BITS in pieces

The Voda­fone case shows why 70-odd Bi­lat­eral In­vest­ment Treaties with for­eign gov­ern­ments that have lapsed since 2016 are not be­ing re­newed

Business Standard - - TAKE TWO - SUBHOMOY BHATTACHAR­JEE

In the cor­po­rate bat­tle for Mum­bai air­port, the Abu Dhabi In­vest­ment Author­ity (ADIA), the Na­tional In­vest­ment and In­fra­struc­ture Fund (NIIF), and Canada’s Pub­lic Sec­tor Pen­sion In­vest­ment Board (PSP) served a le­gal no­tice to the GVK group in Au­gust. Their con­tention was that the 74 per cent stake sale in the air­port to the Adani group would qual­ify as a breach of an agree­ment these in­vestors had signed with GVK, the air­port op­er­a­tor, last year.

Should there be a le­gal bat­tle, which party has a stronger le­gal case is ar­guable. But there should be no dis­pute about the ju­ris­dic­tion of the court where those ques­tions should be de­cided. Yet, there is. ADIA, NIIF and PSP can ap­proach any court in In­dia up to the Supreme Court or an ar­bi­tra­tion panel. But if they choose to move a panel abroad and chal­lenge the In­dian gov­ern­ment’s role (since the le­gal no­tice in­cludes gov­ern­ment-run banks), it be­comes dif­fi­cult for them to en­force an award should they win the case.

This is the same rea­son Voda­fone In­ter­na­tional Hold­ing BV, which owns 45 per cent of In­dia’s mo­bile ser­vice provider, Voda­fone Idea Lim­ited, can­not en­force its re­cent victory in a 13-year tax ar­bi­tra­tion case with In­dia. If Voda­fone wants to en­force the terms of this rul­ing, it will have to ap­proach the In­dian courts — again. That’s be­cause In­dia does not recog­nise the ju­ris­dic­tion of any for­eign court in a com­mer­cial dis­pute that ques­tions the state’s sov­er­eign power to in­ter­vene.

This is also why 70-odd Bi­lat­eral In­vest­ment Treaties (BIT) be­tween for­eign gov­ern­ments and In­dia that have lapsed since 2016 are not be­ing re­newed. In­dia has amended those BITS by in­sert­ing a clause that tilts in favour of the In­dian gov­ern­ment. Other coun­tries have baulked at sign­ing the new BIT be­cause In­dia of­fers a fair and eq­ui­table treat­ment (FET) stan­dard that is un­ac­cept­able to most for­eign in­vestors. In­ci­den­tally, the move to make BITS strin­gent cuts across party lines — the draft was ap­proved by for­mer fi­nance min­is­ter P Chi­dambaram and be­came In­dia’s po­si­tion un­der Arun Jait­ley.

A BIT ef­fec­tively gives a for­eign in­vestor the right to di­rectly ini­ti­ate ar­bi­tral pro­ceed­ing against a state with­out ap­proach­ing its own gov­ern­ment. In fact, a BIT was in op­er­a­tion be­tween In­dia and the Nether­lands when the chal­lenge to the In­dian tax depart­ment’s de­mand for ret­ro­spec­tive cap­i­tal gains tax was made by Voda­fone In­ter­na­tional af­ter it ac­quired Hong Kong-based Hutchi­son Wham­poa’s ma­jor­ity share in Es­sar Hutchi­son in 2007.

The BIT was and is part of the rea­son In­dia joined the dis­pute at the Per­ma­nent Court of Ar­bi­tra­tion at The Hague, the old­est such tri­bunal glob­ally (es­tab­lished 1899). The newer ones are in Sin­ga­pore and Lon­don. To keep alive the in­ter­est of com­mer­cial en­ti­ties in the ef­fi­cacy of the Hague tri­bunal, the Nether­lands main­tains an ex­ten­sive net­work of BITS with nearly 100 coun­tries.

Though In­dia did join the ar­bi­tra­tion in the Voda­fone case, it re­served the right to give ef­fect to the award.

This reser­va­tion by In­dia has a history. New Delhi op­er­ates un­der its do­mes­tic Ar­bi­tra­tion and Con­cil­i­a­tion Act of 1996, which it re­vised last year. The Act does not recog­nise the global ar­chi­tec­ture of ar­bi­tra­tion un­der the In­ter­na­tional Cen­tre for Set­tle­ment of In­vest­ment Dis­putes (ICSID) con­ven­tion to which more than 150 coun­tries are sig­na­to­ries.

In­dia is in­stead a mem­ber of the less strin­gent UNCITRAL (United Na­tions Com­mis­sion on In­ter­na­tional Trade Law), also known as the New York Con­ven­tion. Here, too, In­dia has signed on with caveats. The most im­por­tant of those is that ar­bi­tra­tion awards will only ap­ply where the dis­putes are con­sid­ered a com­mer­cial re­la­tion un­der do­mes­tic law. Sig­nif­i­cantly, In­dia does not recog­nise the re­la­tion­ship be­tween the tax depart­ment and as­sessees as a com­mer­cial re­la­tion.

In­dian courts have up­held this logic. A Con­sti­tu­tion bench of the Supreme Court in State of West Ben­gal vs Keshoram In­dus­tries (2005) held that if the terms of an in­ter­na­tional treaty are in­con­sis­tent with do­mes­tic law, a court will not give ef­fect to the treaty.

In 2012 — about five years af­ter the tax dis­pute with Voda­fone be­gan — Par­lia­ment had passed a ret­ro­spec­tive law on over­seas deals in­volv­ing In­dian as­sets. Ex­pla­na­tion 5 of Sec­tion 9 of the In­come Tax Act al­lowed the gov­ern­ment to tax in­di­rect trans­fers of an In­dian cap­i­tal as­set even if the trans­ac­tion was done as part of a sale by a for­eign com­pany. The for­eign ar­bi­tra­tion award in the Voda­fone case is, there­fore, in­con­sis­tent with cur­rent In­dian law.

The ab­sence of BITS is one rea­son for­eign in­vestors in In­dia pre­fer to route their money through the stock ex­change or via pri­vate eq­uity/ven­ture cap­i­tal in­vest­ments. When com­pa­nies do come in through the for­eign di­rect in­vest­ment (FDI) route, they pre­fer safeguards. One of those is the per­mis­sion for 100 per cent FDI in the sec­tor. The other is by us­ing a spe­cial pur­pose ve­hi­cle in­cor­po­rated in Sin­ga­pore.

The is­land na­tion is the only one with whom In­dia has a mu­tu­ally recog­nised ar­bi­tra­tion route. It was signed as part of the In­dia-sin­ga­pore Com­pre­hen­sive Eco­nomic Co­op­er­a­tion Agree­ment in 2005. For­eign port­fo­lio in­vestors push the gov­ern­ment to re­tract any treat­ment that breaks this cosy ar­range­ment. Fi­nance Min­is­ter Nir­mala Sithara­man had to change the tax laws to recog­nise that for­eign port­fo­lio in­vest­ments or­gan­ised as trusts will pay 15 per cent tax on their div­i­dend in­come against a pro­posed 25 to 37 per cent. Do­mes­tic in­vest­ment trusts do not get this ad­van­tage.

This walk-back oc­curred this year when the gov­ern­ment could use any ad­di­tional money. It is the price In­dia pays for keep­ing its ar­bi­tra­tion laws dis­con­nected from global best prac­tices. It is also why global pen­sion and in­sur­ance funds are more short term in their in­vest­ment out­look in In­dia, op­er­at­ing through the stock mar­kets in­stead of pick­ing up long-term stakes in com­pa­nies, say, in road con­struc­tion or power gen­er­a­tion.

Yet In­dia needs long-term money for its Na­tional In­vest­ment Pipeline, a bas­ket of projects of about ~100 tril­lion. It is likely that for­eign in­vest­ment into them will come from mar­ketlinked in­vest­ment ve­hi­cles such as In­vit— the in­fra­struc­ture in­vest­ment trusts — or Reits — real es­tate in­vest­ment ve­hi­cles where exit is pos­si­ble. By Au­gust those in­vest­ments were al­ready ~60,000 -crore strong and grow­ing. The lessons f rom the ~22,000-crore Voda­fone tax case with In­dia have been learnt.

Voda­fone In­ter­na­tional Hold­ing BV can­not en­force its re­cent victory in a 13-year tax ar­bi­tra­tion case with In­dia

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