In the recent years, India has been involved in several disputes with foreign investors in which the latter have invoked the provisions of the Investor State Dispute Settlement (ISDS) mechanism included in Bilateral Investment Promotion and Protection Agreements, or BIPPAs—better known as Bilateral Investment Treaties or BITs—to bring the host country before international arbitration panels. At the end of 2013, there were 14 disputes against India, the 10th-largest among the countries facing investment disputes.
But it wasn’t until end-2011 that the government, having BIPPAs with 82 countries, faced the challenges posed by these agreements. This was the result of a ruling made against the government in 2011 by a Singapore-based tribunal established under the rules of the United
Nations Commission on International Trade Law (UNCITRAL) that adjudicated the dispute between the public sector Coal India Ltd and the Australian firm, White Industries Ltd., after the foreign firm had invoked the ISDS provisions of the India-Australia BIPPA. This dispute arose after White Industries and Coal India (the former was contracted to supply equipment for a Coal India expansion project) failed to reach a resolution after litigating in Indian courts for years.
Since the Coal India arbitration, a number of foreign investors have either served notices for arbitration or are preparing to invoke the provisions of the ISDS for enforcing the rights in India. These disputes have arisen in two broad domains: the first concerns allocation of the airwaves for telecommunication services and the second, tax disputes involving a number of major foreign investors.
Most of the disputes in telecom arose from the 2012 ruling of the Supreme Court cancelling 122 2G licences allocated to mobile operators, including those granted to foreign firms. The court had ruled that the government had not followed the due process while allocating the licences to the firms. Until now, two of the affected firms, Axiata Group, a Malaysia-based investor with a JV with Idea Cellular, and Khaitan Holdings Mauritius Limited, an investor in Loop Telecom, a UK-based telecom firm, have initiated international arbitration proceedings under the UNCITRAL rules using the provisions of Mauritius-India BIPPA. In addition, the Russian firm, Sistema and the Norwegian firm, Telenor have served notices to the government invoking provisions of India-Russia and India-Singapore BIPPAs, respectively.
In 2012, the Switzerland-based firm, Bycell Holding AG, initiated international arbitration proceedings under the UNCITRAL rules complaining about the discriminatory treatment in the allocation 2G licences. The department of telecommunications had withdrawn letters of intent issued to the firm to launch mobile services in 2009, ostensibly for security reasons. Bycell Holding AG is 97%-owned by Cyprus-based Tenoch, which is, in turn, owned by two Russian nationals. The arbitration proceedings were thus initiated using the provisions of Russia-India and Cyprus-India BIPPAs.
The dispute involving the Indian Space Research Organisation and its commercial arm, Antrix Corporation, and the Devas Group, a Mauritius-based firm, is also being decided through international arbitration proceedings under UNCITRAL rules. The case was filed in 2012, with Devas invoking the Mauritius-India BIPPA. An additional notice of arbitration under the Germany-India BIPPA was filed by Deutsche Telecom, a 20% owner of Devas in 2013. This case involves an agreement between Antrix Corporation and the Devas Group to construct two satellites using which the latter would have provided wireless multimedia services via the S-band spectrum. The government annulled this agreement in 2011 after the valuation of airwaves in the deal between Antrix and Devas came under question. Further, the government ruled that the deal was not in the security interests of the country.
The most recent of the disputes involves Vodafone Plc, the UK-based company and world’s largest telephone service provider, has initiated arbitration proceedings under UNCITRAL rules in February 2014, invoking the provisions of India-Netherlands BIPPA, through its Dutch subsidiary Vodafone International Holdings BV against the retrospective application of capital gains tax introduced through the General Anti Avoidance Rule (GAAR) in the Finance Act 2012. This proposal was aimed at plugging a loophole in the Income Tax Act 1961, which allowed Vodafone to avoid its tax liability arising from the acquisition of Indian telecom company Hutchison Essar in 2007 merely because the transaction took place in Cayman Islands.
The government has responded by initiating a review of the BIPPA model, ostensibly to avoid disputes with the foreign investors. This review must take cognisance of problematic areas of the BIPPAs, which, in our view, include the definition and treatment of foreign investment, expropriation and the investor-state dispute settlement provisions of the BIPPAs.
The definition of investment that the government had agreed to in BIPPAs is particularly problematic as it provides an unusually broad definition of investment. The definition not only includes all conceivable forms of assets, including intellectual property rights, but questionable forms like “rights to money or to any performance under contract having a financial value” and “business concessions conferred by law or under contract”. By adopting this definition, the government has committed itself to treat foreign investors having long-term interest in India as no different from those that are indulging in speculation, which is, in fact, a perfect recipe for perverse incentives. As it revises the model, the government must ensure that it provides protection to only long-term financial flows that can contribute to the country’s development programmes. There is also a strong case for removing all assets from the definition, as they discriminate against the Indian nationals owning similar assets. For instance, including intellectual property rights in the BIPPA implies that the foreign owners of such rights get an additional layer of protection as compared to their Indian counterparts.
Integral to the treatment of investors is the “National Treatment” and the “Most Favoured Nation (MFN) Treatment”. While the “National Treatment” clause promises to the foreign investor that it will be treated “no less favourably” than the domestic investors, the MFN states that the foreign investor will be treated “no less favourably” than investors from any third country. While these provisions are intended to ensure non-discrimination, the manner in which they are formulated implies that the government can extend higher incentives to the foreign investor as compared to a domestic investor or one from a third country with which there is no BIPPA. In the interest of greater involvement of Indian investors, the Centre needs to have a re-look at the provisions relating to the treatment of investors.
“Expropriation” is a critical element of the BIPPA as it underlines the nature of protection provided to the foreign investors. Traditionally, expropriation was taken to be synonymous with “nationalisation” of a foreign enterprise, but more recently, the focus has been on “indirect expropriation”, a term used for a wide variety of circumstances. For instance, a government introducing a regulation to protect the larger public interest has been interpreted as “indirect expropriation” (also termed as “regulatory takings”). It is this interpretation of “indirect expropriation” that has been a cause of concern for several governments. In a recent initiative, the EU and Canada have clarified the boundaries of “indirect expropriation” in the free trade agreement: (i) legitimate public policy measures taken to protect health, safety or the environment would not constitute indirect expropriation, and (ii) indirect expropriation can only occur when the investor is substantially deprived of the fundamental attributes of property. These are useful guideposts for India.
The most egregious aspect of the BIPPA is the Investor State Dispute Settlement (ISDS) mechanism, which allows an “aggrieved” foreign investor to invoke the provisions of the UNCITRAL to initiate legal proceedings against the Indian government before an international tribunal. A further problem is that the ruling of this international tribunal cannot be appealed in any domestic court. In other words, the decision of the tribunal is binding on the parties. Thus, while any legal person operating within the territorial jurisdictions of India is expected to follow the due process provided by the Indian legal system, the BIPPA provides the foreign investor an exception. The growing number of ISDS cases world-wide is a clear indication that this element of the investor protection agreement has immense potential of misuse. India needs to seriously consider ways of curbing the ability of the foreign investors to initiate such disputes.
But it wasn’t until end-2011 that the government, having BIPPAs with 82 countries, faced the challenges posed by these agreements. This was the result of a ruling made against the government in 2011 by a Singapore-based tribunal established under the rules of the United
Nations Commission on International Trade Law (UNCITRAL) that adjudicated the dispute between the public sector Coal India Ltd and the Australian firm, White Industries Ltd., after the foreign firm had invoked the ISDS provisions of the India-Australia BIPPA. This dispute arose after White Industries and Coal India (the former was contracted to supply equipment for a Coal India expansion project) failed to reach a resolution after litigating in Indian courts for years.
Since the Coal India arbitration, a number of foreign investors have either served notices for arbitration or are preparing to invoke the provisions of the ISDS for enforcing the rights in India. These disputes have arisen in two broad domains: the first concerns allocation of the airwaves for telecommunication services and the second, tax disputes involving a number of major foreign investors.
Most of the disputes in telecom arose from the 2012 ruling of the Supreme Court cancelling 122 2G licences allocated to mobile operators, including those granted to foreign firms. The court had ruled that the government had not followed the due process while allocating the licences to the firms. Until now, two of the affected firms, Axiata Group, a Malaysia-based investor with a JV with Idea Cellular, and Khaitan Holdings Mauritius Limited, an investor in Loop Telecom, a UK-based telecom firm, have initiated international arbitration proceedings under the UNCITRAL rules using the provisions of Mauritius-India BIPPA. In addition, the Russian firm, Sistema and the Norwegian firm, Telenor have served notices to the government invoking provisions of India-Russia and India-Singapore BIPPAs, respectively.
In 2012, the Switzerland-based firm, Bycell Holding AG, initiated international arbitration proceedings under the UNCITRAL rules complaining about the discriminatory treatment in the allocation 2G licences. The department of telecommunications had withdrawn letters of intent issued to the firm to launch mobile services in 2009, ostensibly for security reasons. Bycell Holding AG is 97%-owned by Cyprus-based Tenoch, which is, in turn, owned by two Russian nationals. The arbitration proceedings were thus initiated using the provisions of Russia-India and Cyprus-India BIPPAs.
The dispute involving the Indian Space Research Organisation and its commercial arm, Antrix Corporation, and the Devas Group, a Mauritius-based firm, is also being decided through international arbitration proceedings under UNCITRAL rules. The case was filed in 2012, with Devas invoking the Mauritius-India BIPPA. An additional notice of arbitration under the Germany-India BIPPA was filed by Deutsche Telecom, a 20% owner of Devas in 2013. This case involves an agreement between Antrix Corporation and the Devas Group to construct two satellites using which the latter would have provided wireless multimedia services via the S-band spectrum. The government annulled this agreement in 2011 after the valuation of airwaves in the deal between Antrix and Devas came under question. Further, the government ruled that the deal was not in the security interests of the country.
The most recent of the disputes involves Vodafone Plc, the UK-based company and world’s largest telephone service provider, has initiated arbitration proceedings under UNCITRAL rules in February 2014, invoking the provisions of India-Netherlands BIPPA, through its Dutch subsidiary Vodafone International Holdings BV against the retrospective application of capital gains tax introduced through the General Anti Avoidance Rule (GAAR) in the Finance Act 2012. This proposal was aimed at plugging a loophole in the Income Tax Act 1961, which allowed Vodafone to avoid its tax liability arising from the acquisition of Indian telecom company Hutchison Essar in 2007 merely because the transaction took place in Cayman Islands.
The government has responded by initiating a review of the BIPPA model, ostensibly to avoid disputes with the foreign investors. This review must take cognisance of problematic areas of the BIPPAs, which, in our view, include the definition and treatment of foreign investment, expropriation and the investor-state dispute settlement provisions of the BIPPAs.
The definition of investment that the government had agreed to in BIPPAs is particularly problematic as it provides an unusually broad definition of investment. The definition not only includes all conceivable forms of assets, including intellectual property rights, but questionable forms like “rights to money or to any performance under contract having a financial value” and “business concessions conferred by law or under contract”. By adopting this definition, the government has committed itself to treat foreign investors having long-term interest in India as no different from those that are indulging in speculation, which is, in fact, a perfect recipe for perverse incentives. As it revises the model, the government must ensure that it provides protection to only long-term financial flows that can contribute to the country’s development programmes. There is also a strong case for removing all assets from the definition, as they discriminate against the Indian nationals owning similar assets. For instance, including intellectual property rights in the BIPPA implies that the foreign owners of such rights get an additional layer of protection as compared to their Indian counterparts.
Integral to the treatment of investors is the “National Treatment” and the “Most Favoured Nation (MFN) Treatment”. While the “National Treatment” clause promises to the foreign investor that it will be treated “no less favourably” than the domestic investors, the MFN states that the foreign investor will be treated “no less favourably” than investors from any third country. While these provisions are intended to ensure non-discrimination, the manner in which they are formulated implies that the government can extend higher incentives to the foreign investor as compared to a domestic investor or one from a third country with which there is no BIPPA. In the interest of greater involvement of Indian investors, the Centre needs to have a re-look at the provisions relating to the treatment of investors.
“Expropriation” is a critical element of the BIPPA as it underlines the nature of protection provided to the foreign investors. Traditionally, expropriation was taken to be synonymous with “nationalisation” of a foreign enterprise, but more recently, the focus has been on “indirect expropriation”, a term used for a wide variety of circumstances. For instance, a government introducing a regulation to protect the larger public interest has been interpreted as “indirect expropriation” (also termed as “regulatory takings”). It is this interpretation of “indirect expropriation” that has been a cause of concern for several governments. In a recent initiative, the EU and Canada have clarified the boundaries of “indirect expropriation” in the free trade agreement: (i) legitimate public policy measures taken to protect health, safety or the environment would not constitute indirect expropriation, and (ii) indirect expropriation can only occur when the investor is substantially deprived of the fundamental attributes of property. These are useful guideposts for India.
The most egregious aspect of the BIPPA is the Investor State Dispute Settlement (ISDS) mechanism, which allows an “aggrieved” foreign investor to invoke the provisions of the UNCITRAL to initiate legal proceedings against the Indian government before an international tribunal. A further problem is that the ruling of this international tribunal cannot be appealed in any domestic court. In other words, the decision of the tribunal is binding on the parties. Thus, while any legal person operating within the territorial jurisdictions of India is expected to follow the due process provided by the Indian legal system, the BIPPA provides the foreign investor an exception. The growing number of ISDS cases world-wide is a clear indication that this element of the investor protection agreement has immense potential of misuse. India needs to seriously consider ways of curbing the ability of the foreign investors to initiate such disputes.
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