Cairn Arbitration Dispute- India Asks State Owned Banks To Withdraw Funds From Foreign Accounts

There is a new development in the tax dispute between Cairn Energy and India. India asked state-run banks to withdraw funds from their foreign currency accounts. Two government officials and a bank said New Delhi fears Cairn Energy may seize the cash after an arbitration ruling in the tax dispute.

Cairn Energy Tax Dispute

The origins of the tax dispute lie in introducing a retrospective tax amendment in the Finance Bill, 2012. The Manmohan Singh government brought in the retrospective tax law. It made India an unattractive destination for foreign investors.

Cairn Energy discovered the Mangala Oilfield in Rajasthan in 2004. Its Indian subsidiary Cairn India was listed on the Bombay Stock Exchange (BSE) three years later. Vedanta acquired a majority stake of 58.5 percent in 2011. 

A judgment by the Supreme Court of India on the Vodafone tax dispute in favor of Vodafone saw an amendment to the Income Tax Act, 1961. The proposed amendment allowed the government to tax cross-border transactions on stocks, commodities, and derivatives of a company that lies in the country.

After the amendment became law, the Income Tax (I-T) department officials launched an investigation. Cairn was under investigation for retrospective tax evasion. The Income Tax Department investigated the transactions undertaken before the listing on the BSE.

The I-T department demanded ₨ 24,500 crores from Cairn for the capital gains during 2006-2007. The amount included the interest and penalty on the taxed capital gains.


As the investigation of the I-T department started, Cairn PLC went to an arbitration court. It commenced the arbitration proceedings against the Government of India. Cairn India initiated the proceedings under the India-UK bilateral investment treaty.

The Permanent Court of Arbitration in the Netherlands on December 21, 2020, delivered a judgment favor of Cairn plc. It asked India to return $1.2 billion to Cairn Energy plc. Delivering the judgment, the tribunal panel observed that the 2012 law passed by the Indian government was a new tax, not a clarification of prior law that it could apply to earlier years.

The panel further said, “The issue at stake is thus not a matter of domestic tax law; it is rather whether the fiscal measures taken by the State, valid or not under its tax laws, violate international law.”

Finance Minister Nirmala Sitharaman, on March 5, indicated the intent of the government to appeal the verdict. She said it is her duty to appeal in cases where the nation’s sovereign authority to tax comes under question.

Five countries recognized the arbitral award of $1.2 billion to Cairn Energy plc. They are the US, the UK, Netherlands, Canada, and France. The recognition of the award allows Cairn Energy to seize Indian assets in those countries. 

The company is trying to get the arbitral award registered in Singapore, Japan, the United Arab Emirates, and the Cayman Islands. The Indian government has petitioned the Dutch Court of Appeal to set aside the arbitration award.

Repercussions on the Seizure of Accounts

Cairn Energy plc is trying to seize Indian assets in foreign countries to get the Indian government to pay the $1.2 billion arbitral award. Seizure of assets would impact international transactions and foreign exchange transactions.

The Indian government is taking measures to safeguard its economic interest. A government official told Reuters, “Earlier this week a guidance was sent to state-run banks to withdraw funds from their nostro accounts.”

A Nostro account is an account a bank holds overseas at another bank in the currency of that jurisdiction. These accounts are maintained for conducting activities of trade and foreign exchange transactions.

The Finance Ministry did not comment on the issue.

Out of Court Negotiations

Officials of the Indian government and Cairn Energy plc are trying to settle this dispute using informal channels. During these negotiations, both sides have put forth their proposals.

Cairn Energy offered to invest the entire award money in India. It includes the principal amount of $1.2 billion and the interest of $500 million. The offer comes with the caveat of the Indian government agreeing to enforce the award.

It is improbable that the Indian government would accept the proposal. Acceptance of the proposal would mean accepting the verdict of the tribunal, against which it has appealed.

A government official stated, “There is no way that the government is going to accept the proposal. We have filed an appeal. Any solution will be within the legal framework. For that, we have asked them to come under the Vivad se Vishwas scheme and settle the dispute by paying 50 per cent of the disputed principal tax amount and get a waiver of interest and penalty. That would have resulted in an immediate refund of $300 million.”

The Indian government was willing to accommodate and settle the dispute under the Vivad se Vishwas scheme. The window for a declaration under the scheme closed on March 31. The window for payment closed on April 30.   

The Modi government said it would not make retrospective tax claims. But it has defended the ongoing retrospective tax claims in court.

Vijayhardik Josyula

An aspiring journalist bit by the bug of Indology. Love to ponder upon moments of life philosophizing about them. I am an avid cricket buff and look forward to new and exciting adventures through reading and travel. I like writing about political events, climate, and personal thoughts on life and literature.

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