Cairn is providing an update on its ongoing arbitration with the Government of India under the UK-India Bilateral Investment Treaty (“the Treaty”).
All of the written submissions by Cairn and the Government of India have now been made, and the final arbitration hearings are scheduled for two weeks commencing on 20 August 2018 in The Hague. These hearings will involve testimony by expert and fact witnesses and will address Cairn's claims under the Treaty, India's defences and issues of jurisdiction.
As previously announced, the Indian Income Tax Department (IITD) has continued to enforce its retrospective tax claim against Cairn whilst the Treaty arbitration has been ongoing. To date the IITD has seized dividends due to Cairn from its shareholding in Vedanta Limited (VL) totalling approximately US$155 million (m) and it has offset a tax rebate of US$234m due to Cairn as a result of overpayment of capital gains tax on a separate matter. Cairn has now been notified by the IITD that it has sold part of Cairn's shareholding in VL, realising and seizing proceeds of US$216m. Following this sale, Cairn's retained holding in VL is now approximately 3%. It is possible that the IITD may make further sales.
All of these enforcement measures by the IITD are addressed in Cairn's claim in the arbitration. The reparation sought by Cairn in the arbitration is the monetary value required to restore Cairn to the position it would have enjoyed in 2014 but for the Government of India's actions in breach of the Treaty. Accordingly, the status of Cairn's assets seized in India does not affect the merits of Cairn's claims, the amount of relief sought, or the enforceability of the arbitral award.
After the disposal of part of this shareholding in VL and seizure of proceeds by the IITD, Cairn will write down the carrying value of its investment in VL which will result in an impairment charge at the half year equal to the value of the total shares notified as having been sold by the IITD at that time.
Following the hearing the Arbitral Tribunal will issue a binding and internationally-enforceable award. The drafting and issuance of such an award typically takes several months. In this case, taking into account the delays already suffered by Cairn, the Tribunal has stated that it will endeavour to issue its award as expeditiously as possible.
Cairn continues to have a high level of confidence in the merits of its claims in the arbitration. Cairn is seeking full restitution for losses totalling approximately US$1.3 billion (bn) resulting from India's expropriation of its investments in India in 2014, and India's unfair and inequitable treatment of those investments, due to the imposition of retrospective tax measures.
The merger of Cairn India Limited (CIL) with VL completed in April 2017. Under the terms of the merger, Cairn received ordinary shares and preference shares in VL in exchange for the residual shareholding of approximately 10% in CIL. As a result Cairn had a shareholding of approximately 5% in VL plus an interest in preference shares. This investment was valued at approximately US$1.1bn at 31 December 2017.
In January 2014, Cairn UK Holdings Limited (CUHL), a direct subsidiary of Cairn, received notification from the IITD that it was restricted from selling its shareholding of approximately 10% in CIL, which at that time had a market value of approximately US$1bn In that notification, the IITD claimed to have identified unassessed taxable income resulting from certain intra-group share transfers undertaken in 2006, such transactions having been undertaken in order to facilitate the IPO of CIL in 2007. The notification made reference to retrospective Indian tax legislation enacted in 2012, which the IITD was seeking to apply to the 2006 transactions.
The IITD holds CUHL as an assessee in default in respect of tax demanded on the 2006 transactions, and as such has continued to pursue enforcement against CUHL's assets in India. To date these enforcement actions have included attachment of CUHL's shareholding in VL and now sale of part of that shareholding, seizure of the US$155m dividends due to CUHL as described above, and offset of a US$234m tax refund due to CUHL in respect of another matter.
The assessment by the IITD of principal tax due on the 2006 Transactions is INR 102bn (US$1.6bn), plus applicable interest and penalties. Interest is currently being charged on the principal at a rate of 12% per annum from February 2016, although this is subject to the IITD's Indian court appeal that interest should be back-dated to 2007. Penalties are currently assessed as 100% of the principal tax due, although this is subject to appeal by CUHL that penalties should not be charged given the retrospective nature of the tax levied.
The Group has legal advice confirming that the maximum amount that could ultimately be recovered from Cairn by the IITD is limited to the value of CUHL's assets, principally the ordinary and preference shares in VL plus the seized dividends and tax refund from 2011.
Cairn is seeking restitution under the Treaty for losses resulting from the attachment of its shares in VL and failure to treat the Company and its investments fairly and equitably. In addition to resolution of the retrospective tax dispute, Cairn's request for relief to the arbitration panel seeks damages equal to the value of Group's residual shareholding in CIL in 2014 plus further assets seized since.
In March 2015, Cairn filed a Notice of Dispute under the Treaty in order to protect its legal position and seek restitution of the value effectively seized by the IITD in and since January 2014. Cairn's principal claims are that the assurance of fair and equitable treatment and protections against expropriation afforded by the Treaty have been breached by the actions of the IITD, which seek to apply punitive retrospective taxes to historical transactions already closely scrutinised and approved by the Government of India. The IITD has attached and seized assets to try to enforce such taxation. Cairn's plea is therefore that the effects of the tax assessment should be nullified and Cairn should receive recompense from India for the loss of value resulting from the 2014 attachment of CUHL's shares in CIL and the withholding of the tax refund, which together total approximately US$1.3bn.
The Treaty proceedings formally commenced in January 2016 following agreement between Cairn and the Republic of India on the appointment of a panel of three international arbitrators under the terms of the Treaty. Cairn's statement of claim was submitted to the arbitral tribunal in June 2016 and the Republic of India submitted its statement of defence in February 2017. In September 2017 the arbitral tribunal confirmed the schedule for the remainder of the arbitration, with final hearings being in August 2018 and the tribunal's ruling issued expeditiously thereafter. Based on detailed legal advice, Cairn is confident that it will be successful in this arbitration and, accordingly, no provision has been made for any of the tax or penalties assessed by the IITD.
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