2012 retrospective legislation
In January 2014, eight years after the pre-IPO group reorganisation, Cairn Energy was preparing to sell its final stake in Cairn India Limited (CIL). It was then that the Indian Income Tax Department (IITD) decided to launch a retrospective tax investigation into the company.
As a result, Cairn Energy received notification from the IITD that it was restricted from selling its remaining ~10% shareholding in CIL. In the notification, the IITD claimed to have identified unassessed taxable income resulting from the intra-Group share transfers undertaken in 2006 in preparation for the IPO. The notification made reference to retrospective Indian tax legislation enacted in 2012, which the IITD was seeking to apply to the 2006 transactions.
It had a major detrimental impact on Cairn as well as its international shareholders. Cairn has had to sell assets, postpone major investments and make a substantial reduction to its workforce. In addition, the action has led many global investors to question the risk of investing in India.
Cairn commenced international arbitration proceedings against the Government of India under the UK-India Bilateral Investment Treaty in March 2015. The arbitration (the agreed method of Treaty dispute resolution) will determine if India breached its obligations under the Treaty to protect Cairn’s investments in India by retroactively applying a newly enacted capital gains tax law to an internal corporate reorganisation undertaken in 2006. Cairn believes the retroactive application of a newly enacted law is a breach by India of its obligations under the Treaty to treat Cairn and its investments fairly and equitably and to refrain from unlawfully expropriating Cairn’s investments. The Arbitral Tribunal issued an Award on 22 December 2020.
What is Cairn seeking?
Cairn is seeking full restitution for losses resulting from: the expropriation of its investments in India in 2014; continued attempts to enforce retrospective tax measures; and the failure to treat the Company and its investments fairly and equitably. Cairn has a high level of confidence in its legal case under the Treaty and, in addition to resolution of the retrospective tax dispute, its claim seeks damages equal to the value of the Group’s residual shareholding in CIL at the time it was attached in 2014, plus further assets seized since, amounting to approximately INR 10570 Crore (US$1.4 billion).
Since 2014, Cairn has been unable to access the value in its shareholding in Vedanta Limited (VL) (originally a ~5% shareholding) and the IITD continues to pursue enforcement of the tax demand and sell down the shareholding. Almost all the shares have now been sold with US$1 billion of assets collected through dividends, tax refunds and share sales.
Cairn has legal advice confirming that the maximum amount that could ultimately be recovered from Cairn by the IITD is limited to the value of Cairn UK Holdings Limited (CUHL’s) assets, principally the ordinary and preference shares in VL, almost all of which have already been sold and/or redeemed, plus the seized dividends and tax refunds from 2009 and 2011.
Based on detailed legal advice, Cairn is remains confident of its legal position and that it will be successful in the arbitration. Accordingly, no provision has been made for any of the tax or penalties assessed by the IITD. The Treaty affords strong provisions to enforce a successful award and the decision of the Tribunal is final and binding on both parties. Cairn will accept the award whatever the outcome.