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Why is Cairn Energy Seizing Indian Government Properties in Paris?

Editor, TRANSFIN.
Jul 13, 2021 11:57 AM 6 min read
Editorial

Cairn Energy has drawn first blood in its escalating tax feud with the Indian Government.

Big-Fright in Paris

Last week, a French court allowed Cairn to seize 20 Indian state assets - mainly residential properties - worth more than €20m ($23.63m) in Paris.

The Government has said it received no communication on the matter even as Cairn reiterated that it wanted an “amicable settlement” whilst eyeing Indian assets in other countries.

This $1.7bn tax row is over a decade-long and shows no signs of subsiding anytime soon.

 

Background: The Vodafone Saga

The story begins in 2007. That year, Vodafone acquired a stake in Hutchison Essar for $11.2bn for the latter’s Indian telecom assets. This deal came under the scanner of Indian tax authorities, who alleged that the British telco was indulging in wilful tax avoidance.

The matter went to the Supreme Court, which in January 2012 held that the Vodafone-Hutchinson transaction was between two overseas entities and thus Indian authorities had no territorial jurisdiction over the matter.

Then, the Government changed tactics. An amendment was slipped into that year's Union Budget enabling the Government of India (GoI) to levy taxes on capital gains from foreign companies which "derive substantial value from their assets located in India" all the way back to 1962.

Aka, retrospective taxation.

 

Enter, Cairn

Cairn Energy is a Edinburgh-based oil and gas exploration company. It owned a complicated web of assets in India. In 2006, the company decided to restructure its India operations by transferring all these assets to one entity - Cairn India.

The taxman cried foul. It was alleged that the true value of the assets being moved around was much higher, with capital gains worth ₹24,503cr ($3.3bn). Cairn, it was said, was undervaluing its Indian investments to reduce its tax bill.

  1. FYI: In 2007, Cairn India went public in a mega IPO that raised over ₹8,616cr ($1.1bn).

 

Hindsight in Retrospect 

Now, with the power to retrospectively tax corporations, the Government moved to revisit Cairn's restructuring.

Cases were filed at the Income-Tax Appellate Tribunal and the Delhi High Court. Things became more complicated when Cairn Energy decided to sell Cairn India to mining behemoth Vedanta. Tax authorities interjected and barred Cairn from selling about 10% of its India business, citing pending taxation issues. Cairn India's dividend payment to its Scottish parent was also frozen.

Holding that the Government's actions were in gross violation of the Bilateral Investment Treaty (BIT) between India and the UK, Cairn approached the Permanent Court of Arbitration (PCA) at The Hague in 2015.

FYI: While the arbitration proceedings were underway, GoI sold nearly 5% of Cairn's holding in Vedanta (which now owned what was formerly Cairn India) and seized dividends totalling ₹1,140cr ($152.7m).

 

Judgement Day

Late December last year, the PCA ruled in Cairn's favour. It stated that the Indian Government was at fault for violating the BIT and for applying retrospective tax obligations on Cairn and directed it to shell out ₹8,000cr ($1.2bn) in damages. Including interest and other costs, the bill comes to $1.7bn. (More on the ruling here.)

 

Not-So-Fun Fact: Less than three months before the Cairn ruling, the PCA also ruled against GoI in the Vodafone retrospective taxation case. More on that case here. And to understand how international arbitration works exactly, read this.

FYI: Besides Vodafone and Cairn, a third (still-ongoing) India-related case at The Hague is the long-running dispute between ISRO and Devas. This trifecta of troubles has given India a lot of bad press and soured its reputation in international investment circles.

 

Taking a Turn for the Worse

Expectedly, the Indian Government appealed the PCA’s decision in a Dutch court and continued to hold that taxation was a sovereign matter and companies operating in India had to follow its laws whether they liked it or not. (So, sort of like GoI’s unyielding stance regarding the new IT Rules vis-a-vis WhatsApp.)

Meanwhile, seeing that India had no intention of honouring the Hague verdict, Cairn lawyered up and filed cases in local courts in the US, UK, France, Netherlands, Singapore Japan, UAE and Canada with the goal of enforcing the arbitration award.

The idea was to secure a favourable ruling from a court, which would pave the way for the Scottish company to seize Indian assets in that court’s country.

Which is exactly what happened this week in Paris.

FYI: Before you angrily tweet that it’s time to #BoycottFrenchGoods, it may be pertinent to note that France has been an all-weather ally of India of late. A business-related conflict is merely a hiccup in the grand scheme of things!

 

But Why is Cairn Seizing Assets?

The company’s contention is that India, as a party to a 1958 treaty on arbitration awards, and having duly participated in the arbitration’s proceedings all these years, cannot back out of the final verdict simply because it’s not in its favour.

But isn’t seizing government property a little extreme? It definitely is. Which is why what happened last week is a rarity. And an oddity, given the swift pace of the French court’s verdict; such cases usually take years given the diplomatic nuances involved. A landmark case in 1998 where a German court ordered Moscow to pay a German businessman $2.35m or give up control over a Russian property in Germany took as long as eight years.

But why do it? The goal is to either seize enough assets to foot the bill owed (in this case, $1.7bn) or to convey to the Government that Cairn means business and hoping that this will encourage the former to come to the negotiating table and reach an “amicable settlement”.

These seizable assets can include airplanes, real estate, bank holdings etc. Recently, Cairn asked a US court to recognise Air India as an “alter ego” of the Indian state so that its jets could be seized. And anticipating an extreme reaction, GoI in May asked state-run banks to pull out any funds they held in other countries (aka “nostro” accounts).

 

With Precedent or an Outlier? 

India isn’t the first country to face the seizure of its international assets.

In 2019, the World Bank ordered Venezuela to pay American multinational ConocoPhillips $8bn to compensate for the 2007 expropriation of its oil assets by Hugo Chavez.

In 2012, a Ghanian court ordered the impounding of a training ship owned by the Argentine Navy after receiving a petition from US hedge fund NML Capital over $1.6bn in dues that it was owed by Buenos Aires.

Fun Fact: The lawyer representing Cairn in its pursuit of Indian assets? He also represented NML Capital in its case against Argentina.

Not-So-Fun Fact: The Ghana-Argentine episode escalated quickly. At one point, Argentine crew members pulled out their guns on Ghanian officials. Tensions eased only after a court appeal ruled in favour of the argument that the ship was a military vessel and not a commercial one, and thus enjoyed sovereign immunity.

There are other examples too. Including when a British Virgin Islands court ordered the seizure of Pakistani government-owned hotels in New York and Paris or when a French court impounded a luxury jet belonging to the Republic of the Congo to pay a construction firm.

As for the "Air India-is-GoI" angle, Cairn has less precedent to back it. Only this February, a US district court refused to consider Tajik Air as Tajikistan’s “alter ego” when hearing the matter of a $20m arbitration award dispute.

 

The Bottom Line

All said and done, it is in India’s best interests to resolve the Cairn episode ASAP. Not particularly because its assets in other countries may be under threat - there’s no reason to believe that other courts will be hasty as the French one. But because with each passing day that Cairn goes around flashing the PCA’s order and reminding the world that India refused to respect the verdict , India’s reputation as a safe and solid destination for foreign investment and business takes a hit.

However, don’t expect Cairn to back out now. It continues to stress that it has a responsibility to its shareholders to retrieve the $1.7bn in dues. And it’s hard as nails. In its recent annual results, the Scottish company recognised over 160 countries where the arbitration award was enforceable i.e., where Indian assets could be seized.

FIN.
 

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