The Income Tax department, which is probing Cairn Energy plc's transfer of India assets, has asked the UK-based company not to dispose of its 10.3 per cent holding in Cairn India.
Cairn Energy was widely seen as a likely participant in the Indian firm's share buyback, which opened on Thursday.
The I-T department had started an investigation on January 15 to establish if capital gains tax was due from Cairn Energy's transfer of shares of Indian assets that were held in a subsidiary set up in the tax haven of Jersey to newly incorporated Cairn India in 2006.
"Cairn (Energy) has been contacted by the Income Tax Department of India to discuss income-tax assessments for the year ending March 31, 2007. Cairn is cooperating to provide the necessary documentation and information as requested," the Edinburgh-based company said in a statement.
"While discussions are ongoing, the Income Tax Department has instructed Cairn Energy plc to hold its shares in Cairn India," it added.
The I-T Department had 'surveyed' Cairn India's Gurgaon office on January 15. It is investigating the asset transfer under Section 9 of the Income-Tax Act, which deals with income deemed to accrue or arise in India.
A company spokesperson had on January 22 confirmed a "visit" by IT officials for "just a survey" and said the requested information was provided to them.
"Cairn India is fully compliant with all Indian income tax laws and the income tax assessments, including transfer pricing assessment, has been completed for FY 2006-07," the company spokesperson had said.
Any tax demand, if established, may be raised on Cairn Energy. Cairn Energy transfered the India assets to Cairn India Ltd and listed the firm on the stock exchanges through an initial public offering (IPO) in 2006.
The firm, which raised Rs 8,616 crore (Rs 86.16 billion) in the IPO, sold its majority stake in Cairn India to mining group Vedanta Group for $8.67 billion in 2011.
Cairn India, which is sitting on a cash pile of about $3 billion, plans to buy 17.09 crore shares, or 8.9 per cent of the equity, from the open market at not more than Rs 335 apiece, aggregating up to Rs 5,725 crore (Rs 57.25 billion).