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Cairn targets Indian assets in Paris: What is its dispute with Modi govt & why it’s escalated

A tax dispute stemming from a 15-year old transaction has adversely impacted India’s efforts to project itself as an investor friendly destination. ThePrint explains

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New Delhi: Cairn Energy Thursday caught the Indian government by surprise after it moved to take ownership of the latter’s properties in Paris.

The move was a part of the company’s efforts to enforce the arbitration award of $1.7 billion that it won last year against the Indian government at an international tribunal.

ThePrint explains what the case is about, the prolonged legal dispute between the two sides, and what lies ahead.

What is the dispute about?

The case dates back to an internal reorganisation done in 2006 by Cairn. At that time, Cairn UK had transferred its shares in Cairn India Holding to Cairn India. In 2011, Cairn Energy sold nearly its entire holding in the Indian unit to Vedanta Resources, owned by billionaire Anil Agarwal.

In 2014, the tax department issued a tax notice to Cairn Energy and sought to levy a capital gains tax on the 2006 transaction armed with a retrospective amendment enacted in 2012.

India had retrospectively changed laws to tax transactions involving sale or transfer of shares that take place outside India but where the underlying assets are located in India. The country’s stance at the time was that the law was always meant to tax such transactions.

The amendment was aimed to nullify an adverse Supreme Court ruling earlier that year in the famous Vodafone case wherein the apex court had ruled against the income tax department’s move to levy capital gains on an overseas share sale transaction.

This change in the tax provision meant that all transactions over the previous five decades could be brought under the tax net retrospectively. This brought nearly a dozen transactions under the I-T department’s taxable net.

Also read: India to take legal recourse over Cairn Energy’s confiscation of Paris assets worth Rs 180 cr

How did I-T department enforce its claim?

Cairn Energy had a residual 9.8 per cent stake in the Indian unit after its sale to Vedanta. In 2014, the I-T department went on to freeze the remaining shares of Cairn Energy in Cairn India as part of its efforts to recover the tax dues.

Subsequently, after Cairn India’s merger with Vedanta in 2017, Cairn Energy held a 5 per cent stake in Vedanta Ltd along with some preference shares valued at over $1 billion.

But this holding was soon taken over by the I-T department. Cairn Energy’s 4.95 per cent shares in Vedanta as of December 2017 were transferred to “Tax Recovery Officer (International Taxation)-I O/O CIT (IT)-I New Delhi” in the January-March 2018 period, according to the shareholding pattern on BSE website.

The tax department then started selling these shares as part of its efforts to recover its dues. It also withheld tax refunds amounting to $222.8 million due to Cairn UK in another matter. It also seized dividends amounting to $159.8 million and seized proceeds due to the company from redemption of preference shares as part of its efforts to recover the dues.

How did Cairn Energy retaliate against the move?

Cairn Energy decided to initiate international arbitration against India in 2015. It claimed that the Indian government’s actions violated the India-UK bilateral investment treaty aimed at promotion and protection of rights of investors.

The Permanent Court of arbitration ruled in Cairn Energy’s favour in December 2020, handing it an award of $1.7 billion.

Also read: How risk-averse banks have become hurdles to recovery of Indian economy after Covid

What constituted the $1.7 billion award?

Cairn Energy estimated that the losses it incurred due to the Indian government taking over its investments — including its equity shareholding, dividend receipts, tax refunds and preference share redemption — was more than $1.4 billion. The court awarded it $1.2 billion plus an interest of $500 million.

How did the Indian government react to the arbitration award?

The Narendra Modi government, despite voicing its opposition to retrospective amendment to tax laws, decided to appeal against the arbitration award stating that the award questions India’s sovereign right to levy taxes. It filed an appeal in March 2021 in The Hague Court of Appeal. It took a similar stance in the Vodafone case and appealed against a similarly adverse judgment.

Why is Cairn Energy seizing Indian government assets?

Cairn Energy started the process of filing applications in various countries to enforce its award even as it held talks with the Indian government to come up with an amicable resolution.

In May, it filed an application in a US court seeking seizure of Air India’s assets, claiming it is the alter ego of the Indian government. It has filed similar applications in Singapore, Canada, Mauritius and the Netherlands.

However, earlier this month, it successfully managed to freeze residential real estate owned by the Indian government in Paris, impacting around 20 centrally located properties valued at more than $20 million. It was the first step in taking ownership of the properties and ensured that the proceeds of any sales would go to Cairn.

In a statement, Cairn Energy reiterated that it prefers an amicable settlement with the Indian government and has submitted a detailed series of proposals to the government since February 2021. “However, in the absence of such a settlement, Cairn must take all necessary legal actions to protect the interests of its international shareholders,” it said.

(Edited by Amit Upadhyaya)

Also read: Covid has undone years of gains India made after 1991 liberalisation


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