Cairn set for $1.4bn pay-out after victory in India tax dispute saga

It was the second major boost for shareholders in the Edinburgh-based oil and gas giant in less than a week, with investors also set to share a pay-out of around $250 million following the sale of its Senegal operation to Australia’s Woodside

for $400m.

Cairn has been awarded damages of $1.2 billion (£890 million), plus interest and costs understood to amount to around $200 million, following the conclusion of a battle with the Indian government that stretches back to 2014.

That was when Cairn was hit with a $1.6bn tax claim by the then India government, relating to events leading up to an initial public offering of shares in the company’s former subsidiary in India in 2006.

The Indian administration of the time froze Cairn’s shareholding in the subsidiary, which by then had been whittled down to a 10 per cent stake, and pursued its claim under new retrospective taxation laws.

Cairn maintained throughout that it had paid all taxes due in India, and submitted a claim for more than $1.4bn in compensation from the country’s government.

Yesterday, Cairn announced the international tribunal in the Netherlands, which was established in 2018 to rule on its claim under the terms of the UK-India Bilateral Investment Treaty, had settled in

its favour.

The tribunal, which held proceedings under the registry of the Permanent Court of Arbitration, ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty.

The result is materially significant to Cairn, as highlighted by the size of the pay-out relative to the company’s market value of around £1.2bn.

Cairn’s chief executive Simon Thomson has previously said the company could make significant pay-outs to investors if it won

the dispute.

The company may also use the windfall to invest in further investment and exploration opportunities.

With the international tribunal the highest stage at which the case could have been heard, it is understood that the ruling is final and binding, and cannot be challenged further.

Cairn has been in close contact with the British Government, Foreign and Commonwealth Office and High Commission of India throughout the case, and it is thought representations on the issue of payment is on the agenda when Prime Minister Boris Johnson visits India on January 26, as part of India’s national day.

James Thompson, an analyst at JP Morgan Cazenove said in a brokers’ note: “The ruling cannot be challenged. The payment of the award becomes due immediately, though the onus now falls upon India to pay and therefore we look for confirmation from the Government of India that payment will be forthcoming in the near term (we note that UK PM Boris Johnson is due in Delhi on January 26 2021).

“This news is undoubtedly a positive result for Cairn Energy, and while the risk around physical payment will endure, likely until it is paid, we expect shares to respond very positively to the news today.

“As well, we note that the Senegal transaction has completed, with funds received from Woodside, meaning the previously announced dividend is fully covered by cash on the balance sheet.”

Broker Stifel also raised the issue over when Cairn could expect to receive payment, noting that the award was higher than expected.

The analyst said: “Given the size of both this award and the similar ruling in September with the arbitration involving Vodafone India (although that did not involve seizure of assets unlike in the Cairn India case), we would expect India to exhaust every possible remedy before accepting the ruling, making the timing of the

receipt of any award extremely uncertain.”

Last week, Cairn said it would pay a special dividend of 32p per share after completing the sale of its Senegal business.

Shares in Cairn closed up 36.7p, or 22.1%, at 202.6p.