According to two government officials and a banker, India has instructed state-run banks to withdraw funds from foreign currency accounts, fearing that Cairn Energy would try to seize the funds following an arbitration decision in a tax dispute.
In a long-running legal battle with the Indian government over retrospective tax claims, Cairn NSE 0.81 per cent was awarded damages of more than $1.2 billion, plus interest and expenses, in December.
Although New Delhi has filed an appeal, the London-listed company has begun identifying Indian assets abroad, including bank accounts, that could be confiscated if a settlement is not reached, which Cairn claims it is still working on.
The company has filed a lawsuit against India in courts in the United States, the United Kingdom, France, the Netherlands, Singapore, and Quebec, which will make asset seizure and enforcement of the arbitration award easier.
“Earlier this week a guidance was sent to state-run banks to withdraw funds from their nostro accounts,” according to Reuters, one of the government officials, said the finance ministry had provided the guidance.
A nostro account is a foreign currency account held by a bank at another bank in that jurisdiction. These types of accounts are used to settle international trade and other foreign exchange transactions.
A banker from one of India’s 12 state banks, confirmed the ministry had sent the guidance and expressed concern that foreign courts could order funds in their jurisdiction to be sent to Cairn.
The banker told Reuters, “ “There was an apprehension that some courts may take a drastic measure saying whatever the offshore funds of the government of India, those may be taken over or frozen for the time being.”
He further added, “Our assets are tantamount to assets of the government of India as we are owned by them.”
The Indian Banks’ Association, which represents lenders, did not respond to a request for comment right away. At least two state banks did not respond, and others were unavailable outside of normal business hours.
Cairn said in February that it was working with the government on various measures to find a solution.
However, a second Indian government official said that talks between New Delhi and Cairn were stalling and that the ministry’s request to banks indicated that the government was concerned that the British firm could seize assets quickly.
The conflict arose when a previous Indian government decided to apply capital gains tax retroactively to certain firms, including Cairn and Vodafone Plc, which also went to arbitration and won.
The cases frightened foreign investors and dealt a blow to Manmohan Singh’s administration, which lost power to Prime Minister Narendra Modi in a 2014 election.
The government of Prime Minister Narendra Modi has stated that it will not make retrospective tax claims in the future, but it has defended pending cases.