FDI red alert!

International arbitration is the flavour of the month with foreign firms in India finding themselves at a dead end with either the executive or the judiciary. In his March 16 Budget speech, finance minister Pranab Mukherjee had proposed a retrospective amendment to the Income Tax Act, 1961, to cover overseas mergers and acquisitions involving assets in India. This came as a googly to the British multinational Vodafone, which had been told by the Supreme Court in January that it was not liable to pay tax on its $11.2 billion acquisition of Hutchison’s stake in Hutchison-Essar in 2007.

Reeling under the likely impact of this retrospective law change — i.e. a $2.2 billion tax claim — and getting no positive response so far from the Indian government in its attempts to get the proposal dropped, Vodafone has served an ultimatum to New Delhi that it will seek international arbitration to protect its interests. Such arbitration is provided for by the bilateral investment protection treaties that India has signed with a large number of countries. Vodafone has specifically cited the India-Netherlands investment treaty which, like other such treaties, provides protection to international investors and makes it obligatory for New Delhi to ensure fair play.
Vodafone is only the latest company to jump on the international arbitration bandwagon. The February 2 cancellation by the Supreme Court of the 2G licences placed in jeopardy the very considerable investments made by foreign companies in India’s booming telecom industry. While some foreign players, like the UAE’s Etisalat and Bahrain’s Batelco, have announced that they will exit India, companies like Telenor of Norway and Sistema of Russia have invoked bilateral investment treaties with a view to protecting their investments.
Foreign telecom majors seeking relief under the bilateral investment treaties may have been encouraged to do so by the outcome of an international arbitration process involving the Government of India. In a landmark ruling, which is perhaps the first of its kind, an international arbitration panel found India guilty of breaching the provisions of the India-Australia Bilateral Investment Treaty.
The facts of the case are as follows. In 1989, the public sector giant, Coal India, entered into an agreement with White Industries of Australia for the design, development and operation of a mining project on a turn-key basis in Jharkhand at a cost of 400 million Australian dollars. The agreement provided for a bonus to the Australian firm if the mine produced more than a certain quantum of washed coal and a penalty if it failed to meet the target. The dispute was over the payment of bonuses. Coal India rejected White Industries’ claim for bonus and, instead, encashed its bank guarantee. The Australian firm opted for arbitration, as provided by its contract with Coal India.
The arbitration ruling, announced in 2002, went against Coal India. White Industries went to Delhi high court for the enforcement of the arbitration award, while Coal India approached the Calcutta high court, asking it to set aside the arbitration award. Protracted proceedings in several courts over eight years yielded nothing for White Industries. Frustrated, the Australian firm took a precipitate step. It invoked the India-Australia Bilateral Investment Treaty and initiated international arbitration proceedings against India.
The award, announced towards the end of last year but kept under wraps until recently for reasons not entirely clear, went in favour of White Industries. The arbitration tribunal held that the inordinate judicial delay meant that India was in breach of its obligations, under the India-Australia Treaty, towards Australian investors as New Delhi failed to provide White Industries “effective means” of enforcing its original arbitration award.
The arbitration tribunal said, it had “no difficulty in concluding [that] the Indian judicial system’s inability to deal with White’s jurisdictional claim in over nine years, and the Supreme Court’s inability to hear White’s jurisdictional appeal for over five years amounts to undue delay and constitutes a breach of India’s voluntarily assumed obligation of providing White with ‘effective means’ of asserting claims and enforcing rights.”
The tribunal could not be more scathing in its indictment of the Indian judicial system. International experts say that a nine-year wait to get to court is unacceptable in any court system. In Australia, for instance, the wait would not have been more than two years.
This is the first time since the Dabhol debacle that a foreign company has sought relief by invoking a bilateral investment treaty. That project was as messy an affair as it was controversial (in addition to being India’s biggest FDI till date), and eventually got settled out of court. The foreign investors had to be duly compensated.
The White award seems to be opening a veritable Pandora’s box. International investors in India have seen that it is possible to directly bring action against the Government of India if there is protection of an investment treaty. New Delhi has signed over 80 bilateral investment treaties and there are more than 10 free trade or economic partnership agreements, each having an investment protection component. The advantage of international arbitration is that it can be convened quickly, is located in a neutral venue, is determined by neutral arbitrators and the award is enforceable under the New York Convention to which India and, in fact, most countries are signatories.
Some Indian experts have now called for a thorough review of India’s bilateral investment treaty programme. They are worried that these treaties provide “sweeping protections” to foreign investors at the cost of India’s sovereign powers — more specifically, those relating to financial stability, socio-economic rights of citizens and environmental priorities.
While there is merit in some of these concerns, these experts seem to have lost sight of the fact that international investors will come to India — or, having come, stay — only if they are convinced that this is a fair and equitable place to do business in.
India needs to attract foreign investment now more than ever. Foreign investors look for continuity in policy, stability and independent and quick disposal of commercial disputes. What they hate are surprises, about-turns in policy and interminable delays — whether in policy-making or in the workings of the judiciary. All of these threaten to upset their business plans.
If India has to get back to the high-growth regime, which it must to give a better life to its millions and generate enough surplus to be able to help the have-nots, it has no choice but to create conditions that make foreign investors feel welcome here.

The writer, a public affairs analyst, is founder and chief executive of the consulting firm Moving Finger Communications