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TII SPECIAL
India needs to take call on 5 keys to derisk FDI
By Naresh Minocha
May 29, 2019

Naresh Minocha, a veteran journalist, specializes in governance, polity, macro-economic issues, telecom, energy, chemicals and agriculture. He has been working as Consulting Editor with taxindiaonline.com since 2004. He writes and speaks with authority on any issue he picks up. In-depth research is his passion. In his over 37-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. He continues to enjoy endless, learning journey that he started during his university days in the seventies. He believes his quest to be a ‘Know-All' is boundless.

INDIA should put expropriation and taxation hazards faced by foreign companies on the top of new blueprint for economic growth. Preparation of new agenda is customary in India after the formation of new Government or the return of ruling alliance to power.

The reforms agenda for foreign investment should comprise 1) Time-bound negotiation of new bilateral investment treaties (BIT) with 58 countries with which India terminated the flawed ones. BITs serve as beacon for prospective investors.

2) Finalization of model Centre-State investment agreement (CSIA) for effective implementation of BITs. Mooted in February 2016, CSIA is to be signed by Centre (national government) with state (provincial) governments.

3) Setting a limit on dogged litigation waged by Government as defendant against over a dozen arbitration cases launched by foreign companies.

4) Shedding reluctance to be party to certain international pacts such as Energy Charter Treaty and investment facilitation framework being explored under World Trade Organisation (WTO).

5) Reconsider Arbitration and Conciliation (Amendment) Bill, 2018 keeping in view concern voiced by different quarters over some of the bill's provisions. Couple this with enactment of a new law to protect both local and foreign investments.

Prime Minister Narendra Modi-led National Democratic Alliance (NDA) Government returned to power with landslide win in elections for Lower House of Parliament on 23rd May 2019.

After formation of NDA Government on 30th May, it should show clarity and agility in clearing the mess on foreign investment front.

Foreign investment approval numbers are one thing. Actual investment is another. And preventing investment turning into sour grapes is another ball game. With perspective, the Government should fire all cylinders to reverse slow-down in capital formation. It must revive investment climate to lay foundation for generating double-digit growth, wealth and jobs.

Modi Government, in its first tenure, made the mess left by previous regime messier. It did so by multiplying and delaying disputes resulting from retrospective changes in income tax act (ITA). No aggrieved foreign company has thus accepted the Government's offer for out-of-the-court settlement of taxation disputes.

On 29th February 2016, the Government offered a one-time scheme of Dispute Resolution. The companies were given an opportunity to settle their respective cases by paying only the tax arrears in which case liability of the interest and penalty would be waived. This was subject to companies agreeing to withdraw any pending litigation lying in any Court or Tribunal or any proceeding for arbitration, mediation etc. under BIT.

In subsequent month, India sent termination/renegotiation notices to 58 out of 83 countries with which it has had BITs. This step was taken on the basis of Cabinet decision in December 2015 to approve finalized model BIT and to terminate all BITs whose tenure has ended.

According to a release announcing the Cabinet decision, the revised model BIT will be used for re-negotiation of existing BITs. It would also be utilized for negotiating BITs and investment chapters in Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs).

Model BIT has been conceived to protect both foreign investors in India and Indian investors abroad.

The model BIT includes an enterprise-based definition of investment, non-discriminatory treatment through due process, national treatment and protections against expropriation.

It also incorporates a tweaked Investor State Dispute Settlement (ISDS) mechanism. Under it, investors have to exhaust local remedies before commencing international arbitration. Revised ISDS limits the power of the tribunal to award monetary compensation alone. The model excludes matters such as government procurement, taxation, subsidies, compulsory licenses and national security to preserve the regulatory authority for the Government.

United Nations Conference on Trade and Development (UNCTAD) considers India as "a main innovator in the ISDS area" at the country level. UNCTAD's

Issues Note titled 'Reforming Investment Dispute Settlement: A Stocktaking' explains: "ISDS reform is pursued across various country groupings, by countries at different levels of development and from different geographical regions. At the same time, individual countries and regions have been the driving forces behind certain approaches (e.g. Brazil, India, the European Union (EU)".

The Note dated 29th March 2019 says: "India's new model BIT, reflected in one signed treaty so far, has started to shape the country's new treaty practice. The Belarus-India BIT requires exhaustion of local remedies, excludes certain disputes, limits the jurisdiction of the tribunal, increases Contracting States' involvements and refers to a possible future appellate mechanism".

A few countries have so far come forward to either modify existing BITs or sign new BITs after scrapping of 58 BITs. UNCTAD has put number of terminated BITs at 60.

The biggest worry for both India & many European countries is the delay in switchover from scrapped bilateral pacts to the combined one to be signed with European Union comprising 28 countries.

In a disclosure to Parliament in March 2017, Government stated that various EU countries expressed their inability to enter into a new BIT, because of the Lisbon Treaty. Under EU Regulation 1219/2012, the power to negotiate an investment treaty on behalf of the European Union member countries stands transferred to the European Commission.

EU had therefore requested for extension of termination notice period of existing BITs pending finalization of India-EU Bilateral Trade and Investment Agreement (BTIA). However, India has not agreed to extend such termination notice period.

India and EU have been negotiating BTIA with a chapter on investment since 2007.

Apart from putting in place new BITs in place of scrapped ones, the new Government should finalize and sign CSIA with States Governments that are keen to attract foreign investments.

India's Finance Ministry believes that CSIA will ensure fulfillment of the obligations of the State Governments under BITs. Foreign investors will perceive CSIA-signing States as more attractive destinations by foreign investors. Information about fate of the Ministry's attempt to seek cabinet approval for model CISA is hard to come by.

CISA finalization might require tough negotiations between Centre and States if Tamilnadu (TN) Government's reservations are any indication.

In a speech delivered at Inter-State Council on 16th July 2016, TN Chief Minister (CM) stated: "To make States liable now under the CSIA mechanism for bilateral agreements entered into earlier is unfair".

An Inter-Ministerial Group (IMG) comprising Central Government officials would determine the financial liability of States and local governments in the event of an adverse arbitration tribunal award.

TN considers this provision as "a gross violation of the principle of natural justice that no one shall be a judge in his own cause".

It has demanded that States should be given representation on IMG. Investors should perceive the mechanism as being independent of the Centre and the States.

The draft CSIA permits the Centre to unilaterally deduct any arbitration-triggered dues from the Central Government transfers to States. TN considers this provision as "completely unacceptable".

Consider now the need for Centre and States to exercise restraint in delaying international arbitration or in enforcement of arbitration awards given against them through litigation in Indian courts.

Instances of litigation by Central Government include 1) arbitration initiated by Vodafone against retrospective taxation of capital gains and 2) Launching money laundering and bribery probes and resulting litigation against Devas group of companies. These developments followed after the group won $ 563-million arbitration award against India for cancellation of its joint venture with public enterprise Antrix in satellites business.

Similarly, TN Government dragged Nissan Motors to Madras High Court in December 2017 after the company served arbitration notice against the Centre. TN sought stay against arbitration on its alleged failure to facilitate payment of investment incentives to its JV named Renault Nissan Automotive India Private Limited. Nissan has sought compensation of $776 million.

The Central Government's stance on legal fights with companies seeking international arbitration depends on it finalizing & implementing National Litigation Policy. This policy was drafted and showcased in July 2010. It provides for restrain t on Government's propensity to act as compulsive litigant, thereby clogging judicial system.

The new Government has to also decide whether to continue to stay off from the discussion on proposed global agreement on Investment Facilitation for Development.

The talks on this are progressing under WTO. India didn't sign the Joint Ministerial Declaration issued by 68 WTO members during December 2017.

The Declaration stated: "We call for beginning structured discussions with the aim of developing a multilateral framework on investment facilitation. These discussions shall seek to identify and develop the elements of a framework for facilitating foreign direct investments that would: improve the transparency and predictability of investment measures; streamline and speed up administrative procedures and requirements; and enhance international cooperation, information sharing, the exchange of best practices, and relations with relevant stakeholders, including dispute prevention".

The Organisation for Economic Co-operation and Development (OECD) also favours formulation of global framework for investment facilitation.

According to OECD paper released during April 2018, "Transparency, predictability and efficiency are underlying principles of a good investment climate, especially from an investment facilitation perspective, but sustainability and inclusiveness are equally important".

The Paper says: "international framework for investment facilitation could be developed initially as global principles. This would provide a strong message and concrete guidance to the international investment policy community. In time, they could be implemented under the WTO to complement the Trade Facilitation Agreement, potentially under a comparable scheme and structure. In this case, a specific programme could be in place to support developing countries to comply with their commitments-a similar approach to the WTO Trade Facilitation Agreement Facility".

Last but not the least the Government should carefully consider negative feedback on Arbitration and Conciliation (Amendment) Bill, 2018. Certain provisions of the bill have been opposed both by Indian and foreign professionals.

The one attracting strong opposition is the proposed composition of Arbitration Council of India (ACI) as Government body and not an independent one, entrusted with regulation arbitration in India.

Lord Goldsmith QC, Chair of Asian and European Litigation at Debevoise & Plimpton LLP, for instance, has urged India to revisit the bill.

Delivering the inaugural address at the 11th Annual International Arbitration Conclave held in Delhi during February 2019, Lord Goldsmith observed: "What will these changes do if they become law. Foreign businesses will not be prepared to sign up to agreements providing for Indian arbitration if they will not have the chance to appoint arbitrators from jurisdictions with which they are more familiar".

He continued: "They will I predict set back the cause of Indian arbitration by many years, perhaps a generation. Not a case of one step forward and two steps back but 1 step forward and 10 steps back. Having pushed the Sisyphean rock of Indian arbitration painfully step by step up the steep slope of international acceptability it will release that boulder to plummet in free fall back down again".

To conclude, the Government should treat foreign investment climate as an outcome of stable, fair and effective blend of policy, law and regulations. Such perception should also factor in global trends in investment promotion and protection.

 
 
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