Investment protection clause: India can’t do a Maldives without paying a price

Economic Times, India

Investment protection clause: India can’t do a Maldives without paying a price

By John Samuel Raja D & Joji Thomas Philip, ET Bureau

22 December 2012

NEW DELHI: Recent disputes, including the GMR-Maldives government row and the clash between foreign telecom firms Telenor, Sistema, Etisalat and Vodafone and the Indian government, have exposed India’s vulnerable position in investment agreements. While the foreign telecom companies can use a potent weapon - the ’investment protection’ clause in bilateral treaties - against India, GMR cannot do the same with Maldives.

This clause is absent in the India-Maldives trade pact. Conversely, it is present - that too in an open-ended form - in many of the other 70-odd bilateral treaties operationalised by India that have been invoked in the telecom disputes.

The ’investment protection’ clause gives a foreign company an additional, and stronger, legal option in a dispute with a country: international arbitration based on a bilateral treaty.

According to Prabhash Ranjan, associate professor at the National Law University, Jodhpur, India could end up facing large claims as most of the treaties signed by it have blanket investment-protection provisions, which can be exploited by foreign companies in international arbitration panels.

"Many do not have any exception clause like national policy exclusion, or decisions taken to protect the environment or health," says Ranjan, who has expertise in bilateral investment treaties. "As a result, we are vulnerable to wide interpretation by international arbitration panels."

In the past year or so, six telcos have sent arbitration notices to the Indian government.

Clause Must Stay, Say Experts

The telcos invoked provisions in treaties signed by India with countries from which they made their investment. Five of them are contesting the cancellation of their licences by the Supreme Court; in a letter dated November 30 to the government of India, Capital Global and Kaif Investments, which invested in Loop Telecom, have claimed $300 million in damages.

Vodafone, the sixth company, is contesting a retrospective change in tax rules (See table). In normal circumstances, the government has six months to settle the case, failing which the company can initiate proceedings in an international arbitration panel. Norwegian company Telenor, for example, has invoked the Indo-Singapore treaty as it routed its investments to India via the island nation.

Under the treaty, such disputes are to be settled as per the rules of the International Centre for Settlement of Investment Disputes (ICSID), a World Bank entity that is the leading international arbitration panel, with 140 member-countries. "A signatory is bound to enforce all ICSID awards and such awards cannot be reviewed by local courts of signatory countries," says Anirudh Krishnan, an advocate in the Madras High Court.

Although India is not a signatory, arbitration in a dispute involving it can happen under ICSID rules if a bilateral treaty states so - as in the case of the Indo-Singapore treaty. But there’s one difference. "The award under ICSID arbitration is not binding on non-signatories like India," says Ranjan. In other words, the government can appeal in Indian courts. "But it’s not a good option as it would send a bad signal to foreign investors," he adds.

Experts say despite the looming threat of large payouts, India should not remove the arbitration clause from its bilateral treaties. "Today, India is not merely an importer of capital, but has also become an exporter of capital," says Ajay Thomas, registrar of the Indian branch of the London Court of International Arbitration, a major centre for international arbitration.

"With Indian companies increasingly buying assets and investing overseas, these very arbitration clauses would also serve the purpose of protecting Indian interests overseas from arbitrary expropriation and ensuring non-discrimination, and fair and equitable treatment to Indian investments overseas." Ranjan, instead, advocates renegotiating bilateral treaties when they come up for renewal - after every 10 years - to add ’exception clauses’ to protect India’s interests. Exclusion clauses give the government room for unilateral action even if it is to the detriment of certain companies, and generally relate to national policy, environment or health.

Globally, the number of company-versus-country cases is on the rise. In 2011, according to ICSID data, 450 company-versus-country cases were registered under the ICSID convention, as against just 38 in 1996. When a case goes to international arbitration, the tribunal judging it offers the two sides a list of arbitrators to choose from.