It is almost a reflection of the current business climate that the United Progressive Alliance should had received no less than six notices under various Bilateral Investment Promotion and Protection Agreements (BIPAs) and Comprehensive Economic Cooperation Agreement (CECA) to resolve issues between foreign investors and the government over laws and regulations and other government decisions.
Taken together, this is the highest number of such notices the central government has faced at any one time ever since the first BIPA was signed in 1994. Not surprisingly, the bulk of these notices are in telecom, the fallout of the Supreme Court’s cancellation of 122 telecom licences in February following a controversy over allotment.
BIPAs and CECAs intend to provide fair and equitable treatment to the investors of either country in the territory of the other country. So, in a sense, the outcome of these notices will be significant for foreign investors.
| DISTRESS SIGNALS Notices served under various investment agreements | |
| Company | BIPA/CECA* |
| Sistema | Russia |
| Telenor | Singapore |
| Capital Global & Kaif Investment | Mauritius |
| Vodafone Intl Holdings BV | Netherlands |
| Devas Employees | Mauritius |
| The Children’s Investment Fund | United Kingdom |
| *BIPA: Bilateral investment promotion and protection agreement CECA: Comprehensive economic cooperation agreement | |
What does a notice under BIPA or CECA entail? As a first step, most such agreements provide for amicable negotiations in the event of a dispute — under Article 10 of India’s model text for BIPAs, the time frame is typically six months.
If negotiation fails, the disputants can refer the matter to a three-member arbitration tribunal, in which each party appoints one member, and both must select the national of a third state as chairman. If neither can agree on the latter, the President of the International Court of Justice can be invited to appoint someone. Arbitration is decided by a majority of votes.
So far, India has lost the one case that went to arbitration. This involved White Industries of Australia and the Government of India (specifically, the ministry of coal) under the Indo-Australian BIPA that was signed in 1999 but came into force in 2000.
The case concerned a 1989 dispute between government-owned Coal India and Australia’s White Industries that resulted in a nine-year legal battle. Finally, in 2010, White Industries filed a claim against India under the Australia-India agreement.
In 2011, the International Chamber of Commerce tribunal in Paris awarded White Industries A$4.08 million on grounds that Coal India had breached its obligations to grant White Industries “fair and equitable treatment” and “effective means of asserting claims” (the latter an oblique reference to the long-drawn Indian judicial process).
Given this history, the big question is this. The telecom company notices against licence cancellation and auctioning of spectrum, the airwaves that enable mobile telephony, invoke the right to protect their investments under bilateral agreements. In effect, they challenge a Supreme Court order, which the government is following. If we make the extreme assumption that negotiations fail, arbitration follows and India loses, is the government obliged to reverse the judgment of the country’s highest court?
The overarching view among experts is no; Indian laws or Supreme Court decisions, they said, would prevail over BIPA-type agreements. Cyber law expert and Supreme Court advocate Pavan Duggal points out that Article 3 of the Indian model text for BIPA says as much. Section 2 of the Article reads, “…nothing in this Agreement precludes the host Contracting Party from taking action for the protection of its essential security interests or in circumstances of extreme emergency in accordance with its laws normally and reasonably applied on a non-discriminatory basis.”
Meanwhile, there is some question over whether Vodafone’s notice qualifies under the BIPA signed with the Netherlands in 1995 and which came into force from December 1, 1996.
Vodafone’s notice has to do with a $2.6 billion withholding tax demand that the Indian government claims it should have deducted when it bought a controlling stake in telecom company Hutchison Essar from Hong-Kong-based Hutchison in 2007. The case here is more complex since the British company has a Supreme Court ruling in its favour but the government amended tax rules in the last Budget to make capital gains on offshore deals liable to tax with retrospective effect.
After Vodafone served the notice under BIPA in April, the government set up an inter-ministerial group headed by Finance Secretary R S Gujaral to frame its responses. The panel has said the issue is not covered under the agreement and has informed Vodafone accordingly. Duggal confirms that the BIPA did not have an arbitration clause for taxation.
But it is possible, that BIPA can be invoked in this case. Arun Chawla, assistant secretary general of the Federation of Indian Chambers of Commerce and Industry (Ficci), points out that “taxation per se would not come under BIPA but taxation on account of accruing of shares is covered under BIPA”.
The notice filed by The Children’s Investment Fund (TCI), on the other hand, is against the actions of the majority shareholder in Coal India, the government.
TCI holds a little over one per cent in Coal India through two companies based in the UK and Cyprus. In March, it served a notice under agreements between India and the United Kingdom (1994), and India and Cyprus (2002). The notice said, “The Republic of India’s recent conduct with respect to CIL has seriously impaired business activities and operations of CIL and has contravened each of the treaties.” If a settlement is not reached within six months, the fund said, international arbitration would begin under the terms of the treaties.
TCI’s omnibus grievances include pricing of coal up to 70 per cent below international market prices, allocation of coal blocks to the private sector below market prices, those blocks remaining undeveloped, loss-making underground mines continuing to be operated and the government generally controlling and issuing directions to the company in a manner abusive to minority shareholders. TCI also cited interference by the ministry of environment and forests in delaying approvals to develop new coal mines.
Given the fact that local laws and court orders prevail in trade and investment agreements, why have companies rushed for cover under BIPAs and CECAs? Vodafone’s contention is that under the BIPA, the Indian government is obliged to accord fair and equitable treatment to investors; provide full protection and security; not breach the legitimate expectations of investors in making investments; not deny justice or breach previously provided assurances; and not take steps to indirectly expropriate the investment.
Clearly, there’s great deal of complex negotiation ahead in the corridors of power.
