Uday Walia, Partner, Touchstone Partners
I have to begin with a disclaimer: I am one of many legal professionals representing Cairn Power. However this isn’t concerning the proceedings initiated by India to put aside the US$ 1.25 billion arbitral award and even concerning the proceedings initiated towards Air India within the US to hunt to get better this quantity. This text is concerning the curious adventures of Cairn Power in India and why they spotlight the most effective and worst that India has to supply.
Cairn’s Growth in India
Cairn started oil and gasoline exploration and improvement actions in India in 1996. A sequence of acquisitions enabled Cairn to make big discoveries, together with of oil fields in Rajasthan which at present account for roughly 1 / 4 of India’s whole home oil manufacturing.
By 2006, the Cairn Power group’s outstanding success in India raised the potential for gathering all Indian operations and property below a single Indian entity, Cairn India, and providing shares to the general public. The ensuing capital enhance would permit additional funding in Rajasthan and different places in India.
What adopted was the biggest IPO in India; it raised almost US$ 1.98 billion in January 2007. Cairn’s India subsidiary, Cairn India, turned one in every of India’s prime 25 listed firms by market capitalisation.
To date, so good.
Vodafone and the Tax Dispute
In January 2012, the UK-based Vodafone Group gained a seminal case within the Supreme Court docket towards the Earnings Tax Division which had requested the telecom to pay over Rs 19,000 crore as capital positive aspects tax (and penalty) for a transaction that had been accomplished 5 years earlier. In 2007, Vodafone had acquired a Cayman firm from Hutchison. This Cayman firm, along with sure Indian entities, in the end held a 67 per cent stake in Hutchison Essar Restricted, the Indian telecom firm. The shares acquired by Vodafone have been these of a overseas firm, however this was the primary time the Earnings Tax Division sought to tax transfers of shares of a overseas firm on the idea that this Cayman firm derived its worth from Indian property. An oblique switch of Indian property had occurred, the Earnings Tax Division claimed. Till then, solely transfers of shares of an Indian firm have been topic to capital positive aspects tax in India. Vodafone alleged that high-ranking tax officers publicly acknowledged that the Earnings Tax Division’s tax of capital positive aspects arising from the Hutchison-Vodafone transaction was a “check case”.
The Vodafone case attracted appreciable worldwide consideration. On February 5, 2010, Prime Minister Manhoman Singh wrote to his UK counterpart, Gordon Brown, assuring him that Vodafone would “have the total safety of the legislation” and indicating his understanding that “there is no such thing as a retrospective software of taxation and a current courtroom judgment has affirmed this place”.
On January 20, 2012, the Supreme Court docket issued a call in Vodafone’s favour and had re-established order; justice had prevailed – or so we thought. However simply two months later, the Finance Ministry amended the Earnings Tax Act, 1961 to supply that transfers of shares of overseas firms that considerably derived their worth from property located in India have been topic to tax in India. They did this with retrospective impact.
In 2014, the BJP assumed energy in India. Its election manifesto criticised the previous authorities for having unleashed “tax terrorism” and “uncertainty”, which “negatively influence[ed] the funding local weather”. In his first funds speech, the brand new Finance Minister, Arun Jaitley, said that “[t]his Authorities is not going to ordinarily result in any change retrospectively which creates a recent legal responsibility”. A brand new committee was fashioned which might resolve whether or not motion may very well be taken in new instances recognized for retrospective taxes.
In a televised interview a number of months later (which additionally featured the previous Finance Minister, P. Chidambaram), the Finance Minister admitted that it was not on his rapid agenda to repeal the controversial modification; nevertheless, he insisted that “regardless that there’s a sovereign energy of retrospective taxation, we’re not going to train that energy.”
This view was confirmed by Prime Minister Narendra Modi on February 14, 2016. The Prime Minister was quoted in February 2016 by the Monetary Occasions as saying that the federal government “is not going to resort to retrospective taxation; we’re making our tax regime clear, secure and predictable”.
Again to Cairn Power
Between 2009 and 2010, Cairn Power offered a lot of its shareholding in its Indian enterprise to 3rd events. Essentially the most important transaction was the sale of a controlling stake in Cairn India to Vedanta. This was accomplished in December 2011. Cairn Power in the end offered 40 per cent of Cairn India’s issued share capital. The off-market portion of the sale was topic to capital positive aspects tax in India as a result of it concerned the non-public sale of shares in an Indian firm.
Between June 2012 and January 2014, Cairn Power offered further shares in Cairn India on the inventory exchanges. At the moment, Cairn Power held roughly 10 per cent of the shares of Cairn India and was seeking to divest further shares in Cairn India held by it. When Cairn India formally introduced a buy-back programme of its shares in January 2014, Cairn Power supposed to take part, and promote not less than a few of its shares again to Cairn India.
That was to not be. Just a few days after this announcement by Cairn India in January 2014, earnings tax officers confirmed up at Cairn’s Gurgaon workplaces to evaluation information on the 2006 restructuring and IPO of Cairn India. Cairn maintains that the go to was triggered by its announcement of the buy-back, and “was plainly an excuse to provoke tax proceedings towards Cairn primarily based on the Retroactive Modification greater than seven years after the 2006 restructuring and to dam Cairn from promoting its funding.”
In what should be file time, solely a day later, tax officers submitted a 125-page interim report primarily based on the ‘survey’ at Cairn’s Gurgaon workplace. The report held Cairn answerable for taxes regardless that the shares concerned in its restructuring forward of its public providing all belonged to overseas entities. A tax order adopted, freezing Cairn’s remaining 10 per cent fairness in its India enterprise.
On January 25, 2016, the Earnings Tax Division issued a Closing Evaluation Order that supplied for Cairn to pay roughly US$ 4.4 billion at the moment. This included curiosity that had allegedly accrued at a charge of two per cent per 30 days. That was not all. On September 29, 2017, India issued a lump sum penalty order towards Cairn for about US$ 1.6 billion.
Within the months that adopted, the Earnings Tax Division engaged within the compelled sale of Cairn’s shares in Cairn India. By November 2018, 98.72% of Cairn’s shareholding in its India enterprise had been offered by the Earnings Tax Division. These sale proceeds, along with tax refunds resulting from Cairn Power, and dividends declared by Cairn India in respect of Cairn Power’s shareholding, have all been retained by the Earnings Tax Division.
Bilateral Funding Treaties
In March 2015, Cairn Power and a subsidiary served a discover of dispute to India arguing that India had violated its obligations below the Bilateral Funding Treaty between the UK and India entered into in 1995 (the UK-India BIT).
In October 2020, a special arbitral tribunal, constituted in relation to Vodafone’s claims below an identical funding treaty between the Netherlands and India, unanimously held that India has violated its obligations below this Treaty. We perceive India has filed an software to put aside this award in Singapore (the seat of that arbitration).
A few months later, on the finish of prolonged proceedings below the UK-India treaty, the arbitral tribunal at The Hague issued a unanimous award in December 2020 in favour of Cairn Power. The arbitral tribunal (i) declared that India had didn’t adjust to its obligations below this Treaty; and specifically, that it has didn’t accord Cairn’s investments honest and equitable remedy; (ii) ordered India to compensate Cairn for the whole hurt suffered for an combination quantity of roughly US$ 1 billion and pay roughly US$ 248 million for tax refunds that had been resulting from Cairn plus curiosity; (iii) ordered India to withdraw the tax demand; and (iv) ordered India to pay Cairn’s prices of arbitration and authorized charges.
The quantity payable by India shouldn’t be a penalty. It represents what has been appropriated by the Earnings Tax Division. As talked about above, the sale proceeds of 98.72% of Cairn Power’s shareholding in Cairn India, along with tax refunds resulting from Cairn Power, and dividends declared by Cairn India in respect of Cairn Power’s shareholding, have all been retained by the Earnings Tax Division.
India is but to adjust to the award – it’s looking for to put aside the award within the Netherlands. The Finance Minister has said it’s her “obligation” to “attraction” in such instances. There may be additionally an obligation below the Structure to foster respect for worldwide legislation and treaty obligations.
The burning query is that this: how can we appeal to overseas funding with a file like this?
Uday Walia is a partner at Touchstone Partners. You can find him on LinkedIn.
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