Improving Investor Confidence

CA 8/9/15

Improving Investor Confidence and avoiding arbitration

Bilateral Investment Treaties (BIT)

• Treties between two countries to prevent arbitrariness and to protect investors investing in each others countries.
• BITs guarantee investors fair and equitable treatment.
• Other protections include right against expropriation ((of the state) take (property) from its owner for public use or benefit)
• MFN (Most Favoured Nation) provision under BIT guarantees an investor treatment not less favourable than that afforded to any other investor claiming rights under any other BIT.

The White Industries Case and a queue of arbitrations

• White industries, an Australian entity succeded in obtaining a foreign arbitral award against Coal India Ltd.
• India had to pay huge sums for the delay caused by its judicial system which failed to arrive at a quick resolution, thus failing to protect the investor’s rights guaranteed by Indo-Ausiee BIT.
• Since then many investors have issued notices of arbitration against India.
• Famous example is Vadafone capital gains tax issue where vadafone was subjected to retrospective taxation.
• Retrospective taxation is considered unfair and arbitrary and investors fear to invest in countries where governments subject investors to such taxation.
• This kind of issues weakens investor confidence and hence needs to be revived to make sure that both the government and the investors interests are protected.
• For, this purpose Law Commission of India has set up a committee to recommend steps to be taken to protect interests of India and at the same time guarantee minimum basic protection to investors.

Recommendations of LCI

• LCI recommends a modification from a highly narrow ‘enterprise-based definition’ of investment to a broader and universally accepted ‘asset-based definition’. An enterprise-based definition would mean that a foreign investor who did not set up an enterprise in India to carry on business would have absolutely no protection.
• MFN must not be incorporated since India might chose to provide differential benefits to trading partners based on the extent of incoming investment from a country.
• LCI encourages the incorporation of a “denial of benefits” clause, wherein an investor is denied the benefits of a treaty if it involved in corrupt practices or acted contrary to the laws of the country.
• LCI suggests amendments to certain provisions of the dispute resolution mechanism which precluded (prevent) an arbitral tribunal from reviewing “any legal issue which has been finally settled by any judicial authority of the home state”.
• There is a provision in Model Draft which makes it mandatory for the investor to first approach the local courts and exhaust its local remedies (first cross the ‘jurisdictional bar’). To make the mechanism workable, the LCI has suggested omitting the jurisdiction bar. So investors will be free to nock the doors of arbitral tribunal anytime if the ‘jurisdiction bar’ is omitted (Investors will find it easy to resolve disputes quicly, but this can adversely affect India’s interests).
• Model Draft contained general exceptions with a list of permissible objectives such as public health, environment, public order, public morals, improving working conditions, ensuring the integrity and stability of the financial system, banks and financial institutions etc., and it provided that any measures which the state considered to be in furtherance of the above objectives would not be subject to scrutiny before an arbitral tribunal.
• This provision provided the state with the authority to self-judge, that is, to determine if a measure would fall within the exception and not be subject to a challenge. The LCI has suggested that the said provision be re-drafted so as to not be self-judging.

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