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The subject of investor-state dispute settlement (ISDS) has occupied the centre stage in the expropriation discourse due to a spate of recent developments across the globe.
This signals the need for redefinition of all elements of ISDS mechanism as well as broadening the definition of expropriation to factor in recent disputes that turned focus on ambiguities or deficiencies in ISDS system as mentioned in the bilateral or global investment protection agreements.
This should also serve as wake-up call for the companies to mitigate their investment risks in foreign countries through purchase of appropriate investment protection insurance cover.
ISDS has been made part of public consultation process in the ongoing negotiations between the US and the European Union (EU) on the proposed free trade agreement (FTA) named the Transatlantic Trade and Investment Partnership (TTIP).
EU, which has been negotiating ISDS mechanism on behalf of member States since 2009, explains: “ISDS allows an investor from one country to bring a case directly against the country in which they have invested before an arbitration tribunal.”
The stakes in negotiation of ISDS are high as is evidenced from US Trade Representative’s (USTR’s) perspective on TTIP.
As put by USTR, “Transatlantic investments total $4 trillion, directly supporting seven million American and European jobs, with millions more in indirect jobs. These investments help our manufacturing sector, generating 18 percent of U.S. exports to the world. Furthermore, jobs created by foreign investment tend to pay better than other private sector jobs. That is why we need to build on these achievements and help generate more jobs, growth, and exports through certain, clear, and fair investment rules that encourage even more investment in job- and export-supporting economic activity.”
ISDS has also come under lens during the course of negotiations on Bilateral Investment Treaty (BIT)/Bilateral investment promotion and protection agreements (BIPA) or regional FTAs.
In India, ISDS has become the core issue following emergence of about a dozen arbitration cases due to judiciary-induced expropriation and retrospective governance including taxation.
Foreign companies are thus explicitly mentioning expropriation risk in their prospectus for equity or debt offers. Franklin Templeton International Trust's prospectus on Franklin India Growth Fund dated 1 May 2014, for instance, says
"There are special risks associated with investments in India, including exposure to currency fluctuations, less liquidity, expropriation, confiscatory taxation, and exchange control regulations (including currency blockage).”
France’s Cement multinational, Lafarge, says: “expropriation as a result of local legislative, regulatory or political action could have a negative impact on the Group’s results or on the development of its activities."
In its base prospectus for Euro Medium Term Note Programme issued in May 2013, Lafarge adds: “For example, the Group’s plant in Bangladesh has been stopped due to the temporary suspension of a mining license for its quarry in India by the Supreme Court of India. The final “Stage 2” permit for quarrying operations in India was obtained on February 29, 2012, although the Issuer was required to pursue the matter before the Indian courts.”
The proposed arbitration cases would test Indian Government’s stance that BIPA does not provide for compensation for the loss of foreign direct investment (FDI) due to Supreme Court’s (SC’s) judgments on policy and regulatory issues. This stance has been taken in the cases relating to SC verdict on 2G scam that led to cancellation of over hundred mobile phone licences owned by joint ventures.
In its negotiations with US on the long-pending BIT, India had last year reportedly proposed to rule out any scope for compensation of foreign investment lost due to SC’s verdicts.
With the change in political executive, Indian Government would now have to take a public stance on judiciary-triggered expropriation as certain American entities have pitched for conclusion of BIT.
In its Business Advocacy Agenda 2014–2015, U.S.-India Business Council (USIBC), for instance, says: “An investment treaty between India and the United States would provide protection to U.S. and Indian investors alike from arbitrary, discriminatory, or confiscatory government measures, enforceable by recourse to independent international arbitration. Such a treaty could help facilitate two-way investment in infrastructure and other areas where investment is welcome and would provide protections to Indian and American companies as they expand investments overseas.”
The Government’s reported contention that it has no liability in the FDI loss resulting from SC verdicts is specious as it is directly responsible for bad policies and regulations that attracts unfavourable verdicts.
As long as a foreign investor has fully complied with all the laws of the land, the brunt of policy and regulatory flaws articulated by judicial pronouncements should be borne by the Government. If judiciary-triggered FDI loss is excluded from BIPA, then the Government is likely to become complacent with existing non-transparent decision-making process. It might also remain wedded to crony capitalism.
The loss of FDI due to policy-related judicial outcomes should be deemed as expropriation. It should be explicitly provided for in all type of investment protection agreements. These should include the World Bank (WB)-conceived Convention on the Settlement of Investment Disputes (CSID) and investment guarantees provided by WB’s Multilateral Investment Guarantee Agency (MIGA).
Judiciary-triggered expropriation should thus be the fourth category in the types of expropriations. The existing categories are - direct expropriation, indirect expropriation and regulatory expropriation.
Redefinition of expropriation would go a long way in instilling confidence among investors and facilitate competition-driven flow of foreign investment across different regions.
The arbitration cases relating to taxation disputes with Vodafone, Nokia, etc would also indicate whether India’s contention that Vodafone taxation dispute is not covered India-Netherlands BIPA is valid.
Unlike EU-US public consultation on ISDS, the Indian Government had opted for a secretive approach in revision of its model BIPA.
The new Government, which is committed to open governance, must first make public draft of the revised model BIPA for public comment.
It should not get carried away with the findings of a working paper issued by the Office of the Economic Adviser, Department of Industrial Policy & Promotion in March 2014.
The Paper has concluded that “there is hardly any consistent trend in the share of BIPA countries in total inflows of FDI in India during 2000-2012, instead, during 2000-2006, there is a declined in the share because of moderation in the share of both developing BIPA countries (excluding Mauritius) and developed BIPA countries.”
The Paper titled ‘Do Bilateral Investment Promotion & Protection Agreements (BIPAs) attract Foreign Direct Investment (FDI) Inflows into India?’ says: “In a cross country analysis it is found that the market size, business environment and bilateral investment treaties are significant determinants for the FDI inflows for a country. However, in case of India, there is little evidence to support the hypothesis that the BIPA have improved the FDI inflows either from developing countries or from developed countries, while the impact of DTAA has worked better to attract FDI from developing countries.”
The Government should, on the contrary, commission a study on the impact of its stance to not compensate investors in the judicial verdicts-linked expropriation. The study should also assess the impact of India’s indecision on signing of CSID and International Energy Charter (IEC).
A draft note for the Cabinet Committee on Economic Affairs on IEC (which protects FDI in energy sector) is awaiting a call from the new Government. By not signing IEC, India is also risking Indian companies’ massive investments in overseas coal mines, power plants and oil and gas assets.
India has so far signed 83BIPA .Of these, 72 have been enforced so far. Apart from BIPAs, the subject of investor protection has been covered by India in the Compre-hensive Economic Cooperation Agreement (CECA)/ Comprehensive Economic Partnership Agreement (CEPA) that it has signed with a few countries.
The Government should issue a white paper on BIPAs. The paper, among other issues, should map out the differences relating to investment protection in various BIPAs and CECAs. It should indicate what impact these have on inbound and outbound FDI.
The Government should also share with public the findings of the study on BIPA conducted a couple of years back by Finance Ministry. It had then sought the feedback on the effectiveness and utility of BIPAs from Indian companies that invest abroad.
If Indian companies find BIPA not worthwhile, then the Government should consider scrapping all BIPAs and simply opt for CSID which has been signed by 159 countries. It should also opt for IEC and any other such international agreement.
Once BIPAs are scrapped, the companies would have to cover their investment risks through procurement of investment insurance policies.
In any case, the companies have to go beyond the obsession for seeking protection from expropriation under BIPA/CEPA. The foreign companies should thus consider securing their investments in India through different guarantees offered by MIGA. Hardly any multinational has opted for MIGA instruments during the last 10 years.
Similarly, very few Indian firms have opted for MIGA guarantees to safeguard their investments in other countries.
Published by taxindiainternational.com on 6th June 2014
