India is reportedly struggling to convince foreign governments to accept revised terms relating to international arbitration in the new investment treaties it is negotiating with them.
The country cancelled last year existing investment treaties with around 50 foreign governments, primarily because these treaties left it too exposed to possible claims awarded by international arbitrators. The treaties had been largely entered into the 1990s when India was desperate for foreign capital .
In order reduce the exposure, India has now proposed a new model agreement which according to legal advisors is similar to the contracts used by other large emerging market economies such as Brazil and Indonesia.
However some foreign partners have been resistant to the more restrictive approach.
Negotiations Stalled Due To Terms Offering Little Protection
According to sources, India is failing to make progress in the negotiations being held over the past 10 months. Negotiators from several countries like Iran and Australia have reportedly stated that while there are investors interested in coming in, the new treaty terms offer too little protection for them.
One of the major concerns expressed by them is the new requirement under which investors are required to fight any case in the Indian courts for a minimum of five years before opting for international arbitration. Other provisions are being objected which narrow down the scope for companies to file claims, the source said.
The new model treaty also does not contain provisions for investors to lodge claims against India for tax-related issues and also for disputes arising as a result of local government actions.
India is currently facing over 20 international arbitration cases, and may have to pay billions of dollars in damages if it loses. Some of the companies who have filed arbitration proceedings include Vodafone Group, Deutsche Telekom and Cairn Energy .
Japanese automaker Nissan is the latest company who filed a suit against India for damages of over $770 million related to unpaid tax incentives.
According to legal experts, although many countries limit the type of tax-related claims that can be made, India’s approach to eliminate all tax matters goes “too far” and may expose investors to unexpected changes in tax rules or retrospective claims.
India’s Negotiating Position Stronger
India is today considered to be in a far stronger negotiating position than it was during the 1991 balance of payments crisis.
Since Prime Minister Narendra Modi came to power in 2014 with a decisive mandate, annual foreign direct investment flows have doubled to $46 billion in 2016 from $22 billion in 2013.
However the rate of growth in inflows is becoming slower, and the amount is lower than what Brazil received last year. As per a U.N. report Brazil saw inflows of $59 billion in 2016.
Countries Pushing For Better Protection
A European Commission official called India’s unilateral decision to cancel the treaties as “unfortunate” and pointed out that it would result in discrimination between new and existing investors. The existing ones will still be protected by the old treaties for a few years while new investors won’t be .
According to sources, the Commission is looking for ways to re-establish protection for European investors and to also resume negotiations on a free trade agreement with India.
Canada has been discussing since 2004 in regards to a trade treaty, but there has been little progress.
The country’s trade minister Francois-Philippe Champagne has said that Canadian investors are holding back until there is one in place.
However some countries, particularly those that receive more investment from India than they send, have been more open to signing the new agreement. Israel has according to reports not opposed some of the provisions and an accord may be soon signed as per a Business Standard report.
