"Obviously, Vedanta is over-paying... perhaps because they have been kept in dark on issues like statutory levies," a source said. "ONGC did its numbers, but it couldn't stretch the valuation of Cairn India to Rs 320 per share," he said.
London-listed Vedanta is paying Rs 405 a share to acquire a 40 to 50 percent stake in Edinburgh-based Cairn Energy Plc's Indian unit.
Vedanta's valuation is based on the premise that Cairn India will not have to bear any share of the royalty on its mainstay Rajasthan oilfields.
"Perhaps it (Vedanta) has not been told that Cairn India had in July last year, much before the Vedanta acquisition was announced, agreed to adding the royalty paid on Rajasthan crude to the project cost, which can be recovered from the sale of oil," the source said.
Unlike the perception created, ONGC had in July, 2010 -- before the Vedanta deal was announced -- written to Cairn India saying the state-owned oil explorer should be allowed to recover over Rs 14,000 crore in royalty that it was liable to pay on behalf of its private partner.
The source said in July-end, Cairn India replied saying it was agreeable to this, provided oil regulator DGH concurred with the proposal.
The DGH, as well as the Oil Ministry, have agreed to such recovery, but Cairn -- which on August 16 announced the deal with Vedanta -- suddenly did a volte face and is now opposing such a move.
"Perhaps they (Cairn) did not tell Vedanta about the royalty being covered from the cost. Royalty being cost-recoverable means lower profits for Cairn India and so, Vedanta would have put a lower price than current USD 9.6 billion for the acquisition," he said.
ONGC owns a 30 percent stake in the Rajasthan oilfields, but is liable to pay royalty on all the crude oil produced from the fields, making the nation's largest onland field a losing proposition for the PSU.
The ONGC board on Saturday recommended to the government that the royalty it pays not only its share, but also on the 70 percent share of Cairn India, should be deducted from the price realised on the sale of crude oil from Mangala and other oilfields in the Rajasthan block.
"We are of the opinion that royalty as per contractual provision is cost-recoverable," ONGC chairman and managing director R S Sharma said Sunday evening.
The ONGC board's resolution will be added to the preconditions that the Oil Ministry has imposed for approving the Cairn-Vedanta deal.
The preconditions, including resolution of ONGC's royalty liability, have been vetted by the Law Ministry and the same are being sent to the Prime Minister's Office.
"As per our interpretation of the contract, royalty is cost-recoverable," Sharma said.
ONGC's board noted that the Solicitor General of India has opined that the state-run firm's preemption rights will be triggered upon UK's Cairn Energy selling up to 51 percent of its stake in Cairn India to Vedanta.
The stake sale will lead to a change in ownership in the 10 properties held by Cairn, the nation's second-highest law officer opined. ONGC is a partner in seven of these blocks, including all three producing properties of Cairn.
While Cairn had reluctantly agreed to seek the government's consent for a change in ownership in all 10 properties, it has refused to recognise ONGC's preemption rights, Sharma said.
Sharma said ONGC wants Cairn to come to the negotiating table and sort out the royalty issue.
The Oil Ministry and its regulatory arm, the DGH, are also in favour of adding the royalty paid by ONGC to the Rajasthan project cost.
In the case of fields awarded under the New Exploration Licensing Policy (NELP) -- like the gigantic KG-D6 gas fields of Reliance Industries -- royalty can be added to the capital and operating cost of the block, which as per law are deductible from revenues earned on the sale of oil and gas before calculating profits for all stakeholders.
The Production Sharing Contract (PSC) for the Rajasthan block is silent on the treatment of royalty and Cairn is opposed to its addition to the project cost as it would lower its profits.