Rules can't be changed arbitrarily

Companies, individuals will invest in a country if they can be certain of the legal framework

Since entering the country in the mid-1990s, Cairn has invested tens of billions of dollars in India. Working with local communities and regional and state authorities, Cairn helped build one of India’s leading companies — one that now accounts for more than a quarter of the country’s domestic oil production.

This growth was achieved through a process of collaboration. The Cairn development and production story, alongside partners ONGC, involved pioneering innovative feats of engineering such as the world’s longest heated and insulted pipeline. Sixteen thousand people were employed at the peak of construction of the facilities in Rajasthan 

By early 2006, Cairn had achieved significant success operating in India and sought to raise further capital and expand its operations in the country. In order to achieve this, Cairn Energy PLC (Cairn) envisaged the consolidation of all its Indian operations and assets under the umbrella of a single corporate entity and the public offering of shares in that entity through an IPO. Cairn’s Board considered two options for executing its plan: bringing all of the company’s Indian assets and operations under a UK company and listing its shares on a UK-based stock exchange or consolidating those assets and operations under an Indian company and publicly offering its shares on the Indian stock exchanges.

Cairn considered these options to be economically equivalent. Reorganising and listing in the UK was considered to be substantially less complex than listing in India, which would involve compliance with myriad Indian regulations.  However, Cairn recognised advantages to pursuing an Indian IPO; these included further domestication of Cairn’s operations in India by drawing investment from Indian retail and institutional investors and further developing the group’s business dealings and reputation in the country. Furthermore, it would give more autonomy to the Indian management team and improve its ability to attract domestic management talent, which was important to India’s profile in the upstream petroleum sector.

The success in Rajasthan helped put India on the world energy map and ultimately, we recognised that such a company should be owned and operated by Indians. That’s why in 2006 we created a new separate business, Cairn India, in preparation for a listing on the Bombay Stock Exchange 

The initial public offering of Cairn India Limited was the biggest IPO ever in India when it took place in 2006. In order to meet the requirements to list an Indian oil and gas company on the Bombay Stock Exchange and National Stock Exchange of India, Cairn Energy PLC followed the domestic requirements as set out by Indian law and structured the reorganisation to comply with Indian law at the time.

At no point in any of Cairn’s interactions with the various regulatory bodies, either in 2006 or subsequently, did the government of India ever suggest that the 2006 corporate reorganisation could trigger a tax liability. Indeed, Cairn had made no profit or gain; as no interest had been sold, there was no benefit to tax. 

Any suggestion of a significant tax liability would have rendered the 2006 corporate restructuring and subsequent Indian IPO pointless. Cairn would have instead dealt with its India-related investments in another way, such as pursuing a listing on a UK stock exchange or not undertaking the transaction at all.

The imposition of an unforeseeable penalty of $1.6 billion eight years later was unexpected not just because the restructuring to create an Indian business was approved by all necessary Indian authorities at the time, and not just because Cairn has always complied with all laws and paid all taxes, but also because the tax demand was the result of retrospective legislation that sought to rewrite history.

The shock was compounded by the Indian authorities’ decision to seize Cairn Energy’s remaining 10 per cent in Cairn India Limited, removing our ability to raise money and severely limiting our ability to operate. Approximately 40 per cent of our workforce lost their jobs while our investment and growth plans had to be drastically cut back. Three years later, we continue to suffer the consequences.

My fear however, is that India itself will feel the ramifications even more strongly.

Companies and individuals will only invest in a country if they can be certain of the framework in which they do so. They do need to know that the rules that govern them will not be arbitrarily changed.

When this happens, as it did in our case, other investors looking on will have reason to pause for thought. What if the same thing happens to them?

The retrospective legislation, which has caused this issue, was introduced by the previous government. Both before and since they took office, Prime Minister Narendra Modi and Finance Minister Arun Jaitley have repeatedly stated their intention to deliver stability in the tax regime. And as such, steps are being taken in the right direction.

However, the government has the opportunity to strengthen its hand still further.

Halting the arbitrary, retrospective and unwarranted case against Cairn Energy, and companies that find themselves in a similar position, would go a long way towards restoring confidence in the Indian system. It would remove the threat being felt by so many investors in the country, one that further discourages much needed investment in India in the future.

The author is CEO, Cairn Energy PLC