Cairn Energy has reported that they have effectively seized Indian state-owned properties in Paris, in order to recover the arbitration award in the tax dispute with India’s government. In a major escalation in the ongoing clash with the Indian government, the Scottish oil producer has frozen Indian state-owned assets worth over $23.60 million.
The company aims to seize about 20 centrally located Indian government properties in France to recover a part of the $1.7 billion arbitration. Cairn said that the Tribunal Judiciaire de Paris’ approval on freezing the properties was a “necessary preparatory step to taking ownership of the properties and ensures that the proceeds of any sales would be due to Cairn”.
Cairn’s asset freeze application is the first to succeed. The Financial Times said it had seen official documents that confirmed a French court had authorised the freeze. On June 11, the court had ordered Cairn Energy’s take-over of Indian government properties, and the legal process was completed this week on Wednesday evening.
The government, on Thursday, said that it has “not received any such order from any French court” and will take legal remedies to protect the interests of India.
“The Government is trying to ascertain the facts, and whenever such an order is received, appropriate legal remedies will be taken, in consultation with its Counsels, to protect the interests of India,” said the Finance Ministry in a statement.
David Nisbet, the director for corporate affairs at Cairn Energy told the BBC’s Today programme, “It is a long-running story unfortunately, and one we wished hadn’t actually taken place.”
“Clearly what we want to do is find an agreed amicable settlement with the government of India,” he said. “But this is all just part of a process of saying: ‘Look India, we need to earnestly engage’, but we also have a fiduciary duty to protect the rights of our shareholders,” added Nisbet.
Cairn’s fight against India is backed by giant financial shareholders like BlackRock, Fidelity and Franklin Templeton.
History Behind The Tussle
Cairn invested in the Indian oil and gas industry in 1994 and a decade later, it made a huge oil discovery in Rajasthan. The company is credited with discovering many oil shore fields in the country. In 2006-2007, Cairn UK had transferred shares of Cairn India Holdings to Cairn India. Following that it listed its Indian assets on the Bombay Stock Exchange. The reorganising of internal assets was done to prepare for the local units’ initial public offering.
Five years later, the government passed a retroactive tax law where income tax authorities decided to tax Cairn Energy toward capital gains. Cairn refused to pay the tax and went through several rounds of litigation. Cairn lost the case and in 2014, they were billed ₹10,247 crores plus interest and penalty for the reorganisation tied to the flotation. The government then slapped further penalties seeking up to ₹30,700 crore for failure to pay the initial ₹10,247 crore.
In 2017, the tax authorities in India seized the residual shareholding of about 10 percent of Cairn India, which was then valued at about $1 billion. During the arbitration, the government seized dividends totalling to ₹1,140 crores and withheld tax refunds worth ₹1,590 crores to recover part of the demand.
The Scottish firm challenged the move before an arbitration tribunal and invoked arbitration under the India-UK bilateral investment treaty. In December 2020, the Permanent Court of Arbitration (PCA) at The Hague, Netherlands asked the Indian government to reimburse the cost of arbitration by paying $1.2 billion plus costs and interest, which totals $1.725 billion. The three member panel, which had one Indian judge, voted against the Indian government’s retrospective tax demand.
The panel cited that the 2006 reorganisation of Cairn Energy’s India business prior to listing on local stock markets cannot be considered as “unlawful tax avoidance”. The 2012 amendment to the Income Tax Act by the Manmohan Singh government gave powers to the government to seek taxes on past deals. They unanimously agreed that Delhi had violated the 2014 India-UK bilateral investment treaty.
Cairn further threatened to seize overseas assets of state-controlled Indian firms to recover the money due to it. They have already filed a case in the US, UK, Netherlands, Canada, France, Singapore, Japan, the UAE and Cayman Islands for the implementation of the arbitration award in December 2020. This gives Cairn the power to seize commercial state-owned assets. The assets identified range from Air India’s planes to vessels belonging to the Shipping Corporation of India, and properties owned by state banks to oil and gas cargoes of PSUs, according to sources. In May 2021, Cairn Energy sued Air India, further complicating India’s attempts to divest the state-owned carrier this year and privatise the loss making entity.
India’s Reaction To Cairn’s Defense
The Indian government has appealed against the tribunal’s ruling. The government highlighted that it falls outside the domain of a bilateral investment treaty and beyond the jurisdiction of international arbitration. The ministry called the 2006 reorganisation of Cairn’s India business for listing on the local bourses as “abusive tax avoidance scheme that was a gross violation of Indian tax laws, thereby depriving Cairn’s alleged investments of any protection under the India-UK bilateral investment treaty”.
Finance minister Nirmala Sitharaman said that the international arbitration rule against India’s sovereign right to taxation sets a wrong precedent, and that the government was looking into how it could sort out the situation.
Cairn has had three official meetings with the then Revenue Secretary Ajay Bhushan Pandey in February 2021 and at least one video call with his successor Tarun Bajaj. In a report by the PTI, the firm was ready to forgo $500 million out of the $1.7 billion award and invest that amount in any oil and gas or renewable energy project identified by the Indian government, after rejecting a government offer to get paid just one-fourth of the award.
The Indian government has fully participated in the arbitration proceedings since 2015 and wanted Cairn to settle the issue through its now-closed tax dispute resolution scheme Vivad se Vishwas. The scheme closed on March 31 and according to sources, it aimed to cut a deal to drop the tax case if 50 percent of the demand was paid. This was rejected by the company.
Cairn has said that the unanimous ruling of the tribunal was enforceable against Indian-owned assets in more than 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. According to the PTI, Cairn has identified $70 billion of Indian assets overseas for potential seizure to collect the amount.
Tax Disputes Give India Bad Press
The conflict with Cairn Energy is not the only tax dispute the Indian government is battling. In September 2020, Vodafone Group Plc won an arbitration case against the government on similar grounds. A third case is due in The Hague in a long-running dispute between India’s space agency ISRO and a commercial entity Devas, where a final decision is awaited.
Experts believe this will affect India’s reputation. Especially at a time when it aims to attract more foreign investment into the country, cases like these will create a sense of doubt in the minds of investors and hurt India’s future prospects.
In an earlier interview with the BBC, billionaire biotech entrepreneur Kiran Mazumdar Shaw, the new vice chair at the India-US Business Council also flagged “outstanding tax disputes with large corporations” as a key impediment to India’s desire to position itself as a preferred investment destination.
Prime Minister Narendra Modi had famously promised to bring an end to “tax terror” after coming to power in 2014. These instances have instead achieved the opposite of the said promise. Experts believe that the government does not wish to admit to any wrongdoing, and any payout made to Cairn could be read as an acknowledgement of the same.