Cairn Energy Dispute Nearing the End

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UK-based oil and energy group Cairn Energy Plc. announced on Tuesday that it is about to settle the long-running tax dispute case with India. India scrapped its controversial retrospective tax law last month and is focused on resolving the dispute quickly and it might be done in the next few weeks. 

Cairn Energy is expecting to get a refund of Rs. 7,900 crores ($1.06 billion) from India once the dispute is resolved. Out of the $1.06 billion refunds, $500 million would be paid to the shareholders as a special dividend and $200 million would be utilized for a share buyback.

History


The dispute predominantly sprouted after the Indian government introduced the Finance Act, 2012 which amended the Income-tax Act, 1961 retrospectively. Cairn Energy was asked to pay $1.4 billion as a Capital Gain Tax by the Indian Tax Department. This dispute intensified after the Indian government confiscated and sold Cairn Energy shares to claim the tax liabilities.

Cairn Energy moved to the Permanent Court of Arbitration against the Indian Government and India lost the case. In absence of any settlement, Cairn sought to confiscate Indian government assets overseas including Parisian real estate and Air India planes. Finally, after a lot of tussle India scrapped the controversial tax law last month to amend the damages already done to its image

Benefits and implications for Cairn Energy

Benefits

Implications

·   Refund of $1.06 Billion

·   Coming out of all the litigation and directing precious resources towards growth objectives and rebuilding its portfolio

·  Forego the accumulated interest, cost incurred on arbitration & dispute (Approx. $700m)

·  Forfeit the right to get $1.2 billion damages awarded by the PCA

 Benefits and Implications for India

Benefits

Implications

·   Paying a much lesser amount than the actual accumulated amount or the penalty imposed by the PCA

·   None of the Indian- government assets would be frozen any further by Cairn as all the litigations and claims would be withdrawn

·   Gaining back global investors’ confidence

 

·  Opening of India’s coffer for a lump sum payment of billions of dollars would surely not be an easy task

Way forward

The declined Indian economy due to the COVID-19 impact needs to be repaired and foreign investment would be a great aid. Losing international arbitration tarnished India's image which needed to be polished as quickly as possible. Portraying India as an ideal "Investment Destination" requires India to make investor-friendly policies. 

It must be understood that companies will never stop finding loopholes in the law and take advantage of it. Retrospective amendments to such laws shake the investors’ confidence. Moving forward such amendments must be made prospectively instead of retrospectively.

Written by Sakshi Kumari (Guest Contributor)

References

  1. https://www.ft.com/content/b4257bc5-e70e-49a7-bd52-bdc3deef81a2
  2. https://economictimes.indiatimes.com/industry/energy/oil-gas/cairn-energy-expects-a-near-term-resolution-on-retrospective-tax-issue-with-india/articleshow/86003015.cms
  3. https://www.ndtv.com/business/cairn-energy-to-return-700-million-to-shareholders-through-special-dividend-2532664

 

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