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 than a year, political uncertainty is also likely to afflict the country. 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 India’s Reserve Bank, 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. For example, more than a dozen foreign investors commenced international arbitrations 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 or court 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.
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. Among the countries with which India has concluded BITs are Australia, Belgium, Cyprus, France, Germany, Indonesia, Korea, Kuwait, Malaysia, Mauritius, Netherlands, Qatar, Russia, 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.
Although India appears to have been a party to at least nine unreported investment arbitration cases, India did not experience its first publicized loss in an investor–state arbitration until White Industries Australia Ltd. v. India in November 2011. 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. The tribunal held in favor of the investor, ruling that the investor's rights under the award qualified as an investment under the BIT, and awarded it around US$5 million in damages.
Additionally, in the past few years, India has seen a rising tide of investment arbitration cases brought against it. 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. 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 the Singapore–India Comprehensive Economic Cooperation Agreement (the "CECA") as its stake in an Indian joint venture through a Singapore-registered company; and Mauritius-based investors Capital Global and Kaif Investment, which are relying on the Mauritius–India BIT. 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 agreed to conciliation proceedings. Other known disputes have arisen in the satellite and mining sectors. Given increasing foreign investor sophistication 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, and India's Finance Minister approved the creation of a permanent body to advise on the renegotiation of India's existing BITs, with the apparent purpose of weakening or removing investor–state dispute resolution provisions from India's BITs. Despite this rhetoric, foreign investors may still take advantage of India's existing BITs, which continue to provide access to investor–state arbitration until they are renegotiated.
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. We consider two of India’s investment agreements, the Netherlands–India BIT and CECA. A foreign investor seeking to obtain the protections of these agreements could do so by inserting a company established under the laws of the Netherlands or Singapore into the chain of ownership of its Indian investment, in accordance with the requirements of the applicable treaty.
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. 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. . . ." 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 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." 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 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, most-favoured-nation (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. 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. The CECA also carves out substantial exceptions for measures to protect health, safety, or the environment.
Investor–State Dispute Resolution. Both the Netherlands–India BIT and the CECA provide for investor–state dispute resolution through tiered dispute resolution procedures, although the timing for pre-arbitral dispute resolution procedures varies. 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. Under the CECA, an investor must attempt to resolve the dispute 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. Both agreements contemplate either ICSID or UNCITRAL arbitration. 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.
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 on certain limited grounds and conformity with the state's public policy. In UNCITRAL and ICSID Additional Facility arbitrations, the selection of an arbitral seat is crucial because it plays a unique role in deciding the law governing the arbitration procedure, the support or intervention that may be received from the local courts during the arbitration, and the rights relating to enforcement of the award.
India traditionally has had a reputation of court interference with international arbitrations, whether they are seated in or outside India. This trend was reversed in two recent landmark decisions of the Indian Supreme Court: Bharat Aluminium Co v. Kaiser Aluminium Technical Services Inc., which ruled that for any arbitration agreements concluded after September 6, 2012 (the date of the judgment), Part I of the Indian Arbitration and Conciliation Act that 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, and Shri Lal Mahal Ltd. v. Progetto Grano Spa, which held that a mere violation of the law of India was insufficient to violate India's public policy with regard to enforcement of an international award. 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.
Geoffrey S. Stewart is a Partner in the Washington and New York offices of global law firm Jones Day. Baiju S. Vasani is a Partner in the London and Washington offices. Sylvia Tonova is an Associate in the London office. All are members of the Global Disputes Practice. Jones Day's India Practice consists of more than 60 lawyers who were educated or have practiced in India, as well as lawyers qualified to practice in jurisdictions including New York, London, the UAE, and Saudi Arabia. Jones Day has advised clients for more than 20 years on India-related deals in every part of the world and in every financial and industry sector. The opinions expressed in this article are solely those of the authors.