British oil and gas major Cairn Energy has obtained an order from a French court to seize Indian government assets worth about $24 million in Paris. It has also opened proceedings in the US targeting Air India. At the bottom of these moves is a $1.2 billion arbitration suit and a retrospective tax law in India. Here’s what you need to know.
Why Is Cairn UK Suing The Indian Government?
The matter goes back to 2006, when the UK-based Cairn decided to bring its Indian assets under a single holding company called Cairn India Ltd. For that to happen, Cairn UK had to transfer shares under the control of Cairn India Holdings to Cairn India Ltd. At that time, the company had paid no tax on the entire process.
But a few years later, when Cairn India Ltd floated an Initial Public Offering to divest about 30 per cent of its ownership of the company, mining conglomerate Vedanta picked up most of the shares. However, Cairn UK was not allowed to transfer its 9.8 per cent stake in Cairn India to Vedanta as Indian officials held that the company had to first clear a tax liability arising from the transfer of its shares to its Indian entity.
So, in 2014, it made a tax demand of $1.4 billion against Cairn India, although the company had in 2011 been acquired by Vedanta with the 9.8 per cent outstanding shares still held by its UK-based parent. Indian authorities subsequently seized these shares in 2014 along with the dividends Vedanta owed to Cairn Energy for its holdings in the Indian firm.
That prompted Cairn UK to move the court of arbitration at The Hague, Netherlands, against the government of India, saying that India had violated the terms of the India-UK Bilateral Investment Treaty by imposing a retrospective tax due on it. The treaty provides protection against arbitrary decisions by laying down that India would treat investment from UK in a “fair and equitable manner”.
What Is The Retrospective Tax Case?
The reason Indian tax authorities presented a tax demand to Cairn in 2014 for a deal that had happened in 2006 was because at the time there was no provision for taxing a transfer of shares from a company registered elsewhere to an Indian entity. It was with Vodafone’s acquisition of a holding stake in Indian operations of Hutch that the entire retrospective tax situation emerged.
After Vodafone had secured its stake in Hutch by paying $11 billion, tax authorities in India raised a demand for $3 billion over the deal. But when Supreme Court ruled that Vodafone could not be held liable to pay any tax, the then UPA government at the Centre passed a law that required payment of retrospective tax on any deal after 1962 in which shares in a non-Indian company were moved to an Indian holding company.
Vodafone, too, had approached the arbitration tribunal in The Hague against the Indian tax bill and had the court nix the imposition by the Indian authorities. Likewise, Cairn last year won a $1.2 billion award by the court for what it deemed were damages suffered by the company over Indian officials’ seizure of its shares. But India has not accepted the tribunal decision and has applied to have the order set aside.
What Has Happened Now?
Armed with the arbitration tribunal order, Cairn UK has reportedly identified $70 billion worth of Indian government assets in countries like the UK, US, Canada, Singapore, France, the Netherlands, etc. that it can ask courts in those countries to freeze so that it can recover the $1.2 billion award.
It was thus that a French court last month passed an order freezing about 20 Indian properties in Paris, including in an upmarket locality. Further, in the US, the company has reportedly identified Air India’s offices in New York as an asset that it will request US authorities to freeze to help it recover its dues. It has reportedly told US courts that Air India is owned by the Indian government and the entity is like its “alter ego” and can be held accountable for the government’s debts.
What Can Be The Next Steps?
The government of India can go for settling the matter with Cairns and the company has indicated its preference for such a resolution. Cairn has said it was willing to go for “an agreed, amicable settlement with the Government of India to draw this matter to a close”. But it stressed that “in the absence of such a settlement, Cairn must take all necessary legal actions to protect the interests of its international shareholders”.
Reports said that the government is weighing all options, including legal ones, in response to the Cairns move to target Indian assets.