'Hopeful' Cairn Energy in talks with Modi government to resolve tax dispute

New York: London-listed oil and gas explorer Cairn Energy PLC said on Thursday that it is working with the newly elected Narendra Modi government to resolve a controversial tax dispute.

Under the Manmohan Singh dispensation the tax department had contacted Cairn Energy in January to audit its finances and weigh tax assessments for the year ended March 2007. The company was also ordered not to sell its 10 percent holding in Cairn India valued at $1.1 billion. The tax dispute has hit Cairn Energy hard and it has since shed jobs and seen its stock plummet by almost 31 percent this year. Cairn’s founder, Sir Bill Gammell, spoke of his sadness at the dispute after retiring from the board following the -company’s general meeting in May.

India’s move to levy heavy retroactive taxes predictably spooked foreign investors, but Finance Minister Arun Jaitley has pledged a stable and predictable tax regime in his first budget. In an encouraging sign, Jaitley set up a committee in July to review retroactive claims.

“I am very hopeful. We pride ourselves in having been a force for good in India. We have certainly complied with every law, every rule. We have paid all our taxes. I think we were victims at the very tail-end of the last administration when there were missives thrown at us,” Mike Watts, deputy chief executive of Cairn Energy PLC, told the two-day “India Investment Forum,” in New York.

Vodafone, which is contesting a retroactive tax claim of more than $2 billion stemming from a 2007 deal, initiated arbitration proceedings by serving a formal notice to the Indian government in 2012, but Cairn Energy is taking a different tack.

“We are trying to through dialogue really, not through legal matters, but through dialogue to come to fruition. We just know in our heart of hearts that a quick-fix in India is a year. A quick-fix somewhere else may be a lot shorter. You have to bring your expectations down,” said Watts.

“There have been some favorable comments made by ministers about the whole investment climate. The Modi government has only been in power a few months; they have just had their first budget and they have a new budget in February. We are in dialogue, I am hopeful there will be a resolution,” added Watts, who as the former exploration director, master minded a successful campaign to focus on an under-explored area beneath the Thar Desert in Rajasthan.

The company’s former Indian subsidiary recently made three major oil finds in Rajasthan. The latest find includes one near the huge Mangala discovery Cairn Energy made in 2004, which helped propel it into the big time.

Cairn Energy sold a controlling stake in its former Indian subsidiary Cairn India to Vedanta for $5.5 billion in 2011, and paid $3.5 billion of the proceeds to shareholders. The company has invested $5 billion in development capital in Rajasthan over 20 years. The western state alone now provides 30 percent of India’s crude oil production.

“I have never operated in China, but I have in India and countries like Vietnam. You can do business in India. We have demonstrated that and been successful in several states. I think it can be done again,” said Watts.

“The last five years have been detrimental to attracting investments due to pressures of coalition governance and retroactive-taxes which have damaged business confidence. But that is not something that is irreparable. This is a pivotal moment for India - the change in the political scene - the mandate this current government has is for strength, it is for leadership, it is for direction and the business community always wants stability to invest. I am a firm believer in the Indian model. India just needs to focus on getting some of the confidence building measures right, the tax and fiscal terms,” said Watts.

Although Jaitley has pledged a “stable tax regime,” foreign investors want retroactive taxes struck off the books completely.

“I would like the Narendra Modi government to go further and say it is illegal as opposed to what it is right now - it is still legal but it will not be used,” said Teresa Barger, chief executive officer, of Washington-based emerging market investment fund Cartica Capital.