owned firm now wants to change the deal, affecting the sale to Vedanta.

Cairn boss Sir Bill Gammell received a boost last week when the Securities and Exchange Board of India backed the sale. However, it still requires the blessing of the Indian cabinet.

Indian newspaper reports yesterday cited a finance ministry letter dated 16 March saying: "The government of India cannot be seen using this opportunity to settle pending disputes in its own favour."

Phil Corbett, analyst at Royal Bank of Scotland, said investors looking at today's results would be more interested in any updates on Cairn's exploration activities in Greenland.

He said: "With the proposed disposal of the Cairn India stake to Vedanta being played out in public via the Indian press, the scope for material new disclosures appears limited.

"However, we would expect management to reiterate its confidence that the deal will complete, with the focus likely to fall on the schedule of events."

RBS rates Cairn shares as a "buy", with a target price of 510p, and forecast operating profits for 2010 to hit $614m.