Revised BIPPA model: Holding company concept likely to be scrapped

The revision also seeks to define the difference between Central and state govt in order to iron out any differences

Stung by its vexed tax dispute with Vodafone, the government plans to do away with the concept of investment made by a ‘holding company’ under the revised model of Bilateral Investment Promotion and Protection Agreements (BIPPAs) and Comprehensive Economic Cooperation Agreements (CECAs).

A committee of secretaries working on the revised model has suggested that investments made only by the ‘corporations’ that come directly into the country, and not those coming through holding companies, be protected. A BIPPA is meant to promote and protect the interests of investors of one country in the territory of the other.

The new BIPPA text, to be included in the investment chapter of CECA, will seek to change the definition of ‘investment’. Under the new definition, investments of only those corporations that have “real and substantial business” operations in their own countries will be protected.

The revised text also seeks to define the difference between the Central and state governments to iron out differences. The current text doesn’t define government; this has led to a spate of disputes, especially in the telecom sector.

The first dispute of a foreign investor was one involving British telecom major Vodafone. Its Dutch subsidiary, Vodafone International Holdings BV (VIHBV), had in April 2012 served a notice of dispute on the government under the India-Netherlands BIPPA. It had asked the government to abandon the retrospective amendments to the Income-Tax Act that could make it liable to pay a tax of over Rs 12,000 crore. The government had told Vodafone the notice was premature. Vodafone again served a supplementary notice on India in January this year, invoking the India-Netherlands BIPPA on a dispute in respect of a transfer-pricing case between Vodafone India Services and VIHBV.

Later,  Sistema, Telenor and Etisalat also tried to ring-fence their India investments by citing India’s various BIPPA with other countries. After this, the government decided to review the BIPPA and CECA texts, especially on litigation.

The revised text also seeks to lessen the importance of international laws in settling disputes between two parties.

The government had in 2012 formed an inter-ministerial group to revise these agreements. The committee, set up by the Department of Economic Affairs, had representatives from the departments of commerce, industrial policy and promotion and telecommunications, besides those from the ministries of home and external affairs.

To date, India has signed 83 BIPPAs, besides some CECAs, which include an investment chapter on the lines of BIPPAs. The government believes BIPPAs or CECAs have not helped augment foreign equity inflows, except gaining some access in services. It said bilateral commitments, on the contrary, resulted in tightening of the market for domestic Indian manufacturers. The government believes some provisions in bilateral agreements have allowed foreign investors to have their say on sovereign policy matters.