A depreciating rupee, slowing growth, and high inflation are
some of the many risks confronting foreign investors in India. With
elections due to take place in less a year, political uncertainty
is also likely to afflict the country, which is home to 1.3 billion
of the world's population. After the rupee reached record lows
in August, the battered currency regained some ground in the last
few weeks following announcements of planned reforms by the new
head of the Reserve Bank of India, Dr. Raghuram Rajan. While
reforms would be welcome by India's foreign investment
community, experience indicates that government measures enacted in
response to currency and economic crises, while intended to promote
the general welfare, often result in unfair or discriminatory
treatment of certain investors. Consequently, for example, the
Asian economic crisis in the late 1990s spawned several high-stakes
arbitrations by foreign investors against Indonesia. Similarly,
more than a dozen foreign investors commenced international
arbitration proceedings against Argentina following measures taken
by the government to deal with the financial crisis in 2001. While
no one is claiming India is in the middle of a full-blown crisis or
would even necessarily take measures that would adversely affect
foreign companies, investors should nevertheless be stepping
cautiously.
Bilateral investment treaties ("BITs") have emerged as a
mechanism to protect foreign investment in light of the palpable
risks that foreign investors face in many parts of the world,
including cancellation of concessions, leases, or licences;
expropriation of shares; windfall, royalty, and other taxes;
exchange rate risks; prohibition on the repatriation of profits;
political interference; environmental regulation and remediation
responsibility; land rights issues; riots; and protests, to name
but a few. Faced with such risks, and given the possibility that
national courts and laws may not provide an effective and unbiased
means of resolving investment disputes, BITs provide foreign
investors with an additional level of protection under
international law. Moreover, BITs are not designed merely to
encourage Western companies to invest in developing countries but
are important for the protection of investors from developing
states as they increasingly invest overseas.
In particular, BITs generally oblige the treaty parties to treat
foreign investments in accordance with, at the very least, minimum
international standards, and they bar expropriation without
compensation or other arbitrary or discriminatory measures. Foreign
investors may seek damages from the host state for breaches of the
treaty's provisions and general principles of international
law. Perhaps most importantly, BITs also provide for the resolution
of disputes through arbitration before a neutral international
arbitral tribunal. The advantage of arbitration is that, unlike
judicial dispute resolution, the parties can appoint the members of
the tribunal, the procedure is generally more flexible than in
litigation, and the arbitral award may more easily be enforced
internationally than court judgments.
India has signed 82 BITs, of which 72 are in force.[1] Among the countries
with which India has concluded BITs are Australia, Belgium, Cyprus,
France, Germany, Indonesia, Italy, Korea, Kuwait, Malaysia,
Mauritius, Netherlands, Qatar, Russia, Sweden, Switzerland, and the
United Kingdom. While not all have been popularly received, the
protections contained in them are likely to stand for years, if not
decades, to come and should be part of any investor's
arsenal.[2]
This Commentary provides a brief overview of BITs;
discusses India's recent investor–state arbitration
experience and its evolving BIT policy; considers two of
India's dozens of investment treaties—the
Netherlands–India BIT[3] and the Singapore–India Comprehensive
Economic Cooperation Agreement[4] (the "CECA"); and
discusses enforcement of arbitral awards.
Brief Overview of BITs
BITs are designed to promote and protect investments by
investors of the other state party to the treaty. The
investor's nationality is typically determined by the domestic
law on citizenship in the case of individuals and by the state of
incorporation and/or the seat of company management in the case of
companies. Some BITs also provide that juridical persons
incorporated in the host state but controlled by nationals of the
other contracting state may be treated as foreign nationals.
Treaties also may seek to exclude certain investors from the
treaty's coverage through so-called "denial of
benefits" provisions. These provisions are normally aimed at
excluding "mailbox" companies with no substantial
business activities in the state of incorporation, although they
sometimes will also exclude entities controlled by nationals of the
host state or a third country. Similar to tax planning, companies
operating in foreign countries increasingly structure their
investments through an entity incorporated in a state having a
favourable investment treaty with the host state or restructure
existing investments before a dispute is foreseeable so as to take
advantage of treaty protections, if necessary.
Most investment treaties protect a broad range of investments,
which encompass all assets, including but not limited to, moveable
and immoveable property; company shares, stock, and debentures;
claims to money or to any performance under contract; intellectual
property rights, goodwill, and know-how; and business concessions
conferred by law or under contract, including natural resources
concessions. Of particular significance, most BITs permit investors
to make claims for both indirectly and directly held investments.[5] Thus,
in investment arbitration, parent companies or individual
shareholders are often able to assert rights relating to an
investment held through a subsidiary or holding company, including
where that entity is organized under another country's laws.
This is important because investments are frequently made through
multiple layers of holding companies for tax, investment
protection, or other reasons. Despite the breadth of the definition
of investment, BITs would not protect investments procured through
misrepresentation or bribery. Further, one-off sales transactions,
passively held portfolio investments, or pre-investment
expenditures will generally not qualify for protection
either.
The key investment protections offered by BITs are usually (i) fair
and equitable treatment; (ii) expropriation; (iii) protection and
security; (iv) arbitrary or discriminatory measures; (v)
"umbrella clauses"; (vi) national treatment and
most-favored-nation ("MFN") treatment; and (vii) transfer
of funds.
Fair and Equitable Treatment. The fair and
equitable treatment standard has generally been defined to include
(i) protection of legitimate and reasonable expectations that have
been relied upon by the investor to make the investment; (ii) good
faith conduct; (iii) conduct that is transparent, consistent, and
not discriminatory; and (iv) conduct that complies with due process
and the right to be heard. The investor's legitimate
expectations are based on the host state's legal framework,
contractual undertakings, and any undertakings and representations
made explicitly or implicitly by the host state. Changes in the
legal framework would not be considered as breaches unless they
represent a reversal of assurances made by the host state to the
foreign investor. For example, a tribunal found a breach of the
standard by Ecuador where, in making the investment in
Ecuador's hydrocarbons sector, the investor relied upon the
availability of tax refunds and the state subsequently denied the
refunds and provided unsatisfactory explanations.[6] The investor was
awarded compensation in excess of US$70 million plus
interest.
Expropriation. BITs usually require that the
expropriation of foreign-owned property must be (i) for a public
purpose, (ii) nondiscriminatory, (iii) in accordance with due
process, and (iv) accompanied by prompt, adequate, and effective
compensation usually equivalent to the fair market value of the
expropriated investment. An expropriation may result from either
direct transfer of title from the investor, or an indirect taking
(e.g., a cancellation of a license) that substantially deprives the
investor of the economic value, use, or enjoyment of its
investment. Further, an expropriation may occur through a series of
government acts, i.e., a creeping expropriation.
A government measure would constitute an expropriation if it
effectuates a permanent loss of the economic value of an investment
and falls beyond the government's powers to regulate the
general welfare. On the other hand, the imposition of more onerous
environmental regulations that, for example, increase environmental
remediation costs but do not destroy the economic value of an
investment, would not be considered an expropriation. Thus, in
Glamis Gold v. United States, the tribunal dismissed
Glamis's claims that the U.S. expropriated its rights to mine
gold by regulatory measures that reduced the value of the mining
project from US$49 million to US$20 million.[7] In contrast, in
Vivendi v. Argentina, the tribunal found a creeping
expropriation despite the fact that claimants continued to control
the physical assets where Argentina had unilaterally modified
tariffs, used its oversight power to afflict upon claimants
unjustified accusations, used the media to create hostility toward
the claimants, incited the claimants' customers not to pay, and
forced the claimants to renegotiate the concessions.[8]
Protection and Security. The protection and
security standard requires host states to take reasonable measures
to prevent the physical destruction of an investor's property,
including by third parties. For example, in Wena Hotels v.
Egypt, the government breached the standard when it knew of,
but failed to prevent, looting and forced seizure of the
investor's hotel by employees of a state entity.[9] Some
tribunals have extended the standard to legal as well as physical
security, particularly where BITs provide for "full"
protection and security.[10]
Arbitrary or Discriminatory Measures. Treaties
usually impose a legal obligation on the host state not to impair
the management or operation of the investment by "arbitrary or
discriminatory measures." An example of a breach of the
standard was found where, without justification, a state entity
refused to pay a contractually agreed double tariff for electricity
supplies to the producer operated by the investor while it
continued to pay such tariffs to two locally owned producers.[11]
Umbrella Clause. An umbrella clause is a provision
in an investment treaty that guarantees the observance of
obligations assumed by the host state vis-à-vis the
investor. Umbrella clauses thus may turn a host state's breach
of contract or other commitment into a breach of the treaty.
Umbrella clauses can be particularly useful to companies, since the
host state often assumes obligations vis-à-vis investors in
the form of concessions, leases, or licenses. Investors, however,
should be mindful of the limitations of these clauses. If a
contract contains an exclusive dispute resolution provision, some
tribunals have held that the claimant must comply with the
provision and the umbrella clause claim is inadmissible. Another
possible limitation of umbrella clauses is that they may require
privity of contract between the state and the foreign investor,
thus leaving outside their scope contracts between the state and a
locally incorporated company. For example, the CMS v.
Argentina award was annulled in part on the basis that the
obligations of Argentina under the license were obligations owed to
the domestic enterprise in which CMS held shares and not to the
investor CMS.[12]
National Treatment and MFN Treatment. National
treatment clauses require the host state to treat foreign investors
at least as favorably as it treats its own nationals. Conversely,
pursuant to MFN treatment clauses, the state is obliged to treat
foreign investors at least as favorably as it treats nationals from
any country. An MFN clause ordinarily grants a claimant the right
to benefit from substantive guarantees contained in other treaties
to which the host state is a party (for example, to benefit from a
fair and equitable treatment standard if one is not contained in
the applicable treaty). On the other hand, attempts to use MFN
clauses to extend the tribunal's jurisdiction generally have
failed.
Transfer of Funds. Most treaties also provide that
the investor has the right to carry out a transfer of funds in a
freely convertible currency without delay and that the transfer
takes place at the official rate of exchange of the host state on
the date of the transfer. The schemes on transfer of funds vary
between treaties, and it is thus crucial to examine the wording of
the relevant treaty in order to determine the types of transfers
that are permitted.
India's Recent Investor–State Arbitration Experience and Its Evolving BIT Policy
Although reports have suggested that India has been a party to
at least nine unreported investment arbitration cases in the
past,[13] India did not experience its first
publicized loss in an investor–state arbitration until
White Industries Australia Ltd. v. India in November
2011.[14] In White Industries, an
Australian mining company that had suffered long delays in the
Indian courts as it sought to enforce a commercial arbitral award
against an Indian state-owned company initiated arbitration under
the Australia–India BIT, arguing that India's inordinate
delays resulted in a breach of India's investment protection
obligations under the BIT.[15] The tribunal held in favor of the
Australian investor, ruling that the investor's rights under
the ICC award qualified as an investment under the BIT, and awarded
it around US$5 million in damages.[16]
Additionally, in the past few years, India has seen a rising tide
of investment arbitration cases brought against it.[17]
Many of these claims, though by no means all, arose from the 2G
license auctions conducted in 2008, which the Indian Supreme Court
invalidated in 2012.[18] Companies that brought claims include
Bycell, whose Russian and Cypriot investors relied on India's
BITs with those respective countries; Russia's Sistema;
Norway's Telenor, which is using CECA, as its stake in an
Indian joint venture is through a Singapore-registered company; and
Mauritius-based investors Capital Global and Kaif Investment, which
are relying on the Mauritius–India BIT.[19] Vodafone also
served a notice against India under the Netherlands–India BIT
regarding a dispute worth almost US$3 billion over retroactive
changes to Indian tax laws, although this arbitration is now
temporarily shelved as both sides provisionally agreed to
conciliation proceedings.[20] Other known disputes have arisen in the
satellite[21] and mining[22] sectors. Given increasing
foreign investor sophistication with and appreciation of investment
treaties, the complex regulatory nature of doing business in India,
and pressure to stave off the decline of India's currency,
further disputes appear likely.
In the last several months, the Indian government has expressed
strong dissatisfaction with the investor–state dispute
resolution provisions of its BITs. In April, India's Finance
Minister approved the creation of a permanent body to review and
advise on the renegotiation of India's existing BITs, with a
stated goal of achieving the renegotiation of all such BITs.[23]
The apparent purpose of the renegotiations is to weaken or remove
investor–state dispute resolution provisions from India's
BITs. Despite this rhetoric, foreign investors may still take
advantage of India's existing network of BITs which continue to
provide access to investor–state arbitration until the BITs
are renegotiated. Further, even if any BITs are terminated (which
is not the stated intention of the Indian government),
BITs usually have minimum periods for which they will be in force,
with sunset clauses guaranteeing protection for a further period
even after a notice of termination of the BIT.
Two Case Studies of India's BITs
While consideration of India's entire network of investment
agreements is beyond the scope of this Commentary, we
consider two such agreements, the Netherlands–India BIT and
the CECA. Both the Netherlands and Singapore are highly developed
jurisdictions, well-known for their adherence to the rule of law,
pro-corporation policies, and ease of doing business. In each case,
a foreign investor seeking to obtain the protections of these
agreements could do so by inserting a company established under the
laws of that jurisdiction into the chain of ownership of its Indian
investment, in accordance with the requirements of the applicable
treaty. While many factors may influence an investor's decision
to structure an investment in a particular manner—tax,
corporate efficiency, etc., treaty-based considerations should also
be relevant to that determination. Several key provisions from the
two agreements, and their relevant differences, are discussed
below.
Definitions of "Investments" and
"Investors." Both the Netherlands–India
BIT and the CECA construe "investments" broadly, defining
the latter as "every kind of asset" including, without
limitation, moveable and immoveable property, shares and other
interests in companies, monetary claims and contractual rights,
intellectual property rights, and business concessions.[24]
The Netherlands–India BIT further requires that investments
be "invested in accordance with the national laws and
regulations of the contracting party in the territory of which the
investment is made...."[25] For foreign investors,
this reinforces the importance of working with both international
and India-qualified counsel to fully assess the local laws and
regulations that may be implicated by their contemplated
investments, as states often seek to rely on nonconformity with
such laws or regulations as a basis to deny substantive protections
to a foreign investment under a BIT.
A potentially significant distinction exists with regard to the
definition of "investors." Under the
Netherlands–India BIT, there is no requirement that the
investor demonstrate a certain level of business operations in the
Netherlands or any conditions relating to the ownership or control
of the investor. By contrast, the CECA provides that India may deny
the benefits of the treaty to a corporate investor that "has
no substantial business operations in the territory of
[Singapore]" or if investors of India "own or control the
enterprise."[26] A foreign investor availing itself of the
CECA may thus need to maintain a substantially greater presence in
Singapore than it would be required to maintain in the Netherlands
under the Netherlands–India BIT and may not be owned or
controlled by Indian investors.
Investment Protection Obligations. Material
differences also exist with regard to the substantive investment
protections under the two agreements. The Netherlands–India
BIT provides for national treatment, MFN treatment, fair and
equitable treatment, and full protection and security to the
investment, as well as an umbrella clause, repatriation of capital
and returns, and a prohibition on the unlawful expropriation of
investments by the Indian government.[27] The CECA, on the other
hand, provides for national treatment, repatriation of capital and
returns, and a prohibition of unlawful expropriation but does not
provide for MFN treatment, fair and equitable treatment, or
protection and security.[28] The CECA also carves out substantial
exceptions for measures to protect health, safety, or the
environment.[29]
Investor–State Dispute Resolution. Both the
Netherlands–India BIT and the CECA provide for
investor–state dispute resolution through tiered dispute
resolution procedures culminating in binding international
arbitration, although the timing for pre-arbitral dispute
resolution procedures varies.[30]
Under the Netherlands–India BIT, an investor must attempt to
negotiate settlement of the dispute for three months after giving
notice of dispute to India, before the investor can initiate
arbitration.[31] Under the CECA, an investor must attempt
to resolve the dispute through consultations and negotiations for
six months before initiating arbitration, and it must submit the
dispute to arbitration within three years of the time at which it
became aware or reasonably should have become aware of the
breach.[32]
Both agreements contemplate either ICSID or UNCITRAL arbitration.[33] As
India is not a party to the ICSID Convention, ICSID Additional
Facility (assuming the other state is a party to the ICSID
Convention) or UNCITRAL arbitration are the only options.
Enforcement of Awards
An award is usually enforced in jurisdictions where the
respondent has assets. If an investor–state arbitration is
conducted under the UNCITRAL Rules or the ICSID Additional Facility
Rules, the award is usually enforceable pursuant to the New York
Convention. India is a party to the New York Convention. Under that
convention, the courts of most countries are obligated to enforce
foreign arbitral awards, reviewing them only to the extent
permitted under Article V (considering, for example, procedural
irregularities and conformity with the state's public
policy).
Unlike arbitration under the ICSID Convention, which is completely
delocalized and eliminates the role of national courts from the
arbitral process, the selection of an arbitral seat in UNCITRAL and
ICSID Additional Facility arbitrations is crucial for many reasons.
It plays a unique role in deciding the law governing the
arbitration procedure. It determines the support or intervention
that may be received from the local courts in the course of
arbitration. It also has a bearing on the process and rights
relating to enforcement of the arbitral award. Courts in the seat
thus have authority to set aside an arbitral award on grounds
enumerated in the arbitration law of the seat. Further, an award
set aside at the seat may not be always enforceable internationally
pursuant to the New York Convention. It is therefore crucial to
choose a seat in an arbitration-friendly jurisdiction.
India traditionally has had a reputation of court interference with
international arbitrations, whether they are seated in or outside
India. In the landmark decision of Bharat Aluminium Co v.
Kaiser Aluminium Technical Services Inc., the Indian Supreme
Court reversed this trend and ruled that Part I of the Indian
Arbitration and Conciliation Act, which confers significant powers
on Indian courts to order interim measures, appoint and replace
arbitrators, and set aside awards, applies only to arbitrations
seated in India.[34] The decision, however, applies
prospectively, i.e., only to arbitration agreements concluded after
the date of the judgment rendered on September 6, 2012.[35] In
Shri Lal Mahal Ltd. v. Progetto Grano Spa, the Supreme
Court also reversed its prior broad interpretation of the public
policy exception, as it is applied to enforcement of international
arbitral awards. The Court held that public policy with regard to
enforcement of an international award must be given a narrow
meaning and that a mere violation of the law of India was
insufficient to violate India's public policy.[36] Despite these
welcome trends, enforcement of an arbitral award in India may take
several years. Luckily, as an award in investor–state
arbitrations would be typically against the Indian State, claimants
may be able to locate state assets and seek to enforce the award
outside India.
Conclusion
In view of India's troubled currency, slow growth, and political uncertainty, all of which are likely to affect the economic climate in India over the next few years, any foreign company doing business in India must be aware of India's network of BITs that constitute an additional layer of protection for foreign investors and their investments. Investors can structure their investment in advance or restructure an existing investment with a view to gaining investment treaty protection—for example, by inserting into the chain of ownership a company incorporated in a state that has a favorable BIT with India. India's BITs also afford foreign investors access to international arbitration under the UNCITRAL Rules or the ICSID Additional Facility Rules (assuming the other state is a party to the ICSID Convention), ensuring that foreign investors are free from the biases of nationals courts and that their awards are enforced internationally more easily than foreign judgments. Although many of the investment protections across BITs may seem similar in wording, it is important to appreciate that each treaty is different and to seek specialist legal advice.
Foonotes
[1] See "Counsel to India Rails against 'Misuse' of BITs," Global Arbitration Review, Oct. 19, 2012.
[2] ICSID Database of Bilateral Investment Treaties, https://icsid.worldbank.org/ICSID/FrontServlet.
[3] Agreement between the Republic of India and the Kingdom of the Netherlands for the Promotion and Protection of Investments, signed on Nov. 6, 1995, entered into force on Dec. 1, 1996 ("Netherlands–India BIT").
[4] Comprehensive Economic Cooperation Agreement between the Republic of India and the Republic of Singapore, signed on June 29, 2005, entered into force on Aug. 1, 2005 ("CECA").
[5] See, e.g., Siemens A.G. v. Argentina, Decision on Jurisdiction dated Aug. 3, 2004, 135-144; Azurix Corp. v. Argentina, Decision on Jurisdiction, Dec. 8, 2003, 65-66, 74; Enron v. Argentina, Decision on Jurisdiction, Jan. 14, 2004, 49; Oxus Gold v. Uzbekistan, Decision on Jurisdiction, Aug. 9, 2012 (decision not public).
[6] Occidental v. Ecuador, Award, July 1, 2004.
[7] Glamis Gold v. United States, Award, June 8, 2009.
[8] Vivendi v. Argentina, Award, Aug. 20, 2007.
[9] Wena Hotels v. Egypt, Award, Dec. 8, 2000. See also AMT v. Zaire, Award, Feb. 21, 1997 (holding Zaire liable after incidents of looting by the armed forces).
[10] See, e.g., Azurix v. Argentina, Award, July 14, 2006; Siemens v. Argentina, Award, Feb. 6, 2007.
[11] Nykomb v. Latvia, Award, Dec. 16, 2003.
[12] CMS v. Argentina, Decision on Annulment, Sept. 25, 2007.
[13] See "India Is Planning to Exclude Arbitration Clauses from BITs," Business Today, May 8, 2012.
[14] White Industries Australia Ltd. v. Republic of India, Award, Nov. 30, 2011.
[15] Id. ¶¶ 4.3-4.72.
[16] Id. ¶¶ 7.6.10, 16.1.1.
[17] See "India Is Planning to Exclude Arbitration Clauses from BITs," Business Today, May 8, 2012; "India to Look at 82 BIPAs as Foreign Investors Invoke Global Arbitration," The Economic Times, Apr. 5, 2013.
[18] See "Another Claim Looms over 2G Licenses in India," Global Arbitration Review, July 18, 2012.
[19] See id.; "India Appoints Curtis in 2G Spectrum Case," Global Arbitration Review, Apr. 22, 2013.
[20] "Vodafone Treaty Claim on Backburner," Global Arbitration Review, Aug. 23, 2013.
[21] "Panel Formed in Billion-Dollar BIT Claim Against India," Global Arbitration Review, Apr. 24, 2013 (claims filed by three Mauritian entities arising from cancellation of a contract for launch of space satellites).
[22] "Counsel to India Rails against 'Misuse' of BITs," Global Arbitration Review, Oct. 19, 2012 (a hedge fund with a 2% stake in state-owned Coal India brought a claim over government policies to support the domestic power sector).
[23] "India to Look at 82 BIPAs as Foreign Investors Invoke Global Arbitration," The Economic Times, Apr. 5, 2013.
[24] Netherlands–India BIT, Art. 1(a); CECA, Art. 1(a).
[25] Netherlands–India BIT, Art. 3.
[26] CECA, Art. 6.9.
[27] Netherlands–India BIT, Arts. 4(1), 4(2), 4(5), 5, 7.
[28] CECA, Arts. 6.3, 6.5, 6.6.
[29] Id. Art. 6.11.
[30] Netherlands–India BIT, Art. 9; CECA, Art. 6.21.
[31] Netherlands–India BIT, Art. 9(1)-(3).
[32] CECA, Art. 6.21.2-6.21.4.
[33] Netherlands–India BIT, Art. 9(3); CECA, Art. 6.21.3.
[34] See "India's Supreme Court Reverses Bhatia Decision," Global Arbitration Review, Sept. 6, 2012.
[35] Id.
[36] See "India's Supreme Court Overrules Itself on Public Policy," Global Arbitration Review, July 15, 2013.
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