Tripping up on arbitration

Cairn Energy has wrong-footed the government

Last week, the government of India’s twin ambitions of driving economic growth through foreign direct investment and bridging the fiscal deficit via disinvestment came up against hard reality checks when Cairn Energy moved a US court to seize the assets of state-owned but privatisation-bound Air India to recover dues of $1.2 billion that New Delhi owes it after losing a tax arbitration award by the Permanent Court of Arbitration in The Hague in December last year. The government had filed an appeal in the Dutch court of appeals in March. Apart from the spectacle of a country with superpower aspirations being humiliatingly wrong-footed by a corporation, India now finds itself in the unedifying company of countries such as Pakistan, Venezuela and the Republic of Congo, all of which have had assets seized following court rulings. More to the point, the controversy has drawn unwelcome attention to the Indian government’s disinclination to honour international treaties.

Cairn Energy’s investments fall under the UK-India Bilateral Investment Treaty, which refers disputes to international arbitration. Another case involves British telecom giant Vodafone, which also won its arbitration on a retrospective tax case in Singapore. The government has also appealed against this ruling. India’s defence in both cases rests on the government’s sovereign right to tax entities, though the legality of retrospectively taxing an internal reorganisation between Cairn Energy and Cairn India (now owned by Vedanta) before the latter was listed remains an open question. Two points arise in this context. First, this appeal will test the government’s arguments about the supremacy of its sovereign powers over international law. Second, it was clear that Cairn Energy was determined to recover its dues as early as February this year when its chief executive officer visited India and warned the government that his company would move to seize overseas assets. All that the government did was to come up with a novel offer for Cairn Energy to pay the disputed amount through the Vivaad Se Vishwas tax amnesty scheme.

But while this drama was being played out and the government was somnolently waiting for the first hearing its of appeal listed for September 1, Cairn Energy moved energetically to file cases in the nine countries (including the US, the UK, the Netherlands, and the Cayman Islands) for the implementation of the arbitration award, enabling it to identify commercial Indian assets that it can seize. The commanding heights of India’s public sector have now become a key weakness as Cairn focuses its attention on ships owned by Shipping Corporation of India (also a disinvestment candidate) and properties owned by public sector banks. The government’s response so far has been to contend that Air India is not a government asset since it is up for sale. But until that much-delayed transaction goes through with an identified buyer, the government remains its shareholder. Cairn Energy’s aggression has put it in a bind. The government has struggled to sell the ailing flag carrier for several years. Its efforts to corral a buyer now will be hampered by the fact that no prospective owner would touch a company embroiled in an international dispute. These serial mis-steps in the arena of international arbitration may cost the Indian economy dearly when Covid-19 recedes.