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Is It Just Show Business?
By Joe Tirado
Some 16 months after his historic election victory, Prime Minister Narendra Modi continues to discover that while it’s easy to say your country is open for business, the realities of FDI all too often require difficult choices and tough trade-offs.
In recent years, India has been hit with a growing number of claims brought by foreign investors under various bilateral investment treaties (BITs) it has signed with other nations. It has been four years since the first investment treaty arbitration award was published against India, in 2011’s White Industries Australia Limited v Republic of India.
An arbitral tribunal found India guilty of violating the India-Australia BIT on the basis that a seven-year delay in the Indian courts in the enforcement of a commercial arbitration award against Coal India showed investors did not have an "effective means of asserting claims and enforcing rights". Since then, investors have filed a series of contract- or investment treaty-based claims against India which include:
Tenoch Holdings: Tenoch, along with its Russian owners Maxim Naumchenko and Andrey Poluektov, brought a case under India’s BITs with Cyprus and Russia. The claim concerns India’s withdrawal in 2009 of its approval to grant frequency allocation licences to local mobile phone company ByCell.
2G scam: The Supreme Court’s decision to quash all mobile network licences in the 2G scam in 2012 prompted several arbitration claims, while further cancellations in 2013 led to additional disputes.
Louis Drefyus Armateurs: Louis Dreyfus Armateurs filed a BIT claim under the France-India BIT in March 2014. Following its exit from the Haldia Port venture, the company claimed the Indian government hampered the implementation of the venture, disregarded court orders regarding the handing over of equipment, and failed to provide adequate security to its personnel and investment.
Vodafone: Vodafone filed a BIT claim against India under the Netherlands-India BIT in April 2014. This claim is related to Vodafone’s dispute with the Indian tax authorities over its 2007 takeover of Hutchison Whampoa’s Indian operations, which saw Vodafone asked to pay $2.6 billion in taxes.
Reliance, BP and Niko: Reliance Industries, BP and Canada’s Niko Resources have brought two arbitrations against India’s government amid disputes over cost awards and pricing in relation to their operation of gas fields off the coast of Andhra Pradesh.
Devas and Deutsche Telekom: These claims arise out of contracts with Antrix Corporation, the commercial arm of the Indian Space Research Organisation (Isro), for the launch and operation of two satellites, which the Indian government cancelled.
Nokia: The telecom company has reportedly notified the Indian government of a claim under the Finland-India BIT in May 2014 in relation to disputes concerning the application of withholding tax to royalty payments made by Nokia India to its parent company.
India's response to these cases will be scrutinised closely, with Modi’s government under pressure from conflicting interests at home and abroad. Within India, it faces calls to prioritise domestic concerns. But the country’s international trading partners say India must prove its commitment to openness is not just talk.
The early signs are that the domestic lobbying is winning the argument, with GoI now considering measures that might give India greater protection. At the last G20 talks in Australia, for example, India argued that tax disputes arising out of cross-border transactions should not be mandatorily arbitrated under BITs.
Recent media reports suggest the finance ministry is now eager to amend India’s model BIT in order to “balance the objective of investor protection and the interest of nation”. The new model BIT could exclude taxation and introduce new rules on conflicts of interest. The government is said to be considering a requirement that an investor should have “substantial business activities” in India to qualify for BIT protection.
There are likely to be further disputes that will add to the pressure on New Delhi to implement such reforms. In particular, the recent decision of the Indian Supreme Court in Manhoar Lal v The Principal Secretary, which held that the government’s allocation of coal blocks to public and private companies between 1993 and 2010 was illegal, is expected to trigger further claims against India.
The Supreme Court cancelled 214 out of 218 coal licences on the basis of this ruling. Many of these licences have an element of foreign investment and the court's decision will form the grounds for potential investment treaty claims against India.
Such claims will only add to the difficulties the PM faces. He knows the political imperative at home of being seen to fight for Indian interests. But he is also aware of the need to prove his mettle to international investors.
If he moves too far to placate his domestic audience, he risks undermining his reputation as a reformer on whom international investors can depend. He must, therefore, persuade domestic critics that India's long-term interests are best served by embracing globalisation.
(The writer is partner and global co-chair of International Arbitration, Winston & Strawn)
Is It Just Show Business?
By Joe Tirado
Some 16 months after his historic election victory, Prime Minister Narendra Modi continues to discover that while it’s easy to say your country is open for business, the realities of FDI all too often require difficult choices and tough trade-offs.
In recent years, India has been hit with a growing number of claims brought by foreign investors under various bilateral investment treaties (BITs) it has signed with other nations. It has been four years since the first investment treaty arbitration award was published against India, in 2011’s White Industries Australia Limited v Republic of India.
An arbitral tribunal found India guilty of violating the India-Australia BIT on the basis that a seven-year delay in the Indian courts in the enforcement of a commercial arbitration award against Coal India showed investors did not have an "effective means of asserting claims and enforcing rights". Since then, investors have filed a series of contract- or investment treaty-based claims against India which include:
Tenoch Holdings: Tenoch, along with its Russian owners Maxim Naumchenko and Andrey Poluektov, brought a case under India’s BITs with Cyprus and Russia. The claim concerns India’s withdrawal in 2009 of its approval to grant frequency allocation licences to local mobile phone company ByCell.
2G scam: The Supreme Court’s decision to quash all mobile network licences in the 2G scam in 2012 prompted several arbitration claims, while further cancellations in 2013 led to additional disputes.
Louis Drefyus Armateurs: Louis Dreyfus Armateurs filed a BIT claim under the France-India BIT in March 2014. Following its exit from the Haldia Port venture, the company claimed the Indian government hampered the implementation of the venture, disregarded court orders regarding the handing over of equipment, and failed to provide adequate security to its personnel and investment.
Vodafone: Vodafone filed a BIT claim against India under the Netherlands-India BIT in April 2014. This claim is related to Vodafone’s dispute with the Indian tax authorities over its 2007 takeover of Hutchison Whampoa’s Indian operations, which saw Vodafone asked to pay $2.6 billion in taxes.
Reliance, BP and Niko: Reliance Industries, BP and Canada’s Niko Resources have brought two arbitrations against India’s government amid disputes over cost awards and pricing in relation to their operation of gas fields off the coast of Andhra Pradesh.
Devas and Deutsche Telekom: These claims arise out of contracts with Antrix Corporation, the commercial arm of the Indian Space Research Organisation (Isro), for the launch and operation of two satellites, which the Indian government cancelled.
Nokia: The telecom company has reportedly notified the Indian government of a claim under the Finland-India BIT in May 2014 in relation to disputes concerning the application of withholding tax to royalty payments made by Nokia India to its parent company.
India's response to these cases will be scrutinised closely, with Modi’s government under pressure from conflicting interests at home and abroad. Within India, it faces calls to prioritise domestic concerns. But the country’s international trading partners say India must prove its commitment to openness is not just talk.
The early signs are that the domestic lobbying is winning the argument, with GoI now considering measures that might give India greater protection. At the last G20 talks in Australia, for example, India argued that tax disputes arising out of cross-border transactions should not be mandatorily arbitrated under BITs.
Recent media reports suggest the finance ministry is now eager to amend India’s model BIT in order to “balance the objective of investor protection and the interest of nation”. The new model BIT could exclude taxation and introduce new rules on conflicts of interest. The government is said to be considering a requirement that an investor should have “substantial business activities” in India to qualify for BIT protection.
There are likely to be further disputes that will add to the pressure on New Delhi to implement such reforms. In particular, the recent decision of the Indian Supreme Court in Manhoar Lal v The Principal Secretary, which held that the government’s allocation of coal blocks to public and private companies between 1993 and 2010 was illegal, is expected to trigger further claims against India.
The Supreme Court cancelled 214 out of 218 coal licences on the basis of this ruling. Many of these licences have an element of foreign investment and the court's decision will form the grounds for potential investment treaty claims against India.
Such claims will only add to the difficulties the PM faces. He knows the political imperative at home of being seen to fight for Indian interests. But he is also aware of the need to prove his mettle to international investors.
If he moves too far to placate his domestic audience, he risks undermining his reputation as a reformer on whom international investors can depend. He must, therefore, persuade domestic critics that India's long-term interests are best served by embracing globalisation.
(The writer is partner and global co-chair of International Arbitration, Winston & Strawn)
