Where the Cairn case stands

The Cairn case had been dragging along for over 10 years, but now Cairn has got a ratification order from several courts including the courts in the UK, the US, France and Netherlands. When arbitral orders are ratified by courts in a country it technically gives the aggrieved party the right to attach business assets like bank balances, ships and aircraft located in these countries. Cairn has warned India that if it does not release the $1.2 billion as ordered by the tribunal, it would take the next step of attaching Indian assets in these countries. 

More complex than it appears

While the threat may have been issued by Cairn, the actually case may be a lot more complicated. Firstly, in India, no arbitral award is really valid unless it is ratified by an Indian court. Secondly, as Nirmala Sitharaman has rightly pointed out, no international court can question the sovereign right of the government of India to tax incomes. Tax orders can be disputed but that has to be done in the Indian framework and not in other frameworks. Cairn is facing pressure from its own shareholders and obviously is trying to create an image that it is on the job. Cairn realizes it is not as simple as walking away with Indian assets. 

India is bang on target

There have been varied opinions about whether India is on the right track. One really cannot dispute the Finance Minister’s contention that taxation is the sovereign right of the government. If you apply a simple form vs substance argument, it is amply clear that the transaction by Cairn (and Vodafone prior to that) were structures to beat the tax system. That is why Indian government is quite confident of proceeding legally. When the transaction veil is lifted, it is likely to become all too clear that it was just an attempt to use the lax laws at that point of time to earn tax-free gains and that will be hard for Cairn to justify.

Give diplomacy a chance

Neither India nor Cairn PLC have closed diplomatic channels. In fact, Cairn has been pursuing diplomatic alternatives with the Indian government. Apart from Cairn, even top bureaucrats in the UK government are engaging with India to find a more amicable solution. The real answer could lie somewhere in between. Cairn has got a largesse with a dubious structure and they need to own up and pay up. Indian government could have approached the problem better rather than relying on something like retro taxation. Resolving such long pending cases like Vodafone and Cairn is in the long-term interests of these companies and will reflect Indian regulation in good light. It is now over to diplomacy!