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Wednesday , March 19 , 2014
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Cairn buyback trips on tax tiff

Mumbai, March 18: Cairn Energy Plc, the British oil and gas explorer, today suspended its $300-million share buyback programme because of a raging tax dispute in India that dates back to 2006.

The tax tangle has stalled its plans to pull out of India after it sold a 58.5 per cent stake in December 2011 to Anil Agarwal-promoted Vedanta for $8.67 billion.

The tax authorities have barred the Edinburg-based Cairn Energy Plc from selling its residual 10.3 per cent stake in Cairn India valued at just over $1 billion until the tax dispute is resolved.

Incidentally, Cairn India is also running a share buyback offer that started on January 23 and will continue for six months. But Cairn Energy would not be able to participate in that offer.

Last October, Cairn Energy Plc had announced that it would return $300 million to its shareholders through a share repurchase programme. It has since bought back nearly 2.52 crore shares for $94.7 million.

But on Monday, while announcing its annual results for 2013, Cairn Energy said it would not proceed with the share repurchase plan for now.

“The board has decided to suspend the previously announced share buyback programme as of March 21 until the position regarding the Cairn India shareholding is resolved,” the company said.

The Cairn Energy stock tumbled 13.08 per cent to 170.79 pence on the London Stock Exchange (LSE) after the announcement.

In January, the income tax department had sent a notice to Cairn Energy asking it to provide information relating to share transactions between October and December 2006 when Cairn India acquired 251.22 million shares in Cairn India Holding Ltd, a Jersey-based entity, for Rs 26,681.87 crore.

Cairn India Holding, in turn, held stakes in 27 subsidiaries based in Scotland, the Netherlands, Australia, British Virgin Islands that owned oil and gas exploration assets in India, including the lucrative Barmer oil fields in Rajasthan.

Cairn Energy told its shareholders in a notice that the request for information relating to the 2006 transactions stemmed from the controversial retrospective amendment in tax laws in 2012.

The tax amendment was designed to override a Supreme Court verdict that had gone in favour of Vodafone Plc. The apex court had ruled that the “Indian tax authorities had no territorial tax jurisdiction to tax an offshore transaction”.

The tax authorities had demanded that the Dutch subsidiary of Vodafone Plc pay Rs 11,000 crore for failing to deduct the sum while making a $11.08-billion payment in May 2007 to Hutchison Telecommunications International Ltd to acquire a 67 per cent stake in India’s second largest mobile operator.

The taxman now threatens to go after Cairn Energy in much the same way as it hounded Vodafone.

Cairn Energy Plc faces a potential tax demand on the imputed capital gains of Rs 24,500 crore it made in the 2006 share transactions through which it transferred all its India assets to Cairn India just before it came out with its initial public offering in January 2007.

Cairn Energy insists that it has been fully compliant with India’s tax laws.

It may be recalled that the tax authorities had surveyed Cairn India’s Gurgaon office on January 15. According to the income tax department, during the course of survey proceedings it was found that in 2006-07, Cairn India purchased shares of Cairn India Holdings Ltd, a company registered in Jersey from Cairn UK Holdings for Rs 26,681.87 crore.

But while consolidating the accounts of the subsidiaries for the year 2006, Cairn India had said the acquisition of shares had involved “goodwill” estimated at Rs 25,411.51 crore.

Earlier, the entire business of Cairn Energy Group in India was carried on through the subsidiaries incorporated outside the country. After incorporation of Cairn UK Holdings, the ownership of these companies got transferred to Cairn UK Holdings. This was later transferred to Cairn India Holdings.

“Thus from the annual financial statement, it is evident that in the process of acquisition of shares of Cairn India Holdings from Cairn UK Holdings, the payment of Rs 26,681.87 crore made by Cairn India exceeded the book value of the acquired assets by a sum of Rs 25,411.51 crore, which is represented by goodwill in the consolidated financial statements, clearly indicating that substantial gains or, to be more precise, short-term capital gains have accrued to the assessee company-Cairn UK Holdings Ltd,” the income tax department said.

It computed the short-term capital gains of Cairn UK Holdings — the immediate beneficiary of the stake buyout — at Rs 24,503 crore.

Taxman’s claims

Between October 12 and December 29, 2006, Cairn India acquired 251,224,744 shares in Cairn India Holdings, a UK-based entity that holds stakes in 27 subsidiaries. Cairn India pays Rs 26,681.87 crore in five transactions

These 27 entities hold oil and gas exploration assets in India

In the consolidated balancesheet for 2006, Cairn India shows Rs 25,411.51 crore as “goodwill”

The goodwill accounting prompts the taxman to surmise that the payout for Cairn India Holdings’ stake exceeds book value by Rs 25,411.51 core

Cairn UK Holdings, in turn, pays £221,444,034 to Cairn Energy Plc from the payment it receives from Cairn India

One of the subsidiaries — Scotland-based Cairn Energy Hydrocarbon Ltd — owes a debt of £29,780,710 to Cairn Energy Plc. This debt is assigned to Cairn UK Holdings Ltd

Taxman concludes that Cairn UK Holdings Ltd has, therefore, paid £251,224,744 for the 251,224,744 shares in Cairn India Holdings Ltd, which it then transferred to Cairn India

At an average conversion rate of Rs 86.71 per pound, the sum paid by Cairn UK Holdings to Cairn Energy Plc works out to Rs 2178.37 crore

Since Cairn India paid Rs 26,681.87 crore for the stake, the taxman concludes that Cairn UK Holdings Ltd has made a short-term capital gain of Rs 24,503.50 crore on which it paid no tax either in India or in the UK

Moreover, Cairn UK Holdings Ltd admitted in its financial statement for December 2006 that the sale of Cairn India Holdings Ltd to Cairn India resulted in an “exceptional
gain of £1.361 billion”.