Shares of Cairn Energy Plc crashed 19.3 per cent on the London Stock Exchange to 148 pence (at 7-30 pm, IST) on Wednesday after a $1.6-billion claim by India’s Tax Department. The stock of Cairn India tumbled 3.45 per cent at ₹223.70 on the BSE.

Cairn Energy Plc has issued a notice of dispute, potentially leading to arbitration proceedings against the Government of India, as the company hit out at a “disappointing” assessment that went against the Centre’s own stance against retrospective taxation.

Notice of dispute On Tuesday evening, Cairn Energy said it had instructed its counsel to file a notice of dispute under the UK-India Investment Treaty, after the company received a draft assessment order from the income-tax (I-T) department to its subsidiary Cairn UK Holdings Ltd.

The assessment relates to an estimated $1.6 billion and interest and penalties demanded by the department relating to the fiscal year 2006 to 2007. Cairn Energy said it would not be making accounting provisions for the amount demanded, and would also seeking damages for the losses it had incurred from being unable to sell its stake in Cairn India Ltd since 2014, when the I-T Department slapped an order on it preventing it from selling its 10 per cent holding in Cairn India Ltd until the matter was resolved.

Fairly lengthy “This is diametrically opposed to the reassurances we were given,” CEO Simon Thomson said during a conference call on Tuesday evening, describing their claim as “very robust”. The notice was filed hours after the company received what Thomson described as a “fairly lengthy and complicated” 100-page document. “We’ve reacted quickly to protect shareholder interests.”

The notice of dispute phase predates any formal arbitration proceedings — the two sides will now enter a three to six month period where they are expected to engage in discussions and negotiations, not overseen by a third party. If they fail to reach an agreement, it could then proceed to formal arbitration proceedings, overseen by a three-party international panel. “They’ve served a notice essentially saying, negotiate in good faith and attempt to resolve this within the six-month period, otherwise arbitration will need to be commenced,” said Saionton Basu, a partner at Duane Morris in London. The company said the legal process would not impact the rest of its business.

Equitable treatment “The claim is confined to our Cairn India Ltd shareholding… We are of the position that the claim by the tax office is not enforceable outside India and we are well-funded to carry on with the ongoing business.”

Cairn Energy CFO James Smith pointed to the basis of the claim they were making under the UK-India Bilateral Investment Treaty, pointing to the provisions that forbids the expropriation of assets, and requires equitable treatment and for the sides to abide by investment rules.

“The arbitration is unfortunate because in spite of the utterances in the Budget and Parliament, the message about the roadmap for dealing with the retrospective tax issue has not filtered through to the Income-Tax Department,” said Basu.

“They are the only one empowered to review, recall or modify this notice. This is a good strategy by Cairn — to put through this notice. It forces senior members of the government to take notice.”

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