India To Revisit Investment Pacts To Keep Vodafone-Like Cases At Bay

NEW DELHI: The government is examining investment treaties signed with other countries individually and as part of larger free trade agreements to identify prickly clauses that may lead to disputes in future.

The move comes days after the British telecom operator Vodafone served a notice on the government, saying the proposed changes in tax laws would violate India’s bilateral investment promotion agreement with The Netherlands.

“Both the commerce department and the department of industrial policy & promotion are looking at existing investment treaties to see if there are any provisions which are difficult in terms of causing us problems later on or leading us to disputes,” commerce secretary Rahul Khullar told ET.

“Right now the entire process is in the preliminary stage and it will be premature to say more on the issue,” he added.

The re-negotiation of existing pacts, however, is not going to be easy as India will have to concede in some areas to persuade the partner country to agree to changes that it wants in the investment treaties.

Vodafone has served a notice to the Government of India against its proposal to implement retroactive tax on some cross-border mergers that would make it liable to pay Rs 11,000 crore worth of taxes on its acquisition of Hutchison Whampoa’s Indian mobile business in 2007.

It has sought protection under the Indo-Netherland bilateral investment treaty, as the transaction was carried out by Vodafone through its Dutch subsidiary Vodafone International Holdings BV.

The Indian government, however, is of the view that the Indo-Netherland treaty cannot be invoked in this case as the transaction had taken place in Cayman islands.

Some legal experts also believe that since the case is a pure taxation issue, which is a sovereign decision, there is no room for external arbitration.

“It is true that governments always hold on to their taxation authority without subjecting it to external arbitration, so the Vodafone case may not hold. But it is a good opportunity for India to revisit all its bilateral investment pacts to ensure that other disputes are not raised by companies in future,” said trade and investment expert Nagesh Kumar who works as chief economist with UN-Escap.

India has signed more than 50 bilateral investment pacts over the past 50 years, and over time, the country may have agreed to some provisions depending on the partners and the existing circumstances, Kumar said.

“Normally, India would not want the provision for state-investor dispute settlement, which gives investors the power to drag governments to dispute over policy changes, to be part of investment treaties, but it may have crept into some which needs to be checked,” Kumar added.

Mexico and Canada have had to pay huge compensations to American companies under the North America Free Trade Agreement (Nafta), which has a provision for state-investor dispute settlement, for affecting business prospects by bringing changes in internal policies.

Once the commerce & industry departments are through with their research, it will make recommendations to the department of economic affairs, which is eventually responsible for investment treaties.