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India: Investment treaties stifle public policy objectives Dear friends and colleagues, We are pleased to share with you the article below that was published in South-North Development Monitor (SUNS) #7357 dated 25 April 2012. With best wishes, Third
World Network India: Investment treaties stifle public policy objectives New Delhi, 24 Apr (K. M. Gopakumar*) -- Investment treaty provisions can stifle the Indian government's effort to address public policy objectives, as seen from a recent spate of challenges by foreign investors. During the last two months, at least four foreign investors have either invoked or threatened to invoke international arbitration procedures in the investor-to-state dispute settlement provisions under selected bilateral investment treaties (BITs), Comprehensive Economic Cooperation Agreements or free trade agreements (FTAs) to which India is a party. These companies are attempting to prevent the Government of India from taking measures for energy security or against tax evasion or corruption. On 17 April, the world's largest mobile phone service provider, Vodafone Plc, a UK-based company, sent a notice of dispute (notice) to the Government of India against a proposal for retrospective application of capital gains tax contained in the Finance Bill 2012, which is pending before the parliament. The parliament is to resume its budget session on 24 April and is expected to then pass the Bill which seeks to amend the Income Tax Act 1962 in response to significant foregone tax revenues caused in large part by tax exemptions given to corporations. In its press release, Vodafone states that "the proposed amendment violates the international legal protections granted to Vodafone and other international investors in India". It further states that "the retrospective tax proposals amount to a denial of justice and a breach of the Indian government's obligations under the BIT to accord fair and equitable treatment to investors". Therefore, Vodafone demands that the Indian government abandon or suitably amend the retrospective aspects of the proposed legislation. While expressing the intention to settle the issue amicably, the press release also warns that if "the Indian government is not willing to do so, Vodafone will take whatever steps are necessary to protect its shareholders' interests, including commencing investment treaty arbitration proceedings under the BIT against the Indian government". Interestingly, the notice is served through a Dutch subsidiary Vodafone International Holdings BV ("VIHBV") and is the first step required prior to the commencement of international arbitration under the BIT between India and the Netherlands. Vodafone had in a separate case succeeded in litigation against the Government of India in the Indian Supreme Court against a capital gains tax demand regarding the acquisition of assets of Hong Kong based mobile service provider Hutchison Whampoa Ltd in 2007. This case was filed by Vodafone's unit registered in the Cayman Islands, a tax haven. The Government of India demanded capital gains tax for this transaction to the tune of US$2.2 billion from the US$11 billion acquisition. According to the Government of India, even though the transaction took place in a foreign territory, Vodafone is liable to pay tax because the assets concerned are situated in India. In January 2012, the Supreme Court of India overturned the judgment of the High Court of Mumbai and rejected the tax demand of the Government. This judgment is expected to have far-reaching consequences for the Government, which is currently struggling with a huge fiscal deficit because it is exempting many such transactions from tax liability involving many Indian and multi-national corporations. The budget speech of the finance minister in the parliament on 16 March reveals that the fiscal deficit of the government is approximately 5.9 per cent of GDP as per Revised Estimates for 2011-12. Further, the finance minister also stated that tax collection has fallen short by US$6.14 billion. In order to overcome the adverse consequences of the verdict, the Government proposes amendments to the Income Tax Act 1962 through the Finance Bill 2012. First, it allows the Government to tax such transactions since 1962 with retrospective application of a 6-year assessment period. Second, it clearly states that such tax claim is valid irrespective of any judgment from any court, tribunal etc. These proposed amendments are to raise substantial revenue to the tune of US$8 billion for the government from similar deals involving both Indian and foreign companies such as Aditya Birla Group, TATA GE, SAB Miller, Cadbury, AT&T, Sanofi, and Vedanta. Under Indian law, Vodafone still has the opportunity to challenge the legal validity of the amendment (known as judicial review) before the High Court or the Supreme Court once the amendment becomes law. Vodafone's action of choosing investor-to-state provisions under the BIT instead of judicial review is believed to increase pressure on the Government of India to withdraw its proposed amendments prior to the approval of the parliament. According to a media report in the Business Standard, a Government official termed the move of Vodafone as "premature". The report quoted the official: "The move is premature. The company has every right to take legal recourse, but can you serve a notice on the assumption that there would be a dispute?" The Economic Times quoted a finance ministry official as saying, "The deal happened in Cayman Islands and they are invoking India-Netherlands BIPA," adding that "while in the Supreme Court, Vodafone said that the deal happened outside India, under BIPA, it is saying it has made substantial investment in India." Another report in The Hindu states that there is mounting pressure on India. According to this report, after the failed attempt of the UK Chancellor of the Exchequer George Osborne during his recent meeting with Finance Minister Pranab Mukherjee in New Delhi, almost a dozen American industry associations "approached US Treasury Secretary Timothy Geithner." The report quotes from the letter written by the US Chamber of Commerce and the US-India Business Council, among others: "The proposals, which include an unprecedented period of retroactive tax collection, a broad and unclear general anti-abuse rule and an onerous tax on indirect stock transfer, are inconsistent with international tax policy and standards and result in significant erosion of the rule of law. We encourage you to raise these concerns with your Indian counterparts during the upcoming IMF and World Bank meetings this week." Apart from Vodafone, two other mobile service providers viz. the Russian conglomerate Sistema JSFC and the Norwegian company Teleport are citing investment protection provisions in BITs and FTAs to seek compensation for the loss suffered due to the cancelation of their second generation (2G) spectrum licence. Sistema has already sent a formal notice to the government threatening international arbitration proceedings under the provisions of a BIT between India and Russia. The notice warns that Sistema would initiate international arbitration against the Government of India if the latter fails to settle the dispute related to the revocation of its 21 telecom licences in an amicable way within six months. Sistema invested in India through a joint venture with an Indian investor Shyam Telecom in which it holds a 17.4% stake. There are media reports in Times of India on 27 March that Telenor sent a notice to the Government expressing its intention to invoke international arbitration for failure to protect its investment in the country. The same reports also stated that Telenor is seeking nearly US$14 billion in damages. Telenor is citing the India-Singapore FTA to invoke the international arbitration since the investment is routed through a Telenor unit registered in Singapore. Telenor also invested in India through a joint venture with an Indian investor Unitech. These companies are using investment protection to compensate for the loss that they suffered due to the cancelation of their 2G spectrum licences by the Supreme Court, citing the arbitrary process of granting these licenses without an auction. This arbitrary process of issuance of 2G spectrum licenses resulted in an estimated loss of nearly US$20 billion in revenue to the exchequer. Hence, the Supreme Court of India cancelled 122 such licenses granted by the Department of Telecommunications. Criminal prosecution procedure is underway against the people responsible for this fiasco. One of the investment protection claims of the telecom companies - that the government has to compensate for the loss suffered due to a judicial verdict - raises serious concerns about the implications of BITs on judicial independence and good governance. Under the Indian Constitution, the verdict of the Supreme Court is treated as the law of the land and only the parliament has the power to bypass the verdict through legislation, which the parliament exercises only on rare occasions. The international arbitration process now over-rules the law of the land and is also used to legitimize corruption. Another arbitration threat is coming from a hedge fund known as The Children's Investment Fund (TCI) via the pricing policies of coal by Coal India, a public sector undertaking, where TCI holds a 1% share. Coal India was asked by the Government to enter into long-term fuel supply contracts with power producers to ensure fuel supply. One of the policy measures to ensure the affordability of the coal was to delink the price of domestically produced coal from the international price (imported coal). TCI alleges that such a move will result in the loss of revenue for Coal India to the tune of US$20 billion and wanted to claim their share of the profits from this lost revenue. Media reports quoted the partner of TCI saying it would seek legal action "if no clear commitments are made public in the immediate future to provide parity of coal prices to import prices and rectifying the other breaches of fiduciary duties which we have outlined". The partner further stated: "It is a more efficient way to tackle the situation as the procedures in Indian courts are tedious and lengthy. We don't intend to give up and we have the resources and strength to pursue the issue". Coal India was under tremendous pressure from the Government to ensure an uninterrupted supply of coal to power producers at an affordable price. According to Firstpost, "Coal accounts for more than half of India's power generation and will be required for 85 percent of the 76,000 megawatts additional capacity targeted in the next five years. India sits on the world's fifth-largest coal reserves, and produces the most after China and the United States. But it also imported about 80 million tonnes of coal for power last year and that figure could rise to 400 million tonnes in 2030". This move clearly shows how the investment treaty enables TCI, a minority shareholder with a 1% stake, to erect barriers to a public policy measure by the government to ensure energy security. Recently, an arbitration tribunal awarded 8 million Australian Dollars against the Government of India in an action initiated by an Australian mining company, White Industries, under the India-Australia BIT that came into force in 1999. The cause of action goes back to a commercial contract between White Industries and Coal India, a public sector company with the mandate of coal mining, in relation to the development of a coalmine in 1989. Under this contract, White Industries was to supply equipment and technical services. The contract contains a condition to provide a bonus to White Industries if the production is in excess of target, and the company is liable to pay a penalty if the production is lower than the target. Coal India invoked the bank guarantee of White Industries on the ground of non-fulfillment of target. White Industries initiated an arbitration case against Coal India at the International Chamber of Commerce against the invocation of the bank guarantee in 2000. In 2002, the arbitration award went against Coal India. White Industries was awarded 4 million Australian Dollars. Coal India approached the Calcutta High Court to set aside the award, which is permitted under the Indian Arbitration and Conciliation Act 1996. During the same time, White Industries approached the Delhi High Court to enforce the award. In 2007, after non-conclusive litigation in multiple courts, the matter went up to the Supreme Court for the final hearing. However, before the final deposal of the case, White Industries initiated an investment dispute under the BIT between India and Australia. The BIT tribunal held that the initial International Chamber of Commerce arbitration award comes within the scope of definition of an investment and also awarded compensation for denial of the effective means of asserting a claim. The arbitration tribunal cites the fact that the Supreme Court did not heed the plea to expedite the hearing and that White Industries is denied an effective means of asserting its claims. Interestingly, the effective means of asserting a claim provision is imported from the India-Kuwait BIT through the most-favoured-nation treatment clause in the India-Australia BIT. According to news reports, these developments made the Government of India review its obligations under BITs as well as the investment chapters of FTAs. However, there is no clarity regarding the exact nature and scope of the suggested review. One expert who spoke to this author was of the view that the scope of the review should not be limited to the investor-to-state dispute settlement mechanism. According to this expert, the scope of the review should cover the substantial provisions of BITs and investment chapters of FTAs, including the definition of investment. Another researcher points out that the objective of the review should be to bring legal clarity in substantial provisions in order to curtail the interpretational freedom of arbitrators. One set of experts was of the view that a review of individual BITs and FTAs is time-consuming and therefore may not achieve the desired result. India has so far signed 82 BITs and 4 FTAs with investment chapters. Out of these 82 BITs, 72 are already in force. Therefore, individual review of the BITs would take years to complete. These experts suggested that there is a range of options before India viz. re-negotiation, termination, joint notes of interpretation, or unilateral declarations of interpretation. They argue that India should keep all options open to achieve the best outcomes to regain the policy space in the areas of public policy, regulation and development. In this regard, they even suggest abrogation of BITs which contain asymmetric legal obligations on India. (* With inputs from Kajal Bhardwaj, a lawyer working on public interest issues.)
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