ConocoPhillips-styled Indian overseas assets seizure to collect $1.4 bn Cairn award
Cairn CEO Simon Thomson in the January 22 letter to Indian High Commissioner in London, with copies marked to Prime Minister’s Office, Finance Minister Nirmala Sitharaman and External Affairs Minister S Jaishankar, the arbitration award is “final and binding” and “the Government of India has an obligation to comply with its terms.”
“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,” he wrote.
In 2019, ConocoPhillips had moved US courts to seize Venezuelan state oil company PDVSA’s assets to collect USD 2 billion compensation it had won in an arbitration against Venezuela’s 2007 takeover of its assets. PDVSA thereafter paid ConocoPhillips.
“If India does not comply with the order of the tribunal at the Permanent Court of Arbitration in The Hague, it would be a violation of international rules on arbitral awards”
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.
If India does not comply with the order of the tribunal at the Permanent Court of Arbitration in The Hague, it would be a violation of international rules on arbitral awards, commonly called the New York Convention.
Sources with knowledge of the matter said the options before the Indian government were limited. An appeal against the award in a court in The Hague may not yield positive results as the tribunal had given a very detailed 582-page order to make it “as bullet-proof” as possible.
In contrast, the September 2020 arbitration award in UK’s Vodafone Group challenge to retro tax demand of Rs 22,100 crore was only 100 pages. That order has been challenged by India in a court in Singapore – the seat of that arbitration.
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.
More importantly, Cairn is an international company, which unlike Vodafone, no longer has any operations in India.
Cairn in the letter said the money awarded in the arbitration award ultimately belongs to the firm’s owners of Cairn, who include some of the largest global financial institutions such as Blackrock, Fidelity, Franklin Templeton, MFS, Schroders, Legal and General, Aviva, and Aberdeen Standard.
These owners can on their own or through Cairn move courts in the US, the UK and other places for seizing of Indian assets to enforce the arbitration award.
“The money disputed, and now adjudicated in the arbitration ultimately belongs to Cairn’s shareholders, so the ramifications of the award and India’s honouring of it go well beyond Cairn itself and run across the international investment community more widely,” it wrote.
Cairn has hired an agency to identify bank accounts and other assets, including potentially Air India planes and even Indian ships, that could be seized in case India fails to comply. Diplomatic properties however cannot be touched.
The company has registered its claim against the Indian government in the Netherlands and France – essentially telling the regulators in the two countries that they may receive court orders for seizure of some Indian assets. Same would be done in Canada and the United States.
Cairn’s top 20 shareholders hold 74.94 per cent stake. More than 30 per cent of the stock is held by investors from the US and the UK.
“Now that the award has been granted our shareholders expect early resolution, failing which they will expect Cairn to pursue the award in conformity with its rights under the treaty,” the firm wrote adding its full-year results will be announced on March 9, and it will be important for shareholders to have clarity in advance of that date.
The Income Tax Department had in January 2014, slapped a Rs 10,247 crore tax assessment on Cairn for alleged capital gains it made in the 2006 business reorganisation. Cairn denied the scheme avoided any tax that was prevalent on that date and challenged the demand through an arbitration.
During the pendency of the arbitration, the government sold Cairn’s near 5 per cent holding in Vedanta Ltd, seized dividends totalling Rs 1,140 crore due to it from those shareholdings and set off a Rs 1,590-crore tax refund against the demand.
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 USD 1.25 billion plus interest. Together with interest, the total due is USD 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”.