Cairn India is in the red today, down 2.5% at Rs.226 with an intra day low at Rs.224.80. Some 1.5 lakh shares have changed hands in today’s morning trade compared to two week average of around 1.7 lakh shares.

There is activity on this counter today after the company said yesterday that it has filed a dispute notice against the Income Tax department over a $1.6 billion tax claim from 2006-07 fiscal. As the notice is filed under UK-India Investment Treaty, in the coming days, we could see the Indian Govt and Cairn starting to negotiate a resolution to this dispute. In case they do not reach any agreement, then an international arbitration panel will be set up to settle the matter.

This matter pertains to some transactions carried out in 2007 to restructure Cairn to get it prepared for Cairn India’s stock market flotation. Cairn is very particular that it has been fully compliant with all relevant legislation and paid all the applicable taxes in India thus it does not foresee anything to worry about.

The company does not plan to make any accounting provision for this but the flip side to this dispute is that it cannot proceed with its 10% stake sale till the matter is settled. This stake sale can fetch the company around $700 million. But the company has stated that it will see seek restitution of losses resulting from the attachment of its CIL stake since 2014.