Financial Express | 22 August 2015

Chafing at the BIT

The government is looking to replace the Bilateral Investment Promotion and Protection Agreements (BIPPA) that it had signed with 83 countries since 1994—of which 11 are yet to be enforced—with a Bilateral Investment Treaty (BIT), the draft of which has been in the public domain for over three months. The final BIT should be ready soon, based on feedback the government receives. The BIT is not yet law, but still is a policy statement. Instead of being a comfort factor for international investors, the tenor of the BIT seems to be largely protectionist. What the BIT hopes to achieve is to make it all the more difficult for international companies to drag the government for arbitration proceedings, and in overseas locations at that. Over the past few years, taxation has emerged as a sore point between international investors and the government. British telecom major Vodafone has invoked the India-Netherlands BIPPA, seeking international arbitration in its R20,000 crore tax dispute ; then there was Nokia’s R21,000 crore and Cairn Energy’s R10,927 crore tax disputes. And there are three arbitrations filed by Reliance Industries as well, though these do not pertain to taxation issues. While arbitration has yet to formally start in any of the foreign cases, the country had earlier lost an arbitration proceeding to Australian mining company White Industries.

It is the learning from White Industries and the possibility of being dragged into arbitration by other multinationals that the government is looking to bring in a tighter BIT. Three areas where the BIT is likely to be tough are : international tribunals would not have jurisdiction to re-examine a legal issue settled by the Indian judicial authority ; the treaty shall not apply to any taxation measure ; they cannot question whether a measure was taken by the government for public purpose or in compliance with law—the question is whether a retrospective tax law, and that is just one example, is to be considered as public purpose. While India must have the right to fashion its own BIT, the ‘bilateral’ in it means it has to be acceptable to the other country as well. If investors from other countries have certain problems operating in India, or apprehend certain type of problems, why will that country accept a BIT that excludes these issues ? More important, if firms have a problem and feel that neutral dispute settlement mechanisms are going to be denied to them, why would they want to come and invest in India ? Interestingly, while the existing Indo-UK treaty includes tax disputes, the current stand of the Indian government is that these cannot be arbitrated under the treaty ! Also, in a globalised world where Indian firms are also big investors overseas, what is sauce for the goose has to be sauce for the gander—so, if the proposed Indian BIT was to be adopted by other countries, for instance, the takeover of the GMR airport in the Maldives would not have been arbitrated since it was done in public interest. The bottomline is that if the new BIT makes investors wary of investing in India, it hurts the country’s interests.