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Wednesday, July 28, 2021

Explained: Why is Cairn going after Indian assets? What are India’s options now?

Cairn Energy has reportedly won a French court order authorising freezing of Indian properties in Paris. Why is Cairn going after Indian assets? Are there any such precedents? What are India's options?

Written by Apurva Vishwanath | New Delhi |
Updated: July 15, 2021 9:18:29 am
Cairn India employees work at a storage facility for crude oil at Mangala oil field at Barmer, Rajasthan. (PTI Photo/File )

Britain’s Cairn Energy Plc has secured an order from a French court authorising the freezing of 20 Indian government properties in Paris valued at over 20 million euros, the London-based Financial Times reported Thursday. This is the first court order secured against India to enforce a $1.2-billion arbitration award that Cairn Energy had won against the Indian government in the retrospective tax dispute. On Thursday, the Finance Ministry said it had not received any communication in this regard from any French court, and that it was trying to ascertain the facts.

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What is the dispute about?

The arbitration between India and Cairn challenged the India retrospective taxation policy. In 2012, India brought in legislation mandating retrospective tax demands over deals going back to 1962 in which shares in non-Indian companies were transferred to an Indian holding company.

In 2006, Cairn made a bid to consolidate its Indian assets under a holding company — Cairn India Limited. In doing so, Cairn UK transferred shares of Cairn India Holdings to Cairn India Limited, essentially transferring shares in non-Indian companies to an Indian holding company.

Later, when Cairn India divested roughly 30% of its shares through an Initial Public Offering, mining conglomerate Vedanta Plc acquired most of Cairn Energy, but Cairn UK was not allowed to transfer its 9.8% stake in Cairn India to Vedanta. Indian tax officials said that capital gains tax of over Rs 6,000 crore is payable by Cairn UK for the transactions in 2006, even though the transactions had previously been cleared by them.

In fact, the Supreme Court had ruled against the retrospective reading of the law by tax officials in the case of Vodafone. However, Parliament passed a law mandating retrospective taxation over “transfer of Indian assets.”.

This retrospective taxation, Cairn argued, was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.

Why is Cairn going after Indian assets?

In December last year, a three-member international arbitral tribunal ruled unanimously that the Indian government was “in breach of the guarantee of fair and equitable treatment”, and against the India-UK Bilateral Investment Treaty, and that the breach caused a loss to the British energy company and ordered compensation of $1.2 billion.

The Indian government is yet to accept the arbitration award. Cairn Energy is going after Indian assets overseas to recover the compensation. In May, Cairn began the process of extracting the $1.2 billion.

Why has India not accepted the award?

Since the arbitration award was delivered in Hague, India has moved an appeal in the Netherlands. A similar arbitration verdict was delivered in September last year in favour of British telecom company Vodafone. The award requires India to pay $5.47 million to Vodafone as partial compensation.

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What are the assets Cairn is going after?

Cairn Energy has so far registered the arbitration award in several countries, where it has identified Indian assets worth over $70 billion. This includes jurisdictions in the US, UK, Canada, Singapore, Mauritius, France and the Netherlands. In the US, Cairn Energy has chosen New York to sue India because it has located substantial assets it can recover the compensation from in that jurisdiction. Specifically, Air India’s United States operations are headquartered in this district at 570 Lexington Avenue, New York, New York, 10022.

According to the Financial Times report, the French court, Tribunal judiciaire de Paris, on June 11 agreed to Cairn’s application to freeze (through judicial mortgages) residential real estate owned by the Government of India in central Paris, particularly the in the 16 Arrondissement of Paris, a marquee neighbourhood in which a residential property, according to the newspaper, has served as the residence of the Deputy Chief of Mission at the Indian Embassy.

What are India’s options going forward?

While it is the first one to succeed for Cairn, the French court order boosts its chances in other jurisdictions. The assets will be tangled in legal dispute and India will join a list of countries that includes Pakistan, Afghanistan whose assets were seized abroad. Unless it can be proved that the arbitration awards against India are mala fide in the appeals, the award can be enforced in foreign jurisdictions. However, a settlement between the two parties cannot be ruled out.

Is there any Indian precedent for such seizure of property belonging to foreign states?

Seeking courts’ intervention in enforcement of arbitration awards against foreign states is fairly common.

Last month, in a case filed by two Indian private companies for enforcement of arbitral awards in their favour, the Delhi High Court directed the Embassies of Afghanistan and Ethiopia to file affidavits disclosing the assets owned and held by them in India.

While KLA Const Technologies sought to recover approximately Rs 1.72 crore from the Islamic Republic of Afghanistan in enforcement of an arbitration award in which the Supreme Court had appointed the sole arbitrator, the other Indian firm, Matrix Global Private Limited, sought to recover Rs 7.60 crore from Ethiopia.

The ruling by Justice J R Midha was looking into the question of whether a “Foreign State can claim Sovereign Immunity against enforcement of arbitral award arising out of a commercial transaction?”

“A Foreign State does not have Sovereign Immunity against an arbitral award arising out of a commercial transaction. Further entering into an arbitration agreement constitutes waiver of Sovereign Immunity. The agreement by the respondent to arbitrate the disputes would operate as a waiver of the said requirement. When a Foreign State enters into an arbitration agreement with an Indian entity, there is an implicit waiver of the Sovereign Immunity, otherwise available to such Foreign State, against the enforcement of an arbitral award,” the High Court held.

“In fact, the very underlying rationale of international commercial arbitration is that of facilitating international trade and investment by providing a stable, predictable, and effective legal framework within which commercial activities may be conducted to promote the smooth flow of international transactions, and by removing the uncertainties associated with time-consuming and expensive litigation. Otherwise, the very edifice of the international arbitration ecosystem would collapse,” it added.

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