The Indian government's refusal to honour the award of an international arbitration tribunal to pay Edinburgh-based Cairn Energy its dues is becoming increasingly embarrassing.
While the energy major has registered cases in various countries - the US, Netherlands, Germany, etc - for seizing government assets like Air India's aircraft, a French court has obliged and ordered a freeze on 20 Indian properties in central Paris.
In a nutshell: The tax department seized and sold a 10 per cent stake in Cairn’s Indian operations in lieu of tax claims for purported capital gains related to restructuring of the company in 2006. The tax department relied on an amendment to the Finance Act which allowed levy of taxes retrospectively since 1962.
After arbitration proceedings spread over 5 years, the international tribunal, in December 2020, held that the Indian government had violated the bilateral investment treaty signed between the UK and India; and directed Cairn be compensated about USD 1.7 billion or about Rs 12,580 crore.
If the Indian government thinks it can somehow muddle through this dispute, it is not going to happen. There is an appeal filed against the Hague tribunal award on 22 March, this year; but it will not stop courts in various countries ordering the seizure of Indian assets. The French tribunal order is only the opening broadside. Such seizures are not uncommon.
For instance, an Argentine naval ship was seized in Ghana to settle a claim by US hedge fund Elliot Capital against the Argentinian government for defaulting on the payment of sovereign bonds it had issued. “Clearly what we want to do is find an agreed amicable settlement with the government of India,” David Nisbet, Cairn Energy’s director for group corporate affairs, told BBC, adding: “but we also have a fiduciary duty to protect the rights of our shareholders.”
STRING OF DEFAULTS
Unfortunately, India’s Cairn default on international arbitration awards is not a oneoff. In September last, the Permanent Court of Arbitration at The Hague ruled that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on Vodafone for a 2007 acquisition of Hutchinson Whampoa assets was "in breach of the guarantee of fair and equitable treatment" guaranteed by a bilateral investment treaty between Indian and The Netherlands. Earlier, based on Vodafone’s challenge to the tax demand, the Supreme Court had ruled in 2012 that the company was not liable to be taxed in India.
Justice Radhakrishnan, one of the 3-member bench, noted that the Indian tax authorities’ demand for "capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law”".
To circumvent the Supreme Court ruling, the Congress’ then finance minister Pranab Mukherjee, pushed through an amendment to the Finance Act empowering the Income Tax Department to impose tax retrospectively on such deals.
Devas Multimedia is another company seeking over $1.2 billion it won in international arbitration from India. It relates to an old 2011 dispute when an Indian state-owned company Antrix Corp annulled an agreement with Devas citing force majeure. Devas claimed and proved that the annulment in fact eroded the value of its multi-million dollar investments. When the Indian government failed to honour the award, Devas joined Cairn Energy in seeking to seize Air India’s assets abroad.
VIOLATION OF INTERNATIONAL LAW
It is now difficult for India to wriggle out of these arbitration awards. The tribunals have pointed out that there are treaties between India and the UK, in the case of Cairn, and The Netherlands in the case of Vodafone, that guarantee “ "fair and equitable treatment" for each other’s investments; and if a dispute arises, it would have to be settled amicably through arbitration.
A review of the cases show arbitration between the Indian government and the private companies has been carried out, and both sides have participated. An award in each case has been delivered; and now, sanctified by the treaties, the awards h aveto be honoured. Second, at a broader level, the accepted principle the world over is taxation is a ‘prospective’ impost and cannot be ‘retrospective’.
In other words, those entering a business environment cannot be taken by surprise by imposing tax rules predating their entry. It’s like changing the goalpost midway through a game of football! India’s image has taken a beating in international business circles because of these disputes.
The existing impression - that it is almost impossible to enforce a contract in India because of the convoluted and slow legal process - has only been strengthened. In an interview in September 2014 on why it was difficult to do business in India, Vodafone Group CEO Vittorrio Colao said: "Was I surprised at the international backlash post the retrospective taxation, I was not surprised. Has this really backfired on India, the answer is, yes. I wasn’t surprised when India’s public image suffered."
These are important lessons. The government, instead of filing appeals that will only extend the pain, should sit down with these companies and resolve the disputes. That is if it is still serious about becoming a popular destination for international investors.