Cairn Energy probed by Indian tax office Cairn is pinning its hopes on a drilling campaign Cairn Energy, the UK oil and gas explorer, has been forbidden by India's tax office from selling a residual stake worth about $950m in its former subsidiary Cairn India, pending an investigation into its tax affairs. The tax probe makes Cairn Energy the latest in a string of international companies to have their businesses disrupted by Indian tax officials, including Shell, the Anglo-Dutch oil group, and Nokia, the Finland mobile group. Many such cases result in protracted legal disputes, most famously in the case of Vodafone, the British telephone group, which remains mired in a $2.6bn dispute over alleged unpaid capital gains tax, relating to the acquisition of its Indian arm in 2007. Cairn Energy had planned to offload the stake to raise funds for future energy exploration, but now faces a potentially lengthy investigation into its operations in Asia's third-largest economy dating from 2007, the year in which the company floated its then-Indian division. Shares in Cairn Energy fell more than 4 per cent on Friday. News of the investigation also led to a 2 per cent drop in shares of London-listed Vedanta, which in 2011 bought Cairn's Indian subsidiary for $6.5bn, in a high profile deal marked by extensive regulatory delays. This spate of tax rows, alongside controversial legal changes allowing Indian authorities to revisit concluded tax cases retrospectively, have badly dented India's image as an investment destination and prompted claims of arbitrary and unfair treatment from foreign companies. One figure familiar with the situation said the companies involved could face a heavy tax demand and subsequent legal challenges, further denting India's image. This looks like it will turn into a sort [of] Vodafone 2 case, given the tax authorities seem to be targeting a transaction between the international group and its Indian subsidiary around the IPO. It sends a terrible signal to international investors," the person said. On Friday, Cairn Energy confirmed that it had been contacted by India's revenue authorities, while people familiar with the situation said that the company had been forbidden from selling its residual stake pending the completion of the authority's investigation. The ruling also has ramifications for Vedanta, the debt-strapped resources group owned by billionaire Anil Agarwal, which recently launched a $900m share buy-back at Cairn India, partly to provide an exit route for Cairn Energy In a statement, Cairn Energy said: "Cairn is co-operating to provide the necessary documentation and information as requested." Earlier this week, New Delhi-based Cairn India reported that tax authorities had launched an investigation over potential unpaid tax in 2007, the year of Cairn India's flotation. Those familiar with the investigation said neither company has been told the nature of the tax investigation. "It is a fair guess that the revenue think that there is tax due relating to the IPO," another person with knowledge of the companies said on condition of anonymity. Cairn Energy retains a 10.3 per cent in Cairn India, which owns a series of lucrative oil discoveries in the north western state of Rajasthan. Cairn Energy said in August 2013 that the stake was worth $956m. The blocked sale comes at a time in which Cairn Energy has launched plans to spend $400m drilling nine new wells during 2014 in areas ranging from the North Sea to north Africa, an effort that will eventually require fresh capital to finance further exploration. The ruling also has ramifications for Vedanta, the debt-strapped resources group owned by billionaire Anil Agarwal, which recently launched a $900m share buy-back at Cairn India, partly to provide an exit route for Cairn Energy. Following Cairn Energy's exit, Vedanta had planned to merge its cash-rich Cairn India oil and gas division into its heavily indebted mining division, Sesa Sterlite, a move that may now be complicated by the tax probe, analysts say. "The buyback was primarily designed to give Cairn Energy a way out and then to bring Cairn and Sesa together, and so it looks like this all could be delayed, which, given their debts, is not good news for Vedanta," says Dayanand Mittal, an oil and gas expert at brokerage Ambit Capital. A spokesman for Cairn India said the company was "fully compliant with all Indian income tax laws" and claimed that it had completed all tax assessments for 2007.