Cairn Energy hit by $1.6bn Indian tax bill

Cairn Energy has been issued with a bill of at least $1.6bn (£1.06bn) by the Indian government due to unpaid tax by a subsidiary, which the company has contested.

Cairn's Indian subsidiary, Cairn UK Holdings Limited, received a draft tax assessment order from the Indian Income Tax Department arising from the group reorganisation in fiscal year 2006/7. The initial bill is for $1.6bn plus any applicable interest and penalties.

FTSE 250-listed Cairn said it confirmed it has instructed its lawyers to dispute the bill under the UK-India Investment Treaty in order to protect its legal position and shareholder interests but had made no accounting provision.

Analysts said on Wednesday said the bill was unexpected and contradicted the taxation policy statements from the new government of Narendra Modi since its election in 2014.

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."

He said the company had regularly engaged with the Modi administration over the last year and were surprised with the ruling in light of ministerial comments about the negative impact of retrospective taxation on international reputation and investor sentiment towards India.

"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."

The company believes its legal case is “robust”.

Broker Investec admitted that the tax bill broadsided the market and CNE itself, with both expecting a 2015 return of the Cairn India stake.

With Cairn's strong belief that it does not expect the tax dispute to impact its operational plans, Investec sees no funding problems "yet" as the company should be able to get to first oil at its 25%-owned Kraken and 30%-owned Catcher projects on existing resources.

"That said," added analyst Brian Gallagher, "aside from a speedy resolution/climb down, yesterday’s announcement has weakened CNE’s funding dynamics relative to consensus assumptions and removes special div and aggressive Senegal drilling scenarios, for now, in our view."

Accendo Markets analyst Mike van Dulken said it was no surprise that Cairn has contested the bill given the time elapsed, but wondered "could its decision to follow legal advice and make no accounting provision return to haunt it?"

From a technical analysis position, he noted that the shares had been weakening back from 12-month highs of 210p since end-February, and while support at 150p this morning is well above 12-month lows of 141p, he noted a breach of three-month support at 155.5p "could hinder short-term gains".