Cairn Energy PLC versus the Government of India
The news of Cairn Energy’s settlement with the Government of India after winning an international arbitration case highlights multiple lessons on foreign direct investment in the country. First – and often forgotten – is that foreign investors with winning strategies can make very attractive returns from India notwithstanding the market’s complexities. Second, every company operating in India must be constantly aware of, and be actively mitigating, risks. Strong ethics and compliance and imaginative external affairs strategies are critical to ensure that the company minimises its exposures and maximises goodwill if anything were to ever go wrong. Third, while India is a complicated and unpredictable operating environment, there is a rule of law which eventually may provide redress. But lastly, and most critically, success in India requires a long-term approach and above all patience and persistence. The foreign companies that succeed in India are clear and bold in their strategies, localise as much as possible but above all take a secular, patient view of success.
Cairn Energy PLC, a FTSE250 independent Scottish oil and gas exploration company, announced in November 2021 that it had accepted a $1.06 billion settlement of a tax dispute from the Government of India. In August, the Indian Parliament passed the India Taxation Laws (Amendment) Act, 2021 which enabled the settlement of historic tax disputes with Cairn and other foreign companies, including Vodafone. Cairn’s tentative settlement exceeded its then market cap and enabled the company to pledge a $700m return of capital to investors.
In a quite separate case, Vodafone’s acquisition of Hutch Telecom’s Indian business for $11 billion in 2007 led to a fourteen-year battle with India’s tax authorities over the capital gain made, not by Vodafone but by Li Ka-Shing’s Hutchison Whampoa. Vodafone won a Supreme Court ruling in 2012 against the imposition by the Indian authorities of Capital Gains Tax on it, the buyer, of $2 billion plus penalties and interest, based on a gain made not in India but offshore. The Finance Act 2012 then introduced the power to levy retrospective and global taxes at will with effect deemed to be from 50 years earlier. Pranab Mukherjee, then the Finance Minister and later to become President, admitted that the decision “to amend the Income Tax Act, 1961 with retrospective effect [was in order] to undo the Supreme Court judgement in the Vodafone tax case”.
While Vodafone became, after the Enron expropriation, the touchstone case for foreign investors in India, it was Cairn Energy’s battle with India that increasingly caught global media attention.
Compared to Vodafone, Cairn is a minnow, with a market cap of some $1 billion and only 180 employees globally. In December 2020, Cairn won its international arbitration against India under the UK-India Bilateral Investment Treaty and was awarded $1.2 billion in damages plus interest and costs. After India failed to honour the award and sought to appeal it, Cairn began to seek enforcement of the award against Indian sovereign assets in multiple jurisdictions including US, UK, France, Netherlands, Quebec, and Singapore. In the US, Cairn filed a case to hold Air India, as a state airline, to be jointly liable for the award, thus opening the potential to seize Air India aircraft. In France, a court awarded Cairn the right to take over 20 apartments in Paris owned by the Indian government. These legal enforcement actions ran in parallel with Cairn’s long-standing political and diplomatic engagement efforts over the previous seven-year period.
One of the ironies of Cairn’s subsequently troubled Indian yatra was that, over a twenty-five-year period, it was a model corporate citizen and the type of foreign investor that every government might seek to attract. While Cairn’s name might now be associated with concerns over the risks of doing business in India, in fact the company made spectacular returns over the years from India – now topped up by $1.06 billion from the tax case.
After success in the 1990s with the Ravva field on India’s east coast, Cairn purchased Shell’s onshore Rajasthan interests. In 2004 it announced a major discovery that was to transform India’s oil market. The Mangala, Bhagyam and Aishwarya fields today have proven reserves of 2.2 billion boe and have resulted in investment of $6 billion, rapid economic growth and job creation in the traditionally poor Barmer District and are estimated to have generated tax revenues of some $20 billion to central and state authorities.
To monetise this extraordinary success, in 2006 Cairn started to prepare for an IPO of its Indian assets by reorganising the corporate structure into a new Indian holding company, Cairn India Limited. The shares were listed on the Bombay Stock Exchange in 2007 at a value of $6 billion, realising some $750m for Cairn. Over the following years, Cairn sold down its stake, first selling 15% to Petronas and then, in 2010, a 51% controlling interest to Vedanta for $8.5 billion; it paid $500m of Capital Gains Tax on these sales. Cairn sought to exit the remaining shareholding over the next few years.
In 2014, eight years after the pre-IPO corporate restructuring and just as Cairn was at the point of selling its residual 10% in Cairn India for $1 billion, the Income Tax Department opened an investigation into Cairn India. The Department used the new retrospective powers to make a claim that the restructuring was a taxable event and it subsequently seized, and later disposed of, Cairn’s remaining shares in Cairn India.
Cairn launched arbitration proceedings under the Bilateral Investment Treaty over this expropriation in 2015, which it eventually won unanimously in 2020. Vodafone similarly won its arbitration case a few months earlier. While India has been careful not to admit any limitations on its sovereign right to tax, these cases have been hugely embarrassing and detrimental to India’s image as an attractive destination for investment. The Government has now scrapped the retrospective powers and sought to settle the various outstanding cases with foreign investors like Cairn and Vodafone.
On 03 November 2021, Cairn announced it had reached an agreement with the Indian government that would see India refund $1.06 billion in return for Cairn to drop all legal proceedings against the country. While this might be less than the theoretical maximum award, including interest and costs of up to $1.7 billion, Cairn’s CEO, Simon Thomson stated in early September that it was in Cairn’s interest to find a settlement and to “move on”. As ever, finalising the process and getting the cash out of India might take a bit of time. But, with $500m pencilled in for a special dividend, $200m for share buyback and $300m for acquisitions, Cairn closes its India story successfully and moves on to new opportunities under its new name, Capricorn Energy PLC.
Alan Rosling, CBE, is a Strategic Advisor at Audere International.