Cairn Energy had in October last year announced a $300 million programme to buy-back shares for cancellation.
"The Board has decided to suspend the previously announced share buy-back programme as of March 21 until the position regarding the Cairn India shareholding is resolved," the company said in a statement today.
Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for $8.67 billion, still holds 10.3 per cent stake in Cairn India which at today's trading price is worth about $1 billion.
The company faces a potential tax demand on an alleged Rs 24,500 crore of capital gains it made when in 2006 it transfered all its India assets to a new company, Cairn India and got it listed on stock exchanges.
Cairn Energy said it "is not able to sell" the residual shareholding in Cairn India "while interactions are ongoing with the Indian Income Tax Department".
The Income-Tax Department had in a January 22 order held that the Edinburgh-based firm made capital gains of Rs 24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in places like Jersey, a tax haven, to the newly incorporated Cairn India in 2006.
It, according to the I-T Department, received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.
"Cairn has re-confirmed with its advisers that throughout its history of operating in India, the Company has been fully compliant with the tax legislation in force in each year," Cairn Energy had said reacting to the tax move.
While the I-T Department has so far not raised a tax demand on Cairn Energy, it has ordered Cairn India not to allow the transfer of UK firm's residual stake. It also ordered that the shares cannot be pledged or mortgaged.
After transferring the assets, the Scottish explorer listed Cairn India on the stock exchanges through an initial public offering (IPO) in 2006 that raised Rs 8,616 crore.
In 2011, Cairn Energy sold its majority stake in Cairn India to Vedanta but continues to hold 10.3 per cent shares.
Cairn Energy was widely seen as a likely participant in the Indian firm's share buyback, which opened on January 23. Cairn India 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.
The I-T Department started an investigation on January 15 to determine if capital gains tax was due from Cairn Energy's transfer of shares of Indian assets to Cairn India in 2006.