Sistema notice brings bilateral investment pacts under the lens

It was not a paucity of rules and regulations that led to the 2G scam in India. Rather the country has adequate rules and safeguards in place. But the political masters have nudged and prodded the executive to twist and turn the law to suit their personal goals.

Under normal circumstances, one would have thought the last word had been said after the Supreme Court of India gave its final verdict. But, it seems that there are several more labyrinths to be traversed before the final act is played out.

The Bilateral Investment Promotion and Protection Agreements (BIPA) that India has signed with several countries, was one such avenue. The Government confirmed that it had “received two letters dated February 28, 2012 on behalf of Sistema Joint Stock Financial Corporation, Russian Federation (Sistema) – the foreign investor in Sistema Shyam Teleservices Ltd (SSTL) – to settle the dispute arising out of the” judgment.

Significantly, Sistema wanted to resolve the dispute through Conciliation in accordance with Article 9 of the India-Russia Agreement on Mutual Promotion of Investment. Failing which, it reserved the right to commence proceedings against India on the basis of that inter-Governmental investment treaty.

The company said if the dispute is not settled amicably by August 28, it reserves the right to start proceedings against India before an international arbitration tribunal set up in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law and/or in any other available forum.

The Government itself admits that BIPAs aim at increasing the ‘comfort level' and ‘confidence' of the foreign investors by providing for “justiciability” (capable of being decided by court of law) of disputes with the host country.

BIPAs also assure fair and equitable treatment and non-discrimination besides the important option of an alternative dispute resolution mechanism where the affected party can drag the host country to an international arbitration instead of that country's courts.

As on December 9, 2011, India has inked BIPA with 82 countries, of which 72 have become enforceable. While the remaining 10 would soon come into force, the Government is negotiating or close to concluding similar BIPAs with a host of other nations.

In addition, India has signed or is negotiating Comprehensive Economic Cooperation Agreements (CECA) with many countries with separate chapters on investment and its protection similar to the BIPA.

India is not alone in entering into such bilateral investment treaties. The United Nations Conference on Trade and Development (Unctad) says the bilateral investment treaties rose “dramatically” in the 1990s. “Their number rose from 385 in 1989 to a total of 2,265 in 2003,” Unctad states, adding that the pacts now involve 178 countries.

According to some estimates, there are around 2,800-3,000 such pacts between countries. One of the main reasons for the rise of BIPAs was the liberalisation and greater openness in investment policies of developing countries from 1990s onwards.

However, simultaneously, the disputes arising out of these pacts also saw a jump. According to International Investment Arbitration and Public Policy (IIAPP), while many such cases are confidential, “Over 150 confirmed cases have been launched against states under the bilateral investment treaties (to May 2010).”

Of this, “the majority of known cases were brought by investors from the US, UK, Germany, France, The Netherlands, Belgium, Italy, and Spain,” it said. According to other estimates, there are over 350 such disputes so far.

The increase in the number of such disputes has come to the notice of the Indian Government. According to sources, it plans to be more careful in the future and wants to do away with clauses in future CECAs that allows overseas companies investing in India to sue the Government.

However, with many Indian companies going global and investing more overseas including in trouble prone nations of Africa, Middle East and Latin America, the Government also wants to ensure protection of their investments by entering into pacts with clauses including compensation.

Caution advised

But activists and experts want the Government to be cautious. According to Mr Kavaljit Singh, Director of the Delhi-based policy research institute ‘Madhyam' and author of books on foreign investment, “In the light of Sistema episode and also because India is keen to further expand its bilateral investment treaty policy, it would be worthwhile to pursue a greater balance between investor rights, investor responsibilities, and regulatory interests of host governments.”

“Otherwise, private investors may use arbitration mechanisms under these treaties to challenge public policy in India,” he warns.

Dr K.M. Gopakumar, legal adviser to the Third World Network, says the Indian Government can demand renegotiation of the BIPAs and ask for inclusion of safeguard mechanisms or else even scrap the pacts altogether.

The Government can also delink investment clauses from the CECAs, he said, adding that in those CECAs where they have already agreed to investment chapters, they can initiate a review.

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