Boston fund exits Cairn Energy Plc

The retrospective tax amendment in India has spoiled the investor sentiment not only in India, but overseas too, with a Boston-based pension fund completely exiting Cairn Energy Plc. recently.

A person close to the development said the fund sold more than eight million shares in the company on the London Stock Exchange at about £2.50, following the income tax query.

The company has listed the new Indian tax law, which has retrospective effect, among the group's principal risks in relation to its financial and operational performance. The Income Tax Department has seized the company's assets in India by barring it from selling shares in Cairn India.

Cairn Energy holds 10 per cent in Cairn India, valued at $1 billion at the end of December, 2013. It had, in 2011, completed the sale of 40 per cent to Vedanta Resources. In all, it sold off 52 per cent in three tranches, returning about $4.5 billion to its shareholders.

When Cairn Energy raised $2 billion after listing the Indian outfit on the NSE and BSE in January 2007, it retained a 69 per cent shareholding.

In a statement issued following the declaration of financial results on Tuesday, Cairn Energy tried to boost investor sentiment by stating despite the restriction imposed on the access to the value of its shareholding in Cairn India, the company was committed to all of its planned operations in 2014. The company's board however, decided to suspend the previously announced share buy-back programme until the position regarding the Cairn India shareholding was resolved.

Till date, 25,180,201 shares for an aggregate consideration of $94.7 million had been repurchased as part of the buy-back programme. Cairn Energy's share price has fallen by more than 30 per cent eroding its market capitalisation by about 30 per cent since January.

Though a company spokesperson did not give an official comment, the company in its statement said it received a request from the Indian Income Tax Department for information relating to a group reorganisation completed in 2006.

"This reorganisation was compliant with tax legislation in place at the time in each relevant jurisdiction, including India. The Indian Income Tax Department has cited legislation introduced in 2012 as the reason for these inquiries. While this information request is being dealt with, Cairn is unable to access the value of its shareholding in CIL ($1 billion at the Balance Sheet date), either through disposal or future dividend income," it said.

As the restriction was not effective at the year end, the company has not made any adjustment to the fair value reflected in the Group's 31 December 2013 Balance Sheet. "The current year's programme is funded fully from the cash on the Balance Sheet and we have moved quickly to review the capital allocation for 2015 and beyond and will keep this under review."

With no revenue currently recorded in the Income Statement, the Group reported a loss after tax for the year of $556 million. The Income Tax Department has sought information in relation to the year ended March 31, 2007. According to the company, the correspondence indicates that the request for information is in respect of amendments introduced in the 2012 Finance Act which seek to tax prior year transactions under legislation applied, retrospectively.

"While the interactions with the Indian Income Tax Department continue, the Group will take whatever steps are necessary to protect its interests. The actions of the Indian Income Tax Department were taken without any prior discussion with Cairn and could not have been anticipated. It is therefore not possible at this stage to predict the course of any future action it might take."