Fortunately, vengeance and vendetta are not a major part of how companies do business globally.
If you were reading business newspapers in 2012, you could be excused for being overwhelmed by predictions of the imminent collapse of India’s investment ecosystem. Pranab Mukherjee, then India’s finance minister, had just introduced the now infamous ‘retrospective amendment’ to nullify the effect of the Vodafone judgment by the Supreme Court. The court had held that a transfer of assets between two entities outside the geographical territory of India cannot be taxed in India, even if the asset was located in India.
Back then, just about every conversation, and a disproportionate number of newspaper columns, centred on the signal such a move would send to the international investment community — what did it say that the government was willing to steal the spoils from a multinational company which had won its case at the highest court of the land?
Surprisingly therefore, almost a decade later, there seems to be hardly any murmur about the multiple international arbitration awards that the present government seems to be in no mood to honour. In September, the government lost its $3 billion arbitration brought by Vodafone (though, the government’s net liability would be only about Rs 75 crore, given that the disputed tax had not been collected yet). In December, India lost its $1.2 billion arbitration against Cairn Energy. India’s primary argument in both cases was that tax disputes are not protected by the Bilateral Investment Treaties, which both companies were claiming under.
India appears to have taken the awards in its stride, filing appeals against both awards. But with at least Cairn growing impatient, the loss could amount to more than some bad press.
Last week, the government reportedly asked our public sector companies to withdraw moneys held abroad, so that they won’t be subject to attachment proceedings by arbitration victors. Then, on May 14, Cairn Energy filed a plea in New York seeking to attach the properties of Air India, so as to recover the award in their favour.
India’s is arguably not a weak case — that tax disputes cannot be adjudicated under Bilateral Investment Treaties. However, two tribunals have ruled unanimously against India on near similar facts. Perhaps the government ought to have thought of a different strategy that didn’t call into question its reputation for abiding by the rule of law?
The third major case is slightly more complicated.
In 2005, ISRO’s commercial arm Antrix Corporation Ltd. leased some satellite spectrum to American start-up Devas Multimedia Ltd. In 2011, the Indian government cancelled the contract on the grounds that procedures were not followed before awarding the contract. After Devas began proceedings to enforce the $1.2 billion arbitration award it won, India took the audacious step of moving to wind-up Devas (the victor in arbitration).
Even here, India’s core argument carries weight — that the agreement was vitiated by fraud, and therefore, not arbitrable. But if that was the case, then steps ought to have been taken in the 10 years or so since the cancellation of the contract, rather than as a strategy to frustrate an award ex-post facto.
India then hurriedly amended the domestic arbitration law through an ordinance in November, to provide that in case a prima facie case is made out in the making of an arbitration agreement or award, an unconditional stay must be granted. This, just when the Delhi High Court was about to hear arguments on whether Antrix was required to deposit the amount awarded while their appeal was being heard, was a thinly veiled interference with the award using (even misusing?) its legislative power — Vodafone redux. In March, Devas’ investor Deustche Telekom moved a US court seeking enforcement.
To be sure, India has always had a chequered history with international arbitration. Perhaps most embarrassing is the 2002 award won by White Industries of Australia against Coal India. After the Calcutta High Court set aside the award, and the Supreme Court took its sweet time in deciding, White Industries approached the tribunal again challenging the almost 10 year delay in execution — India’s defence was that such a delay was normal in Indian courts. Needless to say, it didn’t cut ice with the arbitrators.
However, the actions of the last year seem to be a step too far. For one, the obligation to honour an arbitration award comes from an international treaty on recognition and enforcement of foreign arbitral awards (the New York Convention of 1958) to which India is a signatory to. To outright frustrate the award would substantially diminish the confidence of international investors.
As a country with significant economic attractiveness, India still is in a position to negotiate better terms for fulfilling the terms of the award — including taking up Cairn’s offer to reinvest the amount back in India. To renege, on the other hand, might cost us a lot more than the amount saved by kicking the can down the road — and that is, not to count the national embarrassment.