The dispute over the implementation of a $1.4 billion international arbitration award in favour of the British oil firm, Cairn Energy Plc, has moved into top gear partly because the Indian government has allowed the problem to drift. Upping the ante, Cairn has got courts in five countries, including the US and Britain, to recognise the award against the Indian government, giving the oil company a window to seize Indian assets like ships, aircraft and bank accounts in those countries. In retaliation, the Indian side is preparing an appeal against the award in The Hague. It will apply for a stay on enforcement first in The Netherlands, and then in eight other jurisdictions where Cairn has moved court to enforce the award.
The tribunal at the Hague had held that the tax claim for purported capital gains against Cairn was not valid and asked the government to repay the assets held back with interest. The tax claim related to a restructuring the company carried out in 2006 while Cairn was preparing for an initial public offering (IPO). The ruling also calls to question the amended Income Tax Act passed in 2012, which gives the Central government powers to reopen merger and acquisition deals all the way up to 1962.
It is important this dispute is handled well as it will have long-term implications in respect of India’s standing in international relations. The tribunal at The Hague has treated India’s tax claim as an investment dispute and therefore covered by the bilateral investment protection treaty signed between the UK and India. Treaties signed with other countries have to be respected, and a retrospective tax demand violates the principle of fair and equitable treatment under the bilateral treaty. Cairn ultimately exited the country, selling its assets to Vedanta. The government must not allow the dispute to escalate. Parallel to the legal initiative, urgent back-channel negotiations should be opened for a settlement. India is pitching hard to be an important investment destination. If the word goes out that investors are not treated fairly, India may be the loser in the long term.