Cairn shares hit by £1bn Indian tax demand

SHARES in oil and gas explorer Cairn Energy lost more than 15 per cent yesterday after the group was served with a $1.6 billion (£1bn) demand from the Indian tax department.

The draft assessment order, which the company disputes, relates to the 2006-7 financial year and stems from amendments introduced in India’s 2012 finance act that seek to tax “prior year transactions under retrospective legislation”.

Cairn said: “The transactions subject to the assessment are those undertaken to effect the group reorganisation that was required to enable the initial public offering of Cairn India Limited in 2007.”

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Amid the ongoing dispute, the Edinburgh firm has been unable to sell its remaining 10 per cent stake in Cairn India,s valued at $703m as of 31 December – down from $1.1bn a year earlier.

Chief executive Simon Thomson said: “Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and we are confident of our position under the UK-India investment treaty.

“Against a backdrop of regular engagement with the government of India since January 2014, it is very disappointing to have received a draft assessment order at this time. Since the election of [Narendra Modi’s] BJP, senior government ministers have consistently commented on the negative impact the issue of retrospective taxation has had on international reputation and investor sentiment towards India.”

Thomson added: “This issue is confined to our interests in India and the group remains well funded to deliver all of our objectives and commitments and we look forward to moving forward with our strategy whilst this issue is resolved under legal process.”

Cairn has net cash balances of $869m, along with a seven-year reserve-based lending facility of $575m that remains undrawn.

The draft assessment order was revealed after the stock market closed on Tuesday. Earlier in the day, Cairn had told investors that it was focusing its efforts on exploiting “significant discoveries” off the coast of Senegal in west Africa and had ruled out any further drilling activity in the Arctic unless it can bring in additional partners. The company’s shares slumped 15.5 per cent to close at 155p – having been down by as much as 20 per cent at one stage – as investors had their first chance to react to the Indian tax demand, which analysts at Investec said was “unexpected and contradicts the taxation policy soundings from the Modi administration since its election in 2014”.

Cairn joins a raft of multinationals, including IBM, Microsoft, Shell and Vodafone, which have incurred the wrath of India’s tax collectors in recent years.

Investec, which has lowered its target price on Cairn’s shares from 225p to 185p, said: “Our take on this is that a settlement is not wholly unrealistic. The move by the tax department may have been unilateral as it appears to be juxtaposed to all rhetoric commentary out of the Indian finance minister and the recent budget. This leads us to believe that the case could become political.”

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Nathan Piper, an analyst at RBC Capital Markets, said any hope that Cairn will be able to sell its remaining stake in its former Indian subsidiary in the short term “appears to have been dashed” by the tax authority’s surprise move.

He added: “This development has no impact on Cairn Energy’s ability to fund ongoing activities. However, in the absence of this catalyst, we anticipate that some major shareholders will rotate out of the stock. As a result, we downgrade the shares to ‘sector perform’ as the impact of this disappointment is fully absorbed.”


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