British business groups are lobbying Prime Minister Boris Johnson’s office to intervene over the snowballing legal dispute between the Indian government and the British oil and gas exploration and production firm Cairn Energy.
The dispute arose over a tax amendment brought in by the income tax department of the Indian government around the time of the move by Cairn Energy to sell its final stake in Cairn India Ltd in 2014. A provision for such an amendment had been made in 2012.
Invoking these provisions the income tax department applied capital gains tax over restructuring within Cairn Energy earlier in 2006. Cairn says that while selling its final stake it was restrained from selling a portion of its shareholding and that these shares were sold and encashed by the income tax department in lieu of taxes it argued it was owed.
Under the UK-India Bilateral Investment Treaty of 2015, Cairn Energy sought resolution of the dispute through arbitration before an international tribunal at The Hague in The Netherlands. On December 22 last year, the tribunal ruled unanimously in favour of Cairn. The proceedings were held under the registry of the Permanent Court of Arbitration.
The tribunal ruled that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty. It ruled further that compensation was due to Cairn Energy. It ruled that the application of the retrospective tax amendment was “grossly unfair” and violated the “fair and equitable treatment” section of the treaty. It awarded damages to Cairn totalling 1.2 billion dollars plus another 500 million dollars in interest and costs.
The tribunal ruled: “The issue at stake is thus not a matter of domestic tax law; it is rather whether the fiscal measures taken by the State, valid or not under its own tax laws, violate international law.”
The Indian government has now appealed against that decision before the Dutch Court of Appeal.
Cairn confirmed in a statement on March 30 that it had received notice that the Indian government had petitioned the Dutch court. “Cairn has full confidence in its position,” it said. A little more ominously, it added: “As previously advised, Cairn will continue to take all steps necessary in order to protect the interests of its shareholders.”
Those steps have come to mean an exploration of legal moves in several countries to seize assets of the Indian government. The company is not going after India’s diplomatic assets, and so that has come to mean it will target the Indian government’s public sector undertakings that have assets abroad. The Indian government is certain to resist such moves both in India and in other jurisdictions.
Jurisdiction
The Indian challenge arises primarily over jurisdiction. The tribunal ruled that the dispute fell within the scope of the India-UK bilateral treaty. The Indian case is that the dispute arises over a taxation matter that is outside the purview of the bilateral treaty. The tribunal ruled that this is not primarily a tax dispute but an investment dispute because the government had violated protection that was rightfully due to an investor under the bilateral treaty.
The legal dispute may well lead to a prolonged and messy confrontation between Cairn Energy and the Indian government. Such confrontations would sit in dramatic variance with assurances and invitations by Indian ministers and officials to invite increased foreign investment.
Renewed efforts are now underway to resolve this dispute at a bilateral government level rather than through the legal path. Cairn says it “remains in ongoing dialogue with the Government of India on fulfilment of award payment and this engagement continues in parallel with pursuing options of enforcement and monetisation of the Award to safeguard shareholders’ rights.”
That dialogue is being stepped up now ahead of Prime Minister Boris Johnson’s visit due at the end of April. Signing a limited trade enhancement agreement ahead of a broader trade agreement tops the agenda through the visit. The UK government is keen now to work out a special trade agreement with India post-Brexit and to put new promotion for investment in place.
The current dispute between Cairn and the Indian government could arise as an irritant if not an obstacle if the UK government picks this time to confront India over it.
—London Eye is a weekly column by CNBC-TV18’s Sanjay Suri, which gives a peek at business-as-unusual from London and around.
Read his other columns here
