The Indian high commission in Britain has cautioned New Delhi that its decision to tax prior year transactions under a retrospective law was causing “serious worry” to British investors, and could jeopardize efforts to woo energy majors in the next auction of oil/gas blocks.
In a confidential despatch to the ministries of external affairs and finance, the Indian high commissioner has suggested a review of the amendment introduced in the Finance Act, 2012, taking into consideration its impact on investor sentiment.
“Since we would be launching another bidding round under the NELP (New Exploration Licencing Policy) shortly, there will be many questions from western investors in general and energy companies in particular,” High Commissioner Ranjan Mathai wrote on January 31.
“It would, therefore, be advisable that this matter is dealt with in a coordinated fashion with attention to its ramifications on foreign investment in India, and its effect on our efforts to attract energy majors into exploration and production in India.”
Mathai said that the retrospective action had been brought up as a “serious worry” in his meetings with British investors, and that Cairn Energy Plc had said the 2012 law did “real damage to the basic principles of investing in India”.
Also, the CEO of the UK-Indian Business Council had on January 30 cautioned him that there was “real concern” among UK business houses over the Cairn tax order, the high commissioner wrote.
The Income-Tax Department in a January 22 order claimed that Cairn Energy made capital gains of Rs 24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in Jersey, a tax haven, to the newly-incorporated Cairn India in 2006.
The scrutiny is on income-tax assessments for the year ended March 31, 2007. According to the I-T department, Cairn received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.
A Cairn official, who accompanied the UK-IBC CEO, told the high commissioner that his company would be “defending their position robustly within the legal framework”, but were unable to tackle the slide in their share price as they were unclear about the process ahead.
The official claimed that the internal restructuring had “not resulted in any real gains or losses but was necessary for the process of the initial public offering”. After the share transfer and IPO in 2006, Cairn Energy sold majority stake in Cairn India to Vedanta for $ 8.67 billion, and now holds 10.3 per cent stake.
While Income-Tax has so far not raised a tax demand on Cairn Energy, it has ordered Cairn India not to allow the transfer of the UK firm’s residual stake into the company. It also ordered that the shares cannot be pledged or mortgaged.
The Cairn official told the high commissioner that the I-T department’s announcement had “caused losses of half a billion dollars” in market capitalization. “.The notification came out of the blue, there was no clarity on the exact nature of investigation or the length of time it would take for resolution,” the official said.
Cairn is worried about the ramification that the freezing of its holdings would have on the company as a whole. Around $ 900 million of Cairn’s $ 2.2 billion liquid assets are now frozen.