Centre to contest Vodafone arbitration award, reach out to global funds

The Indian government will contest the Vodafone arbitration award, but it will also reach out to international pension and insurance funds keen to invest in the country in order to reassure them, said a top official source.

On Friday, Vodafone International Holdings B.V., the parent company of India’s beleaguered Vodafone Idea, won an award in an international arbitration tribunal in The Hague against tax demands made by India.

The finance ministry is certain that whenever the company approaches an Indian court with a request for the enforcement of the award, it shall be opposed. “Parliament had debated the retrospective tax and passed a unanimous resolution in favour of the government’s right to make the tax claim, so we cannot dilute the position,” said the source.  

Incidentally, the government also has the option to approach the Singapore International Arbitration Centre to appeal against Friday’s ruling, which entails a payout of Rs 85 crore. This includes Rs 45 crore for the tax collected so far and Rs 40 crore towards costs charged by the tribunal. Typically, Singapore has been India’s preferred arbitration centre for all commercial disputes, for various reasons.

The finance ministry recognises that this action could have collateral damage, dampening the renewed enthusiasm of long-term pension and insurance funds for investing in India. A large percentage of the Rs 100-trillion that the ministry hopes to attract through the proposed National Investment Pipeline is supposed to come from pension and insurance funds abroad.

The worry for these funds is that India does not provide a formal route for arbitration in its tax treaties with most countries. This has been so since 2016, when the government framed a revised Bilateral Investment Treaty (BIT), replacing the older Bilateral Investment Protection Agreements (BIPA).

The new BIT tilts in favour of the sovereign, that is the India government. In the four years since 2016, 70-odd BIPAs have come up for renewal, but none has been renewed. “The concern about the BIT stems from the superior negotiation power it offers the sovereign. If the Government of India has a particular point of view which would always prevail, then investors could ask what is the space left for arbitration,” said a partner at a law firm, which advises pension and sovereign wealth funds.  

India has had a difficult relationship with arbitration awards. It has not signed the International Centre for Settlement of Investment Disputes (ICSID) convention for arbitration, even though more than 150 countries have signed it. The convention, which came into force in 1966, was promoted by the World Bank as a legal dispute resolution and conciliation framework between international investors. India, South Africa, Brazil, and Mexico are some of the economies which have not signed the document. Had it been signed, Vodafone International Holdings B.V. could have presented the award at any Indian court and got a favourable order.

India is a member of the softer UNCITRAL (United Nations Commission on International Trade Law) convention on arbitration, or what is known as the New York Convention. But here too, India has signed on caveats. The most important of these is that arbitration awards will only apply to those that relate to disputes considered as commercial under domestic law.

India will argue that any enforcement would fall foul of public policy since the retrospective tax is sanctioned by Parliament. It is this provision which spooks overseas funds as a tax demand cannot then be challenged in any arbitration. Once the finance ministry opposes the Vodafone award, all the concerns about uncertainty and how investments will play out midstream will return to haunt the government.  

As a paper by law firm Nishith Desai Associates notes: “India had an unpleasant experience with BITs. The Dabhol project of the late Nineties led to at least two BIT claims by the project companies, as well as seven BIT claims by the project lenders.” It was this experience which led India to come out with the revised BITs in 2016.

However, taking a different stance in another paper, jurist Fali Nariman had noted it would be wrong to argue that the courts in India have an anti-foreigner bias — instead they only demand “sufficient patience”.