Enough is enough
International arbitration has once again left India with a bloody nose. A tribunal at The Hague has unanimously found in favour of Cairn Energy in its long-running tax fight with New Delhi. The award of $1.4 billion, according to a person familiar with the situation, exceeds the British company’s pre-announcement market value. Following India’s equally big September defeat against fellow UK group Vodafone, it’s time for a different approach.
Prime Minister Narendra Modi’s government inherited these high-profile disputes on coming to power in 2014 and let them run their course, embarrassing the bureaucracy along the way. It started with Vodafone. In 2012, India’s top court dismissed the government’s attempt to tax the telco’s 2007 takeover of Indian mobile assets held by Hong Kong’s Hutchison Telecommunications International. But New Delhi changed the law to target transactions retrospectively, ultimately claiming $3.8 billion. It even tried to tax the seller too.
Unlucky Cairn Energy was then caught out by the same controversial law. It made India’s biggest oil discovery in decades in 2004, and went on to list a new company in Mumbai. The UK parent gradually reduced its shareholding in the entity to 10%. Its exit, though, was disrupted when Cairn came under investigation for gains made with the corporate reorganisation. In 2015, it was hit with a $1.6 billion bill. Cairn’s remaining shareholding, merged into Vedanta India, was worth about $1 billion when it was frozen by authorities who eventually sold it off. Those losses are reflected in the company’s financial award: Cairn shares leapt 37% on Wednesday.
India could appeal the verdicts. But two unfavourable outcomes related to the same controversial tax legislation are a wake-up call to end a self-defeating stance by accepting the rulings. While London will need a trade deal with New Delhi more urgently in the event of a no-deal Brexit, India’s response will impact its hopes of winning $100 billion of investment into its oil and gas sector by 2024 and wider hopes to become a global manufacturing hub. Time to move on.