The TLDR: A French court froze 20 residential properties worth over €20 million ($24 million) belonging to the Indian government in Paris. The reason: The government owes a Scottish company Cairn Energy $1.7 billion in a tax dispute—and hasn’t yet paid up. The company is now targeting Indian assets around the world—including those owned by Air India. 

What is this tax dispute?

• Cairn Energy is an Edinburgh-based oil and gas exploration company—which began its operations in the country over two decades ago.
• In 2006, Cairn Energy consolidated its Indian assets under a holding company called Cairn India Limited—and it transferred its entire share capital to Cairn India.
• Cairn India then went public on the Indian stock exchange—and divested 30% of its shares.
• In 2011, Cairn Energy sold most of its holding in the Indian unit to Vedanta Resources for $8.7 billion. 
• But tax authorities barred the transfer of a residual stake of 9.8% and froze all dividend payments from Cairn India to Cairn Energy.
• In 2012, the government rewrote the tax code and gave itself the power to go after merger and acquisition (M&A) deals all the way back to 1962.
• And in 2014, it turned around and slapped a $3.88 billion (Rs. 29,047 crore) capital gains tax bill on Cairn Energy for gains made due the Cairn India IPO back in 2006/2007.
• Cairn Energy disputed the retrospective application of the new tax laws. But the government seized the remaining 9.8% stake in Cairn India, valued at around $1 billion, in pursuit of back taxes.
• Having no luck in Indian courts, Cairn Energy sought international arbitration under the India-UK treaty.
• In December 2020, the Permanent Court of Arbitration (PCA) at The Hague sided with Cairn—and said the retrospective application of the Indian tax laws was “in breach of the guarantee of fair and equitable treatment,” and against the India-UK bilateral treaty.
• And it awarded Cairn Energy $1.2 billion (roughly Rs 9000 crore) in compensation—which is lower than the $ 5.6 billion it asked for back in 2016.

And the government isn’t paying up?

The government has appealed the Hague verdict on the grounds that it has the sovereign right to tax any entity operating within its borders—and that right is not subject to any bilateral treaty. And in April it refused Cairn’s offer to invest the entire $1.2 billion award plus $500 million in interest in India. The government’s counter-offer asks Cairn to come to the table under the Indian tax dispute scheme ‘Vivad se Vishwas’. It will reduce the amount owed to $682.5 million (Rs 5100 crore), waive all interest and penalties, and return 1.8% of the seized shares in Cairn India.

And now Cairn is seizing the government’s assets?

The company has already filed lawsuits in the US, the UK, Canada, Singapore, Mauritius and the Netherlands in an attempt to grab the Indian government assets. France is the first country where it has been successful in pressing its claims. In May, it filed a case in New York arguing that it should be able to seize the assets of Air India. Reason: The airline is “legally indistinct from the state itself… The nominal distinction between India and Air India is illusory and serves only to aid India in improperly shielding its assets from creditors like (Cairn).”

Also this:

“The award is enforceable against India-owned assets in the more than 160  countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Funds of Indian public sector undertakings (PSUs) in foreign banks can be frozen. Properties or assets owned by Indian state-owned banks or PSUs can also be seized.”

Point to note: As a BBC News analyst explains:

“Cairn does not have any particular interest in trying to seize and resell Air India aircraft or the clutch of properties it has seized in France. What it wants is to be a thorn in the Indian government's side. The legal actions will, Cairn hopes, push India into a negotiated settlement—to avoid further court battles and another wave of bad publicity.”

And will Cairn win these cases?

Well, as we said, the Paris ruling is Cairn’s first victory. And it depends on what precedent each court in each country considers. Here are some past examples:

• In February, in a similar $20 million arbitration award dispute, a US court declined to consider Tajik Air as Tajikistan’s alter ego.
• OTOH, last December, a copper company won an order from a British Virgin Islands court to seize hotels in New York and Paris owned by the Pakistan government—in return for dues owed by Pakistan International Airlines.
• In 2020, a French court impounded a luxury jet belonging to the Republic of the Congo—to pay a construction firm that was owed money. The company also received $30 million from a French bank account of a Congo-owned oil firm.
• A notable 2012 case involved an Argentine ship seized by a US hedge fund in Ghana—because the government had defaulted on its loans. But it was later returned to Argentina when it successfully argued that it was a military ship and not a commercial carrier.

Point to note: The Indian government has instructed all state-run banks to withdraw funds from their foreign currency accounts abroad just to be safe.

What does the government say?

It is waiting for a copy of the French court’s order and will then decide how best to proceed—but also said: “Constructive discussions have been held and the government remains open for an amicable solution to the dispute within the country’s legal framework.” FYI: Cairn’s response has been along the same lines:

“Our strong preference remains an agreed, amicable settlement with the Government of India to draw this matter to a close, and to that end we have submitted a detailed series of proposals to them since February this year. However, in the absence of such a settlement, Cairn Energy must take all necessary legal actions to protect the interests of its international shareholders.”

Reading list

The Telegraph and BBC News offer an overview of the French ruling. International Tax Review has the clearest explanation of the tax dispute. India Today’s explainer has a lot more background if you need it. Indian Express explained the arbitration ruling at The Hague. Mint has a good explainer on corporate seizures of global assets—and how they work. Quartz looks at past cases for precedent.