London-listed Cairn Energy on Tuesday announced suspension of its $300 million share buyback programme as it does not have funds for it. The company was banking on getting the money from selling its 10.1% stake in Cairn India for the buyback. However, the Indian tax authorities in January have directed the UK firm to not to sell its stake in Cairn India over an inquiry into a tax dispute. The board has decided to suspend the previously announced share buyback programme as of March 21, 2014, until the position regarding the Cairn India shareholding is resolved. To date, 25,180,201 shares for an aggregate consideration of $94.7 million have been repurchased as part of the buyback, Cairn Energy said in a statement. In an order dated January 22, the Indian income-tax department alleged that Cairn Energy Plc of UK did not pay tax on Rs 24,503.50 crore of capital gains made on transferring India assets to a new company. Cairn Energy, the original promoter of Cairn India, which holds oil & gas assets in Rajasthan, had sold the majority stake to Vedanta Group. The I-T order said the gains from the stake sale to Vedanta came after the Edinburgh-based firm transferred its entire India business from subsidiaries incorporated in Jersey, a tax haven, to newly incorporated Cairn India for Rs 26,681.87 crore in 2006. Some media reports claimed the tax liability on capital gains could be Rs 5,000 crore or more. Cairn Energy is in the process of compiling the requested information requested and will send it to the tax authority in April. Cairn is committed to resolving the Indian tax situation and in the meantime can, if required, adapt forward capital and equity exposures, it said. The group was compliant with tax legislation in place at the time in each relevant jurisdiction, including India. The group will take whatever steps are necessary to protect its interests, it said. Income tax probe has also impacted Cairn Indias own buyback programme, which started on January 23. The company had announced that it will spend up to Rs 5,725 crore to buy back 17.09 crore shares or 8.9% stake at not more than Rs 335 a share. Vedanta Group currently holds 56% stake in Cairn India. The Indian company has been able to buy back only 32.7 lakh shares, just 1.9% of the proposed buyback offer. The offer will get over on July 22. Analysts said the tax issue would impact this buyback to some extent but the major movement in the stock was expected only based on real production. If the company manages to achieve its 200,000 barrel a day production, then the stock would inch up, they said. Tax experts called the I-T departments move questionable. The case is similar to Vodafone tax case in some sense but there are differences as well because Cairn UK has disposed of Cairn India shares and had paid appropriate taxes at every step as per the Indian law requirement. So unlike Vodafone, tax has been paid here. From a foreign investor sentiments point of view, this is definitely negative; this just adds to their ongoing woes. Currently, there is no clarity on the circumstances in which this retrospective amendment is applicable and on calculation of capital gains in such cases., Rajesh Simhan, head, international tax practice at Nishith Desai Associates, told dna. It is also to be seen whether like Vodafone Cairn Energy also decides to arbitrate using the bilateral investment protection treaty. It also to be seen whether it will stand test of constitutionality, because the provisions themselves may be challenged under Articles 14,19 and 21 of the Constitution. he said.
Posted on: Wed, 19 Mar 2014 13:12:15 +0000