Mar 12 Juil 2011 08:28
http://www.financialexpress.com/news/bit-of-cairnvedanta/816
While this issue has brought to fore many concerns such as what signal India is sending to foreign investors at a time when FDI inflows have dipped, this article wishes to debate the issue related to compatibility of the conditions imposed on the deal with the India-UK Bilateral Investment Promotion Agreement (BIPA). This issue attracted attention after the ministry of external affairs...MEA) circulated a note cautioning the government that imposing conditions on the Cairn-Vedanta deal would violate the India-UK BIPA. BIPAs or Bilateral Investment Treaties (BITs) are international treaties signed between countries to protect investment made by investors of one country in the other. India-UK BIT, signed on March 14, 1994, and enforced from January 6, 1995, was the first BIT signed by India immediately after the launch of economic reforms in the early 1990s to attract foreign investment and to signal a paradigm shift in India’s attitude towards foreign investment. Since then, India has entered into close to 70 such BITs.
BITs act like a mega-regulatory web for foreign investment at the international level and impose restrictions on the regulatory ability of countries with regard to foreign investment. BITs are also profound in nature because they give a direct right to foreign corporations to challenge sovereign public law regulations of the host state in international investor-state arbitration. This is different from most public international law arrangements like the WTO dispute settlement system where only a state can bring an international dispute against another state and not a private corporation. Close to 3,000 such challenges have been made, involving a number of developing countries like Argentina, resulting in arbitral awards requiring countries to pay millions of dollars in damages to foreign corporations.
Despite the MEA note, the government has gone ahead and imposed conditions on the deal ostensibly on the belief that these regulatory conditions are compatible with India’s obligations under the BIT with the UK. While imposing conditions on the deal, per se, may not violate the India-UK BIT, the nature of conditions certainly can. Some industry pundits have argued that the stringent royalty conditions could dent the revenues of Cairn India. A regulatory measure adversely affecting the revenues of a company..will not, on its own, amount to a violation of the India-UK BIT, unless the adverse effect is of such a high degree that it amounts to expropriation or the regulatory measure breaches any promise given by the Indian government to Cairn at the time of investment and thus violate Cairn’s legitimate expectations. However, the condition on Cairn to withdraw the cess arbitration, prima facie, violates Article 3 of the India-UK BIT that requires every British investment to be treated in a fair and equitable manner. The India-UK BIT does not define fair and equitable treatment. Lack of definition opens the possibility of an expansive interpretation. Investor-state arbitration tribunals have interpreted fair and equitable treatment in non-Indian BITs to include: investor’s legitimate expectations, denial of justice, transparency in host state’s action, and good faith.
It is Cairn India’s legitimate right to resort to arbitration as per a legally enforceable contract to...resolve a dispute related to payment of cess. Notwithstanding the merits of the case, any condition that restricts the party from enjoying this right is arguably ‘denial of justice’—an integral part of the fair and equitable treatment provision in BITs and thus could run foul with Article 3 of the India-UK BIT. Furthermore, the fact that regulatory conditions imposed on Cairn India are meant to help an Indian public sector company, ONGC, could also play a critical role if investor-state arbitration between Cairn Energy and India were to arise.
A few days before the conditional approval became officially known, Cairn and Vedanta restructured the deal indicating their acceptance of the conditions and, thus, Cairn Energy might not drag India to investor-state treaty arbitration. However, the fundamental issue is the role of BITs each time India regulates foreign investment. One wonders whether this debate on the issue of compatibility of India’s regulatory conditions on the Cairn-Vedanta deal with India’s obligations in the India-UK BIT would have arisen at all, had the MEA not circulated the note regarding this. There is not much evidence of such debate having taken place in the past, although there have been numerous occasions when regulatory complexities vis-à -vis foreign investments have arisen. For example, the complex web of regulatory issues in dealing with Posco required a debate on these regulatory measures in light of various provisions of the investment chapter of the India-Korea Comprehensive Economic Cooperation Agreement. Similarly, it is necessary to understand the ongoing legal battle on taxation with Vodafone BV in light of the India-Netherlands BIT. It should not be forgotten that India’s regulatory measures vis-à -vis Enron (Dabhol Power Company) resulted in India’s actions being challenged under the India-Mauritius and other BITs by foreign investors. BITs have not figured prominently in matters related to foreign investment regulation in India despite India’s sour experience with Enron litigation and the unpleasant experience of other developing countries, especially in Latin America with investor-state arbitration. It is important for Indian policymakers to carefully weigh each regulatory measure on foreign investment in light of the BIT obligations. This can happen only if there is a clearer understanding of BITs, especially in light of the global jurisprudence on BITs that has emerged in the last decade or so.
The author is an assistant professor at the National University of Juridical Sciences, Kolkata, and PhD Candidate at King’s College London
pranjan1278@gmail.com...
.