Economic Times | 25 Mar, 2015
Cairn Energy seeks compensation from India on tax demand; Cairn India stock gains
By ET Bureau
NEW DELHI: Cairn Plc has sought compensation from the government of India for the steep fall in the value of its shares in Vedanta-controlled Cairn India, which it is not allowed to sell until it settles the controversial retrospective tax demand of $1.60 billion, orRs 10,200 crore. The British explorer retained a 10% stake in Cairn India after selling the controlling stake to Vedanta. The shares were worth about $1 billion when they were frozen by tax authorities last January.
Cairn India started trade in green and was up 1 per cent in intraday trade on Wednesday following reports.
Cairn Plc has argued that it wanted to sell this stake to make investments but the Indian government action reduced its financial capacity by $1 billion.
Further, the value of this holding has since fallen to about $700 million.
Retrospective taxation has been a thorn in the flesh of foreign investors such as Cairn and Vodafone but industry executives say that Cairn is the only company in which the tax demand resulted in an immediate financial implication of about $1 billion - the value of the shares it is not allowed to sell.
This also makes it the first case of a foreign company initiating legal action to seek compensation for loss in value of shares it held. Cairn Plc, which had made India’s biggest oil discovery in decades, issued a notice to the Indian government earlier this month under the bilateral investment treaty.
The case is related to internal corporate reorganisation in 2006-07. Tax authorities had started probing the case last year. Cairn said the disclosure of the action by tax authorities had triggered a sell-off in its shares, leading to an immediate drop in Cairn Plc’s shares by 43%. This caused Cairn "significant reputational harm" and prevented it from making other investments and transactions it wanted to pursue.
Cairn has raised the issue with the government of India and cited Finance Minister Arun Jaitley’s budget speech in which he said retrospective taxation adversely impacts the stability and predictability of the tax regime, and added that resort to such provisions would be avoided. "Regretfully, those sentiments are not reflected in any plan or undertaking to relieve Cairn from the taxation policies of the prior government," Cairn Plc said in a communication to the government.
The company said the actions of tax authorities breach parts of its obligations under the UK-India Investment Treaty. These include obligation under Article 3 to "create favourable conditions", and ensure "fair and equitable treatment" and "full protection and security". It also cited Article 5 and Article 7, which the company feels should insulate it from retrospective taxes and restrictions on selling shares.
The company’s chief executive Simon Thomson sent a "notice of dispute" under Article 9 of the treaty on March 11. It was addressed to Prime Minister Narendra Modi, Finance Minister Arun Jaitley, Law Minister Ravi Shankar Prasad and External Affairs Minister Sushma Swaraj. "The Retroactive Amendment, and the imposition of capital gains tax, is not only contrary to relevant legal standards, its application to Cairn is particularly unjust because the transactions at issue were internal to the Cairn Group; no shares or assets were sold to any third party nor were any capital gains earned," it said in the communication to the government.
"Had Cairn received any indication or had any reasonable cause to believe that its purely internal transaction would be subject to capital gains tax in India, it would not have undertaken the internal reorganisation," it said.
Cairn has demanded immediate relief, failing which it will resort to arbitration to seek the reversal of actions taken by tax authorities, release of attached shares and "payment of full compensation for any resulting damages sustained by Cairn, including for the diminution in value of the Attached Shares (which have declined in value by hundreds of millions of US dollars since they were first attached)," it said.