Cairn may lose 9.8% in India unit

Cairn Energy’s 9.8 per cent stake in Cairn India, attached by the tax department for non-payment of dues, may be put on the block as part of recovery proceedings initiated late last week. This is among the options being considered by the government. The 200 million shares with the tax department are valued at around Rs5,200 crore.
 

The UK oil major may also face a penalty of around 300 per cent, amounting to Rs30,000 crore. The tax department has till September to impose a penalty on Cairn Energy.
 

Recovery was initiated after the Edinburgh-based company failed to pay Rs10,247 crore tax by June 15 on capital gains under a retrospective amendment to the income-tax law. This comes within three months of Income Tax Appellate Tribunal (ITAT) upholding the demand of the income-tax department.
 

The tax demand is in respect of Cairn Energy transferring shares of Cairn India Holdings to Cairn India as part of an internal group reorganisation in 2006-07. This gave rise to different interpretations on whether the UK-based company made capital gains preceding an initial public offering (IPO) by Cairn India.
 

At the time of the IPO, ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India. In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings.  In exchange, 69 per cent of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69 per cent in Cairn India. Later, in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta group, barring a minor stake of 9.8 per cent.
 

Selling the 9.8 per cent stake in the open market may not be a viable option as it may affect the stock price. A sale of these shares to Vedanta may also be considered unless Cairn Energy succeeds in obtaining a stay from the tax recovery officer.

The tax department has given Cairn Energy 15 days time to respond to its recovery notice.

According to sources, the 9.8 per cent stake may be auctioned or reverse auctioned. The revenue department might seek the opinion of the department of investment and public asset management in this matter.
 

If the tax department decides not to sell the stake, it will earn an annual dividend of Rs600-700 crore from Vedanta, according to sources.The shares have been attached for more than three years now. The I-T department has also adjusted Rs1,500-crore refund due to Cairn.
 

Meanwhile, Vedanta has already asked banks to transfer the Rs660 crore held in an escrow account to the tax department. Cairn had approached Securities and Exchange Board of India (Sebi) last month complaining about the non-payment of dividend worth Rs670 crore due by Anil Agarwal-led Vedanta group. Cairn Energy’s appeal to the international tribunal in London for an interim order to restrain the Indian government from recovering tax dues was rejected on June 12. The final hearing on the case is scheduled for January 2018.
 

Officials in the tax department refused to comment on the matter. Cairn Energy has not yet moved any high court challenging the Income Tax Appellate Tribunal order. The tax department has filed a caveat in a high court against any stay demand by the Cairn Energy on the order of the tax tribunal.