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As it awaits government approval, the Cairn-Vedanta deal hangs perilously in the balance. The deadlock stems from an old dispute over royalty payments, but has nonetheless shaken investor confidence

Contrary to popular belief, the Cairn-Vedanta deal is not shrouded in layers of complexity. Elements of its financing structure admittedly convey sophistication, marrying debt, equity and capital markets, but the deal in its essence is straightforward.

On 16 August last year, Edinburgh-based Cairn Energy signed an agreement that would give 51-60% of its Cairn India subsidiary to UK mining giant Vedanta Resources. To satisfy India’s takeover regulations and complete the US$9.6 billion deal, Vedanta, through its Indian subsidiary, iron ore producer Sesa Goa, would offer Cairn India’s minority shareholders ₹355 (US$8) per share for up to 20% of the shares of Cairn India.

Based on the subscription in the open offer, Cairn Energy would then give up between 40% and 51% of its ownership to Vedanta so that the mining company would enjoy majority control. On top of that, Cairn’s promoters would be paid an extra ₹50 per share as non-compete fees.

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