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What drives Cairn to tackle Indian assets abroad

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Britain’s oil and gas major Cairn Energy has secured an order from a French court to seize Indian government assets worth around $ 24 million in Paris. It also opened proceedings in the United States against Air India. At the bottom of those moves is a $ 1.2 billion arbitrage and retrospective tax law in India. Here’s what you need to know.

Why is Cairn UK suing the Indian government?

The case dates back to 2006, when the British company Cairn decided to consolidate its Indian assets under a single holding company called Cairn India Ltd. For this, Cairn UK had to transfer shares under the control of Cairn India Holdings to Cairn India. Ltd. At that time, the company had not paid any tax on the whole process.

But a few years later, when Cairn India Ltd launched an initial public offering to sell around 30 percent of its stake in the company, mining conglomerate Vedanta recovered most of the shares. However, Cairn UK was not allowed to transfer its 9.8 percent stake in Cairn India to Vedanta, as Indian officials felt the company had to first pay a tax liability resulting from the transfer of its shares to Vedanta. its Indian entity.

So in 2014, she filed a $ 1.4 billion tax claim against Cairn India, although the company was acquired in 2011 by Vedanta with the 9.8% of the outstanding shares still held by its based parent company. UK. Indian authorities then seized those shares in 2014, along with the dividends Vedanta owed Cairn Energy for its stakes in the Indian company.

This prompted Cairn UK to move the arbitration tribunal in The Hague, the Netherlands, against the Indian government, claiming that India had violated the terms of the bilateral investment treaty between India and the UK. by imposing a retrospective tax on it. The treaty offers protection against arbitrary decisions by stipulating that India would treat UK investments in a “fair and equitable manner”.

What is the retrospective tax case?

The reason the Indian tax authorities made a tax claim to Cairn in 2014 for a deal that happened in 2006 was that at the time there was no provision to force a transfer of shares from a company registered elsewhere to an Indian entity. It was with Vodafone’s acquisition of a stake in Hutch’s Indian operations that the whole retrospective tax situation emerged.

After Vodafone secured its stake in Hutch by paying $ 11 billion, Indian tax authorities requested $ 3 billion as part of the deal. But when the Supreme Court ruled that Vodafone could not be required to pay any tax, the then UPA government at the Center passed a law that required the payment of retroactive tax on any transaction after 1962 in which the shares of a non-Indian company were transferred to an Indian holding company.

Vodafone had also approached the arbitral tribunal in The Hague against the Indian tax bill and asked the tribunal to dismiss the imposition by the Indian authorities. Likewise, Cairn won a court award of $ 1.2 billion last year for what he considered to be damages suffered by the company as a result of the seizure of his shares by Indian officials. But India did not accept the court’s decision and requested that the order be set aside.

What happened now?

Armed with the arbitration tribunal’s order, Cairn UK reportedly identified $ 70 billion in Indian government assets in countries like the UK, US, Canada, Singapore, France, the Netherlands Stockings, etc. that he can ask the courts of those countries to freeze so that he can recover the price of $ 1.2 billion.

This is how a French court last month issued an order freezing around 20 Indian properties in Paris, including in an upscale locality. In addition, in the United States, the company has reportedly identified the Air India offices in New York as an asset that it will ask US authorities to freeze to help it collect its contributions. He reportedly told US courts that Air India was owned by the Indian government and that the entity was like its “alter ego” and could be held responsible for government debts.

What can be the next steps?

The Indian government can go to settle the matter with Cairns and the company has indicated its preference for such a resolution. Cairn said he was ready to seek “a friendly settlement agreed with the Indian government to bring this matter to an end.” But he stressed that “in the absence of such a settlement, Cairn must take all necessary legal measures to protect the interests of its international shareholders”.

Reports say the government is evaluating all options, including legal options, in response to Cairns’ decision to target Indian assets.

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