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Measured steps

The state seems oblivious to India’s international obligations under BITs

The state seems oblivious to India’s international obligations under BITs

Of late,there have been many instances of different organs of state and foreign corporations coming face to face on regulatory issues. This includes the Supreme Court ruling that ordered the cancellation of 2G licences held by telecom companies,including foreign players; the proposal in the finance bill,2012,to impose a retrospective tax on Vodafone,preceded by a long tax litigation; and lately,the decision of the National Green Tribunal (NGT) to revoke the conditional environmental clearance given to the Rs 51,000 crore Posco investment.

Apart from the unease regarding what impact all these regulatory tussles will have on investor sentiment,a key concern is that the state,in all these cases,appears to be oblivious to India’s international obligations to these foreign investors in Bilateral Investment Treaties (BITs). This concern is real because India has entered into more than 80 BITs,including Free Trade Agreements (FTAs) with chapters on investment. So a large part of foreign investment is in the purview of these international treaties. The list includes almost all countries with major capital exports to India,like the UK,the Netherlands,Germany,France,Australia,Mauritius,Singapore and South Korea. Domestic regulatory measures that impact a foreign investor from any of these countries have to be compatible with the investment treaty,else it would give rise to an international claim. Given such an enormous network of BITs,one would assume that India’s executive,legislature and judiciary have internalised the impact of BITs on their exercise of regulatory power. But it appears that the different organs of state have poor knowledge of BITs. None of the policy pronouncements dealing with foreign investors,such as India’s domestic FDI policy or any policy aimed at a particular foreign investor,explains the compatibility of domestic regulatory measures with India’s BITs. Likewise,judicial decisions involving foreign corporations seldom bother to explain their legal reasoning in the light of India’s BITs.

The following developments necessitate the need to internalise the cost of BITs in domestic decision making. First,India recently lost an investment treaty arbitration (ITA) dispute to White Industries,an Australian company,under the India-Australia BIT. The ITA tribunal ordered India to pay massive damages to the Australian investor as White Industries had suffered inordinate delays in Indian courts in enforcing its international commercial arbitral award against Coal India. Second,Sistema,a Russian firm whose 2G licences have been cancelled by the SC,has formally served a notice to India under the India-Russia BIT alleging that India had violated the BIT. Third,Telenor,another company whose 2G licence has been cancelled by the SC,is reportedly mulling over challenging the cancellation of its licence by invoking the investment chapter of the India-Singapore FTA. Fourth,and the latest,is the report that Vodafone contemplates challenging,inter alia,clause 113 of the finance bill 2012 under the India-Netherlands BIT. This clause provides for validation of tax demands,including those on capital gains raised on companies registered outside India,irrespective of any court judgement. This clause is clearly directed at taxing Vodafone. Such a regulatory measure might have serious implications when viewed in the light of the broad obligations that India has to Vodafone International Holdings (a company registered in the Netherlands) under the India-Netherlands BIT. Apparently,some in the government are of the view that taxation measures are outside the purview of the India-Netherlands BIT. This is incorrect. In the BIT,taxation measures are an exception in the obligations to national treatment and Most Favoured Nation,but not to other obligations like treating Dutch investors fairly and equitably. Different ITA tribunals have interpreted this provision broadly to include certainty and predictability in the regulatory regime of the host nation.

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If Vodafone were to take India to ITA,India will have the difficult task of convincing the tribunal that imposing retrospective taxation measures,even when its own apex court ruled the taxation measure illegal,is part of a regulatory framework that is certain and predictable. The point is not that India shouldn’t adopt these measures but to make sure that they are synchronised with India’s BITs. If not,India will have to pay a massive financial cost. If India considers that the BITs encroach on its regulatory sovereignty,it should review them to make sure that it can amend its laws without any international constraint. However,for this to happen,the government’s deficiency in understanding the ramifications of the BITs needs to be addressed.

The author is a research scholar of law at King’s College,London

First published on: 16-04-2012 at 03:15:31 am
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