The company said the bulk of the proceeds from any partial flotation of its Indian assets would be returned to investors. The initial public offer is planned to take place before production begins from the Rajasthan fields in 2008.
Cairn indicated it was likely to retain a majority stake in the new Bombay-quoted company, which will own virtually all of the company's exploration acreage in India. Under Indian law, Cairn would have to sell a minimum of 25 per cent and a maximum of 80 per cent of its Indian assets, which in turn account for about 90 per cent of the group.
Shares in Cairn surged 6.5 per cent on the news to give the company a market valuation of £3.3bn, although some analysts expressed disappointment that it had not announced the outright sale of its Rajasthan assets.
News of the planned spin-off came as Cairn increased its estimates of the total amount of oil in place in Rajasthan from 2.5 billion barrels to 3.5 billion and raised its estimate of recoverable reserves by 20 per cent to a little less than 900 million barrels. Production is forecast to be at least 150,000 barrels a day.
Sir Bill Gammell, Cairn's chief executive, owns about 1 per cent of the company and would make about £15m if the company chose to float off a little less than half of its Indian assets. Sir Bill, a personal friend of Tony Blair and George Bush, has presided over a six-fold increase in Cairn's valuation since buying the rights to the Rajasthan fields from Shell five years ago.
He denied the decision to opt for a partial flotation of the Rajasthan fields was a defensive measure to ward off a potential bid for the assets from India's state-controlled Oil and Natural Gas Corporation.
Sir Bill said an initial public offering had been in the pipeline for the past two years and would result in a "win-win" for shareholders in India and the UK. He said the new company, to be known as Cairn India, was likely to trade at a higher valuation which would in turn feed back into the rating of the existing UK-quoted company, which will be renamed Cairn Resources.
Cairn Resources will retain the group's acreage in Bangladesh and Nepal and probably a small chunk of its Indian assets, and would seek to build up a new portfolio of discoveries.