Govt to fortify bilateral investment treaties with new safeguards

The government proposes to fortify bilateral investment promotion and protection agreements (BIPAs) with new provisions to ensure that in future government regulations are not challenged or arbitrations proceedings started against the government.

These provisions are being incorporated in the several BIPAs currently under negotiation, including the one with the USA, and are also likely to be included in existing agreements, once they are re-negotiated, reports quoting finance ministry sources said.

This, according to sources, will ensure that companies or other entities will, if at all, invoke BIPAs only to challenge executive decisions within the stipulated period and not at random. This provision has already been incorporated in the recently signed investment protection and promotion agreement with the United Arab Emirates, they add.

The move comes in the backdrop of the several setbacks suffered by the government in the approval of projects without the required safeguards. These project approvals have later boomeranged on the government with court cases and arbitration proceedings over tax claims.

The new provisions are intended to provide safeguards to the government against arbitration cases filed abroad due to any change in law by Parliament or due to any judicial pronouncement here.

The government is faced with number of issues related to foreign direct investment by various foreign investors, including Vodafone (the Netherlands), Sistema (Russia) and The Children's Investment Fund (the UK), who have threatened to invoke BIPA once they found their investment in trouble due to change in the Act by Parliament or any executive decision, or even due to judicial pronouncements.

Mauritius-based Devas Employees, Capital Global Ltd and Kaif Investment have also served notices to the government under BIPA.

Foreign companies use various routes for circumventing Indian laws and dodge tax payment in India.

The government is in a fix regarding the Vodafone tax issue after the Supreme Court decided in favour of the company in a matter related to tax demand after it bought Hutchison operations.

The government had to make an amendment to the income tax laws with retrospective effect. That too has been challenged by the company, which threatened arbitration proceedings against the government for a retrospective income tax amendment to negate the judicial pronouncement.

The Children's Investment Fund, which has a one per cent stake in public sector Coal India Ltd, has alleged government's interference in the working of coal utility.

The government also had to face the music after the Supreme Court cancelled all 2G telecom licences awarded in 2008 over irregularities as two foreign companies used BIPA to protect their investment. Sistema invoked the treaty between India and Russia, while Telenor invoked the agreement with Singapore. Telenor had made its investments into Unitech Wireless through a Singapore subsidiary.

The 'model text' is being drafted and the amendments are expected to be finalised by the end of this month. All future agreements and renegotiation of existing agreements will be based on the new text.

Currently, India has BIPAs with 82 countries, of which 72 are in operation, while the remaining are in the process of being enforced. The government aims to renegotiate its existing BIPAs in the next two years.