Cairn Energy signals India tax dispute nears end

Cairn Energy PLC updates

Cairn Energy expects to return “up to $700m” to investors as the UK oil and gas group indicated it is close to settling its years-long dispute with the Indian government over a $1bn-plus tax arbitration.

India’s parliament last month approved a bill rescinding a 2012 amendment that had allowed it to pursue taxes retrospectively against Cairn, Vodafone and around a dozen other companies.

The tax had turned into a growing issue for Prime Minister Narendra Modi’s government after an international arbitration tribunal last year ordered India to pay Cairn around $1.7bn in compensation for the seizure of its stake in Cairn India in 2014.

New Delhi refused to honour the award, prompting Cairn to begin trying to target billions of dollars worth of overseas Indian government assets, including real estate and planes, for seizure.

But New Delhi said last month it would refund what it had collected under the tax, including $1bn from Cairn, if the companies agreed to accept only the principal, forgoing interest and costs and to drop any outstanding legislation.

In the first sign that it is willing to settle its dispute, the Edinburgh-based company said it is “working with [the] government of India to expedite documentation and payment of refund” and was willing to forgo the additional $700m it is owed under the international award.

Cairn said a deal could be finalised within a “matter of weeks”. The company expects to receive a lump-sum payment in rupees, around Rs79bn, and then convert it into dollars.

It would return up to $700m to shareholders through a special dividend of $500m and a share buyback programme of up to $200m, subject to approval.

The remaining $300m “would be allocated to further expansion of the low cost, sustainable production base”, Cairn said.

The dispute proved increasingly embarrassing for India’s government after Cairn won the arbitration award. New Delhi argued the award violated its sovereign right to tax.

But Cairn in July secured an order from a French court freezing Indian-government owned properties in Paris as a step towards collecting on its debt. It also filed a lawsuit in a US court seeking to seize aeroplanes of state-owned carrier, Air India, in lieu of payment.

Modi, whose Bharatiya Janata Party opposed the retrospective tax when in opposition in 2012, is hoping that scrapping it and settling with Cairn and other companies will help to repair the country’s reputation as an investment destination. He is courting foreign investment as part of an effort to help India’s economy recover from the shock of the Covid-19 pandemic.

Analysts at JPMorgan said the move “de-risks” approximately $1.06bn of the expected award and more than two-thirds are expected to be returned to Cairn before the year end.

“Progress in resolving our Indian tax issue and active portfolio management leave Cairn well positioned to deliver growth from a sustainable business, focused on generating further value and returns for shareholders,” said Simon Thomson, chief executive.

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