Government could face substantial damages, warns Cairn counsel

It will be better fromeverybody's perspective tostop the bleeding right nowand turn things aroundROBERT L NELSON JR.,PARTNER, SHEARMAN & STERLING LLP  

Cairn Energy plc could seek a claim of as much as $900 million from the Indian government for ‘losses’ caused to it by the latter’s actions as part of a $1.6 billion tax dispute, warned a senior counsel at a law firm representing the London-listed company in this matter.

Cairn Energy has initiated international arbitration against the Indian government under the U.K.-India Bilateral Investment Treaty (BIT) seeking to ‘protect its legal position and shareholder interests’.

The Indian government could face “substantial damages, between $600-900 million” against it for the fall in value of the Edinburgh head-quartered company’s residual holding in Cairn India Ltd. as a result of several factors that include the government’s decision to not allow the stake to be sold pending resolution of the dispute, Robert L Nelson Jr., a partner at law firm Shearman & Sterling LLP, told The Hindu.

Arbitration proceedings at the Hague-based International Court of Justice, between the oil and gas explorer and the Indian government, have been gathering pace, with the Indian government recently naming its arbitrator after initially decliningto join the arbitration. Both sides will soon select a chairman and then decide a date for starting the arguments.

Mr. Nelson Jr. has previous experience in the Bechtel and GE matter regarding the successful restructuring of the $3 billion Dabhol power project, according to Shearman & Sterling’s website. Shearman & Sterling, one of the world’s top law firms, has a track record of winning sizeable arbitration awards for its clients in such high-stakes investor-state disputes.

It had secured a historic $50 billion arbitration award in favour of Yukos Oil Company in July 2014 when a Hague-based Arbitration Tribunal unanimously held that Russia violated its international obligations under the Energy Charter Treaty by destroying Yukos Oil Company and appropriating its assets.

After raising the tax demand, citing a retrospective legislation, India’s Income Tax (I-T) department had in January 2014 provisionally attached Cairn Energy’s 10 per cent shareholding in Cairn India . The U.K. company had sold the controlling stake in its former Indian subsidiary to Vedanta Group for $8.7 billion.

The 10 per cent stake was valued at about $1 billion at the time and Cairn Energy wanted to sell this off to finance its different corporate investments.

Fall in value of stake

The value of the shares ‘seized’ by the government had now fallen to about $400 million, and therefore Cairn Energy could make a $600 million claim towards restitution of losses due to the Government restricting the company from selling that 10 per cent stake since 2014, Mr. Nelson Jr. said.

Referring to the slump in global oil prices and the consequent impact on the shares of oil companies, he said “it is in the Indian government’s interest to resolve it sooner than later because considering the state of the oil markets, it is likely that the value of Cairn India shares that were attached will continue to fall.”

Mr. Nelson Jr. cautioned, “If it (value of Cairn India shares) falls down to $100 million, then the government is looking at a claim of $900 million against it for that as opposed to a $600 million claim now.” Cairn Energy’s market cap is about $1.2-1.4 billion.

According to sources, U.K. government officials had raised the matter during Prime Minister Narendra Modi’s recent visit to that country and asked the Indian government to expeditiously settle the matter as part of measures to boost investor confidence.

The dispute relates to a $1.6 billion tax demand raised by the I-T department against Cairn Energy regarding transactions it undertook to reorganise the group ahead of the Cairn India IPO in 2007. Cairn India is the operator of India’s largest onshore oil field.

The I-T Department claims that Cairn Energy made capital gains of about Rs.24,503.50 crore in 2006 as a consequence of it transferring its assets in India to Cairn India, a new entity.

Cairn disputes the claim and has said the company has been fully compliant with the tax legislation in force in each year and paid all applicable taxes. The company holds no gains were realised as there was no transfer of value and no taxable event in India.

The move to attach the shares had forced the company to change its business plans and even lay off 40 per cent of its employees, Mr. Nelson Jr. said.

“It will be better from everybody's perspective to stop the bleeding right now and turn things around. Just as we did in the Dabhol case, we can take a bad situation and turn it into something that will be reasonably positive for everybody,” he said.

It will be better from

everybody's perspective to

stop the bleeding right now

and turn things around



After initially declining to join the arbitration saying BITs (Bilateral Investment Treaties) do not cover tax disputes, India recently named its arbitrator