India must pay UK oil and gas explorer Cairn Energy at least $1.2bn after New Delhi lost one of the country’s longest and highest-profile corporate tax disputes.
Shares in Cairn Energy surged as much as 40 per cent in early trading on Wednesday after an arbitration tribunal ruled that India breached its obligations under the UK-India Bilateral Investment Treaty.
In a statement, Cairn Energy said the tribunal found that “India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and has awarded to Cairn damages of $1.2bn plus interest and costs.”
The dispute dates back to 2014, when India demanded $1.4bn in tax payments from Cairn Energy after the UK group’s flotation of its Indian subsidiary on the Bombay Stock Exchange in 2007.
Edinburgh-based Cairn Energy rejected the claim, arguing that the law under which the tax was being sought was not passed until 2012 — six years after it established Cairn India as a separate subsidiary.
In the years that followed, New Delhi made several efforts to apply pressure to the UK group. After the oil company sold its majority stake in the Indian subsidiary to Vedanta — reducing its holding to 10 per cent — the government seized the remaining shares in 2014, as well as dividends Vedanta owed to Cairn Energy.
Cairn Energy filed a dispute under the UK-India Bilateral Investment Treaty, seeking international arbitration that started in 2015 for the value of the confiscated shares and the foregone dividends, plus interest.
Despite the surge in Cairn Energy’s share price, analysts cautioned it was unclear when India would pay the money.
“Although many years in the waiting, the question quickly moves on to when this might be paid,” said Nathan Piper at Investec.
The Indian government said it “will be studying the award” and “take a decision on [any] further course of action, including legal remedies”.
Arvind Datar, who was part of Cairn Energy’s legal team, said he was “very happy” with the ruling that “is one of the few cases that deals with retrospective taxation.” Mr Datar said he believed India had the right of appeal, and “given [the] huge amount of damages, I suppose they will”.
Al Stanton at RBC Capital Markets said he expected “a significant portion of today’s award to be paid out as a special dividend”.
Earlier this month, Cairn Energy announced a one-off shareholder payout of $250m after the completion of the sale of its Senegalese assets.
The ruling is India’s second loss in an international arbitration this year after telecoms company Vodafone in September won a dispute where the government sought €3bn in back taxes and penalties.
Both disputes stem from a decision by the Indian government in 2012 to retrospectively changed the tax code in a move giving it the power to claim taxes for deals struck in decades earlier if the underlying assets were in India.