It is not clear what India’s strategy is going to be when the UK-based Cairn Energy’s CEO Simon Thomson comes calling on finance minister Nirmala Sitharaman later this week, but if it is the same as the one adopted in the Vodafone case—that is, to ask for a review of the award—it is a really bad idea. Apart from the signal it sends to global investors, and the fact that unlike the Vodafone case where a retrospective tax demand was also made, the taxman actually seized $1.4bn of Cairn’s assets (bit.ly/3digPDv), there is little chance of India winning the review.
India’s main argument continues to be that tax rulings, retrospective or not, cannot be arbitrated under its bilateral investment treaties (BIT). Indeed, that is why, in 2016, the new model BIT specifically excluded tax matters from its purview. And, as it happens, several other BITs, like the one between Hong Kong and New Zealand, specifically exclude tax matters. Much of this, however, is quite irrelevant, never mind how often the argument is repeated by the government and its lawyers.
For one, several other country BITs allow taxes to be the subject of arbitration. And, in any case, India may have come up with a model BIT in 2016, but no major country has signed it; and even if they had, given the retrospective tax cases predate this, the firms would still use the older BIT.
That tax matters cannot be arbitrated is an old Indian position, and it was also made during both the Vodafone and Cairn hearings of the arbitration panel; never mind that then finance minister Arun Jaitley had promised that he would resolve the UPA’s retrospective tax cases by respecting the rulings of either courts or arbitration panels on it. Since India had argued that tax matters could not be arbitrated, the panel hearing the Cairn matter dealt with this matter in the final ruling. In which case, the only hope India has of getting the ruling reversed in the review is if it can prove mala fide in the award, and that is not going to be easy.
If the government loses the review, as in the past, it will probably petition Indian courts to stay the case, but there is no certainty over how that will go. Last year, the Supreme Court (SC) turned down a government appeal to stop a $476-mn award that Vedanta and Videocon had won way back in January 2011. And while hearing the government appeal against the $672-mn arbitration award that Devas Multimedia won in 2016 against Isro-arm Antrix Corporation, the fact that the SC asked Devas whether it would be willing to waive off the interest component of the money owed to it suggests the challenge may not hold. There are, on the other hand, also cases where SC has ruled against enforcing arbitration awards on grounds that they ran contrary to India’s public policy; this was the argument the government made in SC while asking for the award to be set aside.
Much of this, of course, is moot since, by filing a case in a US court to enforce its award, Cairn has signalled it will, if need be, attach Indian assets. Sadly, for India, there is a rich history of the assets of countries being seized when they have failed to honour global arbitration awards.
In February 2006, for instance, Franz Sedelmeyer obtained an attachment order over a $40 million Russian-owned apartment complex in Cologne to meet an unpaid investment treaty arbitration award of $2.3mn plus interest. During his saga, Sedelmeyer even tried to impound the money Lufthansa was to pay Russia for overflying its airspace—that’s how serious the Cairn case can get—but German courts ruled that this would hurt Lufthansa.
In July 2011, the Thai crown prince’s Boeing 737 plane was impounded at Munich Airport to meet an unpaid investment treaty arbitration award of 29 million euro, plus interest. And in October 2012, an Argentine Navy training vessel was seized in Ghana in connection with Elliot subsidiary NML Capital’s worldwide efforts to enforce a $1.6bn court judgment received on defaulted bonds.
The most interesting story is that of the $50bn award that three majority shareholders got against Russia for taking over the oil firm Yukos. They tried to attach various Russian assets including the Orthodox Cathedral situated in the heart of Paris, shares owned by the Russian public company VGTRK in the news channel Euronews, etc. After a series of twists and turns, the shareholders attached the trademarks for vodka brands Stolichnaya and Moskovskaya in the Netherlands, but this was overturned last October on grounds that these were the property of a Russian state-owned firm and not Russia itself.
There are several other successful instances of enforcing awards, like ConocoPhillips, in May 2018, seizing assets of the Venezuelan state-owned oil company to enforce a $2-bn award. The short point is that, if India doesn’t do the honourable thing and return—to Cairn—the assets the taxman seized, things can get ugly. Indeed, the seizure itself was illegal since the tax demand had been challenged by Cairn; even in the case of Vodafone which saw the first retrospective tax demand, no money has been taken from it or assets seized. Cairn, as it happens, has been quite nice in not asking for damages for the loss of business suffered as a result of assets being blocked.
Apart from this being the honourable thing to do, given how investment levels in the country have plummeted—total investments fell from 32.3% of GDP in FY09 to 24.2% in FY21, and FDI from 3.4% to 3%—you would think the government would be desperate to convince investors it will play by the rules.