India Asked to Pay $1.2 Billion to Cairn After Arbitration

(Bloomberg) - India was ordered to return over $ 1.2 billion to Cairn Energy Plc after Prime Minister Narendra Modi's government lost arbitration in a tax dispute, the second defeat since September on such levies.
An international arbitration tribunal ruled that India's tax claim was invalid and asked the government to return the funds to Cairn along with the interest. India had seized dividends, tax refunds, and stocks in order to get some of the fees back. The judges unanimously ruled that India's retrospective tax claim is in violation of the UK-India bilateral investment protection treaty, Cairn said in a statement on Wednesday. India can appeal.
Cairn Energy rose as much as 45% in early London trading, its largest intraday gain in nearly 17 years.
The ruling is India's second loss in international arbitration after it amended law in 2012 that allows companies to tax companies for mergers and acquisitions retrospectively as early as 1962. A move that terrified investors. Three months ago, Vodafone Group Plc won a year-long tax dispute with the government over a controversial $ 3 billion tax claim.
"The 2012 change clouded the water for everyone," said Chitranshul Sinha, partner at India-based law firm Dua Associates. "Vodafone and Cairn awards should be understood as a lesson that predatory retroactive tax policies should be abolished."
Former Treasury Secretary Pranab Mukherjee introduced the retrospective tax after the National Income Tax Office lost a case in which Vodafone asked for the Indian operations of what was then Hutchison Whampoa Ltd. claimed capital gains taxes in 2007.
The return on Cairn's claim compares to a market capitalization of $ 1.3 billion and "could lead to M&A or a special dividend if successful and enforced," wrote Bloomberg intelligence analyst Will Hares last year.
The UK oil explorer received a tax claim from the Indian authorities in March 2015 for a 2006 restructuring while preparing for an IPO of Cairn India. According to information on the Cairn Energy website, the tax authorities had confiscated 10% of Cairn India's shares, valued at around $ 1 billion.
In 2011, Cairn Energy sold most of its stake in the Indian unit to billionaire Anil Agarwal's Vedanta Resources Plc for $ 8.7 billion. Cairn Energy had transferred ownership of its Rajasthan oil field, the country's largest onshore discovery in two decades, to Cairn India.
The Edinburgh-based company filed a dispute under the UK-India investment treaty and filed for international arbitration that began later in 2015 over the losses incurred in expropriating its investments in India from minority stake.
"India must gracefully accept the ruling and close this one problem that has been a thorn in the side of foreign investors," said Dinesh Kanabar, chairman of Dhruva Advisors LLP, a Mumbai-based tax advisory firm.
(Updates to add a tax expert comment in the last paragraph. A previous version had updated details and corrected the currency.)
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