India to Restructure Bilateral Investment Promotion Agreement Framework

March 4, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – The Indian government is circulating a new draft for the future negotiation of bilateral investment promotion agreements (BIPA) that will exclude both taxation and intellectual property rights issues.

The decision to rework India’s framework for negotiating bilateral investment treaties stems partly from the government’s ongoing tax dispute with Vodafone and an unfavorable ruling in an arbitration case with the Australian firm White Industries in 2011.

Under the proposed changes currently being circulated for inter-ministerial consultations, foreign investors would only be able to invoke a BIPA between India and the country from which an investment originates rather than invoking multiple BIPAs if, for example, a holding company is involved in a dispute.

“The idea is that only one treaty should be invoked which governs the investment,” said a senior official involved in the circulation of the new BIPA draft.

One of Vodafone’s ongoing high-profile tax disputes with India has resulted in the British-based telecom company challenging the Indian government under the India-Netherlands BIPA after entering India through a Netherlands-based subsidiary in 2007. Vodafone used a Netherlands-based subsidiary to acquire Hutchison Essar (now Vodafone India) for US$11 billion in 2007, ultimately leading to a lengthy tax dispute over the purchase that has involved retrospective amendments to India’s tax law in an attempt by the government to circumvent a 2012 Supreme Court ruling in Vodafone’s favor

India’s response to Vodafone’s challenge has been to claim that tax issues are not covered under the India-Netherlands BIPA.

“Response has been sent to the company…the ministry has written that tax disputes are not covered under the treaty invoked by them,” a finance ministry official told The Economic Times yesterday.

In recent years, as many as 17 foreign companies have served arbitration notices to India under bilateral investment treaties after their investments faced adverse policy action from the government. Another high-profile arbitration case between India and Australia-based White Industries in 2011 resulted in India being ordered by a London-based international arbitration tribunal to pay the company INR500 million (US$8 million) for legal delays.

The potential for the India-Vodafone case to reach international arbitration has fostered the sentiment that India’s BIPAs must be tightened to better protect the nation’s interests and reputation with foreign investors.

India currently has 83 BIPAs that many lawmakers believe makes the government unnecessarily vulnerable to costly legal challenges from foreign investors.

Proposed Changes

According to The Economic Times, a number of changes have been proposed to the BIPA framework:

Removing “without unreasonable delay” concerning the repatriation of investments and returns
Taxation issues, intellectual property rights and the power to maintain a state enterprise will be removed
Investors will be required to exhaust all local dispute settlement options before invoking a BIPA
Defining “government” to mean central and state governments
Providing “adequate compensation” rather than “fair and equitable compensation” in the case of nationalization
In the case of expropriation of investment, fair market value as on the day before the expropriation will be given
Minimum investor obligations, including those entailing the mitigation of corruption, will be stipulated

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as as well as liaison offices in Italy and the United States.

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