Cairn Energy gave India its largest domestic oil discovery, but left the country after being slapped with a tax claim of Rs 10,247 crore, which used a law to empower tax companies to government. The company has now won an international arbitration against the tax claim, and the government has been ordered to repay the value of Cairn’s shares it sold, the dividends it seized and the tax refund it had withheld to recover the tax claim.
For a government struggling to raise revenue to raise the Govt-19 shattered economy, appeals against the arbitration award are limited, and it may not have the financial backing to make such payments, two sources on growth said.
“One option is to hand over to Cair one or more of the oil and gas sectors that the government now owns after being surrendered by operators for a variety of reasons,” one of them said. “The terms of the contract have changed since the Ratna and R-Series oil and gas sector in the Arabian Sea was taken over by Essar Oil-Premier Oil in 2016.”
The Palmer Oil Field in Rajasthan, originally discovered by Cairn Energy, may be another option. Vedanta Ltd., which operates the sector after acquiring Cairn’s Indian subsidiary a decade ago, has not yet agreed to government terms for extending the contract beyond the original deadline of May 2020.
Under Vedanta, which continues to run the sector in monthly extensions until the legal challenge to government conditions is resolved, Rajasthan oil fields have seen a steady decline in production.
“This is a win-win – the government resolves its responsibility by not disrespecting the arbitration award through endless legal challenges and at the same time withdrawing the established research and production (E&B) company without paying a single penny or disturbing the sentiments of investors,” another source said.
No major oil and gas discovery has been made in the last seven years.
If the government chooses not to honor the arbitration award, it risks the seizure of its assets abroad, just as the US oil company Conoco Phillips did with Venezuela.
Earlier this month, Cairn Energy CEO Simon Thompson wrote a letter to the Government of India stating that the arbitration award was final and binding and that failure to comply would violate international rules.
“Since India is a signatory to the New York Conference, this award can be implemented against Indian assets in many jurisdictions around the world, and the necessary arrangements have been made for that,” he said of the 1959 conference, recognizing and implementing the Foreign Arbitration Awards.
Earlier this month, the Malaysian government seized a state-owned aircraft owned by Pakistan International Airlines following a court order following a UK court dispute with the airline’s tenants.
Although Cairn did not mention any Indian assets in its letter, sources said the assets included its diplomatic missions, non-diplomatic premises, flights of state-owned airline Air India and state-owned ships in the UK, Netherlands, France and Canada. And the United States.
The letter said Cairn Energy had asked the Government of India for an early indication of the implementation of the Arbitration Award before announcing its full-year earnings on March 9 for the clarity of its shareholders.
As Cairn India prepared for its initial public offering, tax authorities estimated the unpaid taxes at Rs 10,247 crore on January 10 in connection with a restructuring in 2006. In 2015, tax authorities seized about 10 per cent of the remaining shares of Cairn Energy in Cairn India, which then valued at about $ 1 billion.
The Edinburgh-based company filed a dispute under the UK-India Investment Agreement and sought international mediation, which began in late 2015, for losses incurred in acquiring its investments in India from minorities.
Pending mediation, the government seized Rs 1,140 crore in dividends held by minorities in Cairn India (now affiliated with Vedanta Limited) and refunded Rs 1,590 crore in taxes against the demand.
A three-judge tribunal appointed by India unanimously overturned a Rs 10,247 crore tax claim on Cairn last month and ordered the return of the value of the shares sold, the confiscation of dividends and the refund of the tax.
Prior to listing local businesses, the tribunal ruled in 2006 that Cairn Energy’s restructuring of India’s business was not “illegal tax evasion” and ordered tax authorities to drop the tax claim imposed following an amendment to the Income Tax Act of 2012. Look for lines in past contracts.
It ordered the government to recover the tax claim along with interest on the value of the shares sold, the confiscated dividends and the tax refund. Further, the arbitrator was asked to reimburse the cost. These are all $ 1.25 billion and interest. Including interest, the total amount to be paid is 4 1.4 billion.
In response to the arbitration award, the government read the order and stated that it would “consider all options and make a decision on further action, including legal remedies, before taking appropriate action.”
Sources said the options available to the Indian government are limited. The appeal against the award in the court in The Hague – the seat of the arbitral tribunal – did not yield favorable results because the tribunal issued a very detailed order of 582 pages, making it as “bullet proof” as possible.
It may be futile to appeal to the Supreme Court against the Cairn Arbitration Award because it remains to be seen whether the Indian High Court has the power to retain the award of an international tribunal.