Cairn – Indian assets row:

10th July, 2021 Economy

Context:

Britain’s Cairn Energy Plc has secured an order from a French court authorising the freezing of 20 Indian government properties in Paris valued at over 20 million euros.
This is the first court order secured against India to enforce a $1.2-billion arbitration award that Cairn Energy had won against the Indian government in the retrospective tax dispute.

In 2012, India brought in legislation mandating retrospective tax demands over deals going back to 1962 in which shares in non-Indian companies were transferred to an Indian holding company.
In 2006, Cairn UK transferred shares of Cairn India Holdings to Cairn India Limited, essentially transferring shares in non-Indian companies to an Indian holding company.
Mining conglomerate Vedanta Plc acquired most of Cairn Energy, but Cairn UK was not allowed to transfer its 9.8% stake in Cairn India to Vedanta when it sought the initial public offering.
Indian tax officials held that capital gains tax of over Rs 6,000 crore is payable by Cairn UK for the transactions in 2006, even though the transactions had previously been cleared by them.

the Supreme Court had ruled against the retrospective reading of the law by tax officials in the case of Vodafone.
However, Parliament passed a law mandating retrospective taxation over “transfer of Indian assets.”

This retrospective taxation, Cairn argued, was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.

In December last year, a three-member international arbitral tribunal ruled unanimously that:
- the Indian government was “in breach of the guarantee of fair and equitable treatment”,
- against the India-UK Bilateral Investment Treaty,
- that the breach caused a loss to the British energy company and ordered compensation of $1.2 billion.
Cairn Energy is going after Indian assets overseas to recover the compensation. In May, Cairn began the process of extracting the $1.2 billion.

Since the arbitration award was delivered in Hague, India has moved an appeal in the Netherlands.
A similar arbitration verdict was delivered in September last year in favour of Dutch telecom company Vodafone.

Cairn Energy has so far registered the arbitration award in several countries, where it has identified Indian assets worth over $70 billion.
This includes jurisdictions in the US, UK, Canada, Singapore, Mauritius, France and the Netherlands.
In the US, Cairn Energy has chosen New York to sue India because it has located substantial assets it can recover the compensation from in that jurisdiction.

The assets will be tangled in legal dispute and India will join a list of countries that includes Pakistan, Afghanistan whose assets were seized abroad.
Unless it can be proved that the arbitration awards against India are mala fide in the appeals, the award can be enforced in foreign jurisdictions.
However, a settlement between the two parties cannot be ruled out.

A Foreign State does not have Sovereign Immunity against an arbitral award arising out of a commercial transaction.
Further entering into an arbitration agreement constitutes waiver of Sovereign Immunity.
The agreement by the respondent to arbitrate the disputes would operate as a waiver of the said requirement.
When a Foreign State enters into an arbitration agreement with an Indian entity, there is an implicit waiver of the Sovereign Immunity.
In fact, the very underlying rationale of international commercial arbitration is that of facilitating international trade and investment by providing a stable, predictable, and effective legal framework within which commercial activities may be conducted to promote the smooth flow of international transactions.

Unwillingness to put this issue to rest will ensure that claims of improving the ease of doing business in the country are met with scepticism.
Talk of tax administration reform rings hollow when a tax department is intent on not accepting its mistake or correcting it.
An adverse order in the Air India case will not only complicate matters for the government’s plans to privatise the airline, but may also put a spanner in the privatisation of other public sector entities.