Business Today | 31 January 2021
India may offer Cairn oilfield against $1.4 billion arbitration award
The government may give Cairn Energy one of the surrendered oil fields such as Ratna R-Series in lieu of the $1.4 billion it has pay to the British firm, helping prevent seizure of foreign assets in case of default as well as get a experienced operator in struggling E&P sector, sources said.
Cairn Energy gave India its biggest onland oil discovery but exited the country after it was slapped with a Rs 10,247-crore tax demand using a legislation that gave the government the powers to tax companies retrospectively. The firm has now won an international arbitration against the tax demand and the government has been ordered to return the value of shares of Cairn it had sold, dividends it had seized and tax refund it had withheld to recover the tax demand.
For a government struggling to find revenue to boost a COVID-19 battered economy, options of appeal against the arbitration award are limited and it may not have the financial bandwidth for such a payout, two sources with knowledge of the development said.
"One option is to give Cairn one or more of the oil and gas fields that the government now owns after they are surrendered by operators for various reasons," one of them said. "The government could give the Ratna and R-Series oil and gas field in the Arabian Sea that taken away from Essar Oil-Premier Oil consortium in 2016 because contractual terms had changed."
The Barmer oilfield in Rajasthan, which was originally discovered by Cairn Energy, could be another option. Vedanta Ltd NSE -0.92 %, which now operates the field after it bought out Cairn’s Indian subsidiary a decade back, has so far not agreed to the government conditions for getting an extension of contract beyond its original end day of May 2020.
Under Vedanta, which continues to operate the field on monthly extensions till its legal challenge to government conditions is settled, Rajasthan oilfields have seen steady decline in output.
"It’s a win-win - the government settles it liability without paying a single penny or upsetting investor sentiments by not honouring the arbitration award through endless legal challenges and at the same time getting back an established exploration and production (E&P) firm back," another source said.
No major oil and gas discovery has been made in the past seven years since the retrospective tax demand was raised.
In case the government chooses not to honour the arbitration award, it risks the prospect of its assets in foreign countries being seized just jike US oil firm ConocoPhillips did with Venezuela to recoup muti-billion dollar of compensation awarded in arbitration.
Earlier this month, Cairn Energy’s chief executive officer Simon Thomson wrote to the Indian government that the arbitration ruling is final and binding, and failure to comply would breach the international rules.
"As India is a signatory to the New York Convention, the award can be enforced against Indian assets in numerous jurisdictions around the world for which the necessary preparations have been put in place," according to the letter, referring to the 1959 Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Earlier this month, Malaysia’s government had impounded a plane owned by state carrier Pakistan International Airlines on a court order due to a UK court dispute with aircraft lessors.
While Cairn didn’t mention any Indian asset in its letter, sources said assets could include bank accounts of its diplomatic missions, non-diplomatic premises, planes of state carrier Air India and state-owned ships in the UK, Netherlands, France, Canada and the US.
Cairn Energy has asked the Indian government for an early indication of implementing the arbitration award, well before the announcement of its full year earnings on March 9 for clarity of its shareholders, according to the letter.
The tax authorities had in January 2014 slapped with an initial assessment of unpaid taxes of Rs 10,247 crore over a restructuring carried out in 2006 while preparing for an initial public offering of Cairn India. The tax authorities in 2015 seized Cairn Energy’s residual shareholding of about 10 per cent of Cairn India, then valued at about $1 billion.
The Edinburgh-based company filed a dispute under the UK-India Investment Treaty and sought international arbitration that started later in 2015 for the losses over expropriation of its investments in India from the minority holding.
During the pendency of the arbitration, the government also seized dividends totalling Rs 1,140 crore due from its minority holding in Cairn India (now merged with Vedanta Ltd) and set off a Rs 1,590-crore tax refund against the demand.
The three-member tribunal, which comprised a judge appointed by India, last month unanimously overturned a Rs 10,247 crore retrospective tax demand on Cairn and asked the Indian government to return value of the shares it sold, dividend it seized and tax refunds it stopped to enforce the tax.
The tribunal ruled the 2006 reorganisation of Cairn Energy’s India business prior to listing on local bourses was not "unlawful tax avoidance" and ordered tax authorities to drop the tax demand which was levied following a 2012 amendment to the Income Tax Act that gave authorities powers to seek taxes on past deals.
It ordered the government to return the value of shares it had sold, dividends seized and tax refunds withheld to recover the tax demand along with interest. Also, it was asked to reimburse the cost of arbitration. All this totalled to $1.25 billion plus interest. Together with interest, the total due is $1.4 billion.
The government, in response to the arbitration award, had stated that it will study the order and "consider all options and take a decision on the further course of action, including legal remedies before appropriate fora".
Sources said the options before the Indian government were limited. An appeal against the award in a court in The Hague - the seat of the arbitration panel - may not yield positive results as the tribunal had given a very detailed 582-page order to make it "as bullet-proof" as possible.
An appeal in Supreme Court against the Cairn arbitration award too may be futile as it remains to be seen if the Indian top court has jurisdiction to stay an award of an international tribunal, they said.