$1.4bn arbitration award: Cairn says hopeful of solution, will take steps to protect shareholder interest

After three days of talks with top finance ministry officials, UK's Cairn Energy plc on Sunday said it is hopeful of reaching an amicable resolution on $1.4 billion that an arbitration award has ordered India to return, but insisted it will continue to take steps to protect shareholder interest.

Cairn CEO Simon Thomson held discussions with Finance Secretary Ajay Bhushan Pandey and over half a dozen other senior officials including CBDT Chairman between February 18 and 20 in an attempt to find a resolution to the issue without having to resort to extreme step of seizing Indian assets overseas to recover the money the firm has been awarded.

"We have had cordial and constructive discussions in Delhi over the last few days with officials from the Ministry of Finance. "Notwithstanding and without prejudice to our rights under the international arbitration award, we have discussed a number of proposals with the aim of finding a swift resolution that could be mutually acceptable to the Government of India and the interests of Cairn's shareholders," the firm said in a statement.

Cairn, which gave the nation its biggest onland oil discovery, promised to return to India if the issue that arose after the income tax department in 2014 seized its assets after slapping a Rs 10,247 crore tax demand, was resolved. Sources privy to Indian government thinking have indicated that New Delhi will challenge the arbitration award as taxation is a sovereign right but this did not figure during three days of talks.

The finance ministry officials tone was more reconciliatory realising limited options they have. "We remain hopeful that an acceptable solution can be found, in order to avoid further prolonging and exacerbating this negative issue for all parties," Cairn said. "However, we have also been clear that we must continue to take all necessary steps to protect the interests of our shareholders."

Cairn in a letter to the Indian government last month indicated it could seize overseas assets such as bank accounts, payments to state-owned entities, airplanes and ships if New Delhi fails to comply with the arbitration award and return the value of the shares sold, dividend seized and tax refund withheld by the income tax department to recover part of the tax demand it had raised using retrospective legislation.

The firm has already moved courts in various jurisdictions such as the US, UK, Netherlands, Canada and Singapore to register the arbitration award and has started identifying assets it could seize in the event of Indian government does not comply with the tribunal order.

In the statement, Cairn said it has enjoyed a long and successful history operating in India, investing billions of dollars, bringing employment and benefiting local communities. The business it created in India has generated more than $20 billion in revenue for the government, the statement said.

"The freezing of our assets in 2014 to enforce a retrospective tax measure has been extremely negative for all parties, and we are very keen to be able to put this legal matter behind us and move forward positively," the firm said.

Cairn said an international arbitration seated in The Hague and constituted under the terms of the UK-India Bilateral Investment Treaty has "ruled conclusively on the matter and issued a final and binding award in Cairn's favour ordering the refund of the value of the assets taken, being $1.2 billion, plus significant interest and costs."

"That arbitration also ruled decisively that this matter falls within the jurisdiction of the UK-India Treaty, having heard arguments from the parties on that subject," it said.

The tax department in January 2014 raised the issue of alleged capital gains Cairn made on reorganising its India business prior to an IPO in 2006-07. In March 2015, it slapped a Rs 10,247 crore tax demand, levying short-term capital gains tax even though Cairn had over several years built the India business that included developing the Ravva oil and gas field in the KG Basin and discovering the nation's biggest onland oilfield in Rajasthan.

Cairn at that time stated that its internal reorganisation was in compliance with the law and had been approved by various regulatory bodies including SEBI. It denied evading any taxes prevalent at that time and challenged the tax demand through international arbitration.

The government alleges that the offshore transactions executed by Cairn in 2006-07 were aimed at evading taxes. The transaction in 2006-07 involved entities in Jersey led to capital gains in the hands of Cairn UK Holdings, which is taxable in India, it had stated.

Cairn's hands have been forced by its shareholders who after waiting patiently for seven years for resolution of the tax issue, now want action to recover the award. The shareholders include big financial institutions such as BlackRock, Fidelity, Franklin Templeton, Schroders and Aviva. But, since the 582-page judgment was issued, the government has given no indication about whether it intends to honour the verdict, even though payment was due immediately.

Rather than sit and wait for the government's response, Cairn has moved to cover for all eventualities and moved courts in the US, the UK, Canada, Singapore and the Netherlands to register the arbitration award, a prelude to seeking legal seizure of assets. Once the arbitration award is registered, it can then move the courts to seek its enforcement by seizing identified Indian assets.

An international tribunal had in December unanimously ruled that India violated its obligations under the UK-India Bilateral Investment Treaty in 2014, when the income tax department slapped a Rs 10,247-crore tax demand using legislation that gave it powers to levy taxes retrospectively.

In a ruling Cairn describes as "final and binding", the tribunal ordered New Delhi to pay $1.2 billion in damages, plus interest and costs, to compensate Cairn for the shares — long sold off by the tax department — as well as confiscated dividends and withheld tax refunds.

This totals $1.4 billion. If Cairn were to enforce the arbitration award, India would not be the first country to face seizure of its international assets from an energy company. In 2018, ConocoPhillips seized products from an oil refinery owned by PDVSA in the Dutch Caribbean after the Venezuelan state-owned oil company failed to honour an international judgment awarding Conoco $2 billion in compensation for the expropriation of its assets in 2007.

Cairn Energy had in 2011, sold Cairn India to mining billionaire Anil Agarwal's Vedanta Group, barring a minor stake of 9.8 per cent. It wanted to sell the residual stake as well but was barred by the I-T department from doing so. The government also froze the payment of dividends by Cairn India to Cairn Energy.