He will be replaced by Ian Tyler, former chief executive of Balfour Beatty, who became a non-executive director of Cairn in June.
Sir Bill will not receive an exit payment, a spokesman for the company said, with his fee ceasing when he leaves the company at the end of its annual shareholder meeting on May 15.
Sir Bill, a former Scottish rugby internationalist, was Cairn's chief executive from 1988, when it was listed on the London Stock Exchange.
He became the company's chairman in 2011.
Sir Bill was paid £230,000 a year in the role, according to Cairn Energy's latest report for the 2012 financial year.
Cairn chief executive Simon Thomson said: "Bill has been an exceptional leader and leaves a lasting legacy at Cairn.
"His role in the company's growth over 25 years has delivered significant value to shareholders.
"I am delighted that Ian Tyler has agreed to become our new chairman given his extensive listed company and non-executive experience."
Sir Bill said: "I am proud of Cairn's many achievements during my tenure as founder, CEO (chief executive officer), and subsequently chairman, and as a shareholder I look forward to further progress.
"After 25 years on the board, I am pleased to be leaving in the knowledge that the board and the company will remain in highly capable hands with Ian as chairman and with Simon at the helm as CEO."
Sir Bill retains around 600,000 shares, equivalent to 0.1% of the company.
These had a paper value of nearly £1.2m at last night's closing price of 193.9p, down 4.9p or 2.5% on the day.
Cairn's shares have fallen 29.7% since March 4 last year when they were trading at 275.7p. The company originally floated at 240p a share although the share structure has been affected by subsequent share splits and consolidations.
Sir Bill led Cairn on a successful move into India where in 2004 it made a bumper find at a Rajasthani oil field it had bought from Royal Dutch Shell.
This funded payouts to investors worth around £2.2 billion in 2011.
But it has struggled to come up with subsequent finds of similar scale.
In January the company revealed that Greenland had dropped down its priority list, despite spending more than $1bn (£625 million) on controversial exploration work off the island's coast.
Much of Cairn's exploration attention is currently focused on north-west Africa.
Cairn retains extensive acreage in the North Sea after its £700m takeover of Agora Oil & Gas and Nautical Petroleum in 2012.
The company hopes to develop a series of fields that could be used to generate cash to fund exploration work elsewhere around the world.
Cairn's desire to reward Sir Bill for the returns generated by the company during his tenure landed him at the centre of the so-called Shareholder Spring in 2012.
The company had offered him a £3.5m incentive to seal the sale of a 40% stake in Cairn India to mining giant Vedanta Resources. This was to be settled in the form of a £2.5m share award and a £1m charitable donation.
But Cairn backed down on the share award after investor pressure
Nevertheless, Cairn suffered a humiliating 67% vote against its directors' remuneration report at its shareholder meeting in 2012 as it continued to push through a separate £1.4m "termination payment" paid in lieu of notice when Sir Bill moved from being chief executive to chairman.
Mr Tyler, who is also chairman of Bovis Homes and Al Noor Hospitals, said: "This is an exciting and challenging time for Cairn and I look forward to working with Simon, his management team and the board as we continue to seek to create and deliver material value for shareholders."