India is learning that there is a heavy price to be paid for the large number of bilateral investment treaties, or BITs, it has signed in the hope of attracting foreign investment. In recent months, a slew of global investors upset with policy changes made by the government are seeking huge compensation from India in international arbitration. They are using provisions of the various BITs to seek not just monetary damages but also revocation of regulatory measures and key decisions such as on taxation.
Latha Jishnu outlines the threats such treaties pose by highlighting the most alarming investor complaints that have been filed worldwide against the state. If India does not review its investment policies and trade agreements and build in adequate safeguards, it could be in for worse shocks
When The Children’s Investment Fund Management (TCI), a UK-registered company, did not like the way India’s public sector behemoth Coal India Ltd (CIL) was being run, it put New Delhi on notice. TCI, a minuscule shareholder in the coal giant, said it intended to start arbitration proceedings against India under the Cyprus-India bilateral investment protection treaty, or BIT, to seek compensation for the “harm caused to its investments”.
TCI is an aggressive hedge fund which had bought 63,599,991 shares of CIL through its Cyprus subsidiary when the government offloaded 10 per cent of its shares in 2010. This gave the British fund 1.01 per cent of the equity in CIL, which is among the country’s top public sector undertakings (PSUs) and rated India’s most valued company by market capitalisation in 2011. TCI has the option of using either the UK-India or Cyprus-India BIT to seek damages, and appears to have plumped for the one that offers it a more promising basis for making its claims.
BITs are international investment treaties made between states that define the rights of investors in each other’s territories and, as experience has shown, give primacy to corporate profits even at the cost of human rights and the environment. Worse, they circumscribe the regulatory powers of governments and not just of developing countries.
London-based TCI is unhappy with its CIL investment for several reasons. It objects to CIL selling coal at rates that it says are 70-80 per cent below the international market value, that the PSU is forced by the government to enter into “prejudicial fuel supply agreements” and to follow a number of government directives that are not to the public benefit. These directives, it claims, destroy the profitability and value of the people’s stake in the coal giant. Crucially, the fund wants cash-rich CIL to substantially increase its dividend payout.
|The minority scare
WHEN the oddly named The Children’s Investment (TCI) Fund Management began attacking the management policies of the public sector Coal India Ltd (CIL) last year, there were many who welcomed it as a much-needed move to shake up the government-owned behemoth. But the big question was how a minority investor, even one as feared as TCI, could dictate terms to CIL.
TCI, a London-based hedge fund, holds just 1.01 per cent of the shares in CIL, which is 90 per cent government-owned. Yet, TCI boss Christopher Hohn is demanding that the coal ministry stop interfering with the decisions of the CIL board and allow it to sell coal at market rates, and also pay out higher dividends. But surely, TCI knew it was buying into a government-owned company. The public offer prospectus had listed all the risks when its shares were put on sale, mentioning specifically that CIL sells at prices lower than in domestic and global markets for various reasons such as supplying coal at low rates to power plants; that the President of India has the power to issue directives relating to the conduct of CIL’s business, and so on.
TCI appears intent on pushing up its profits, although these have not been insubstantial. Market analysts say investors have earned 39 per cent return on equity even though the Sensex was showing negative index. Worryingly, TCI has in its notice of arbitration objected to the Mines and Minerals (Development and Regulation) Bill, 2011, which it claims would be a violation of the Cyprus-India investment protection treaty. The reason: the Bill proposes a high rate of tax on coal mining profits.
Fair trade activists blame the skewed global trade and investment regime for increasing the power and influence of companies and even individual investors against sovereign governments. In the case of arbitration filed by Bycell (see below ‘Notice of Intent’), it is two Russian nationals who are seeking damages from the Indian state for withdrawing its approval to grant licences to ByCell Telecommunications India because of security concerns. Here’s how it is panning out. Bycell India is majority owned by ByCell Holding AG, incorporated in Switzerland. The Swiss company is 97 per cent owned by Cyprus-based Tenoch, which, in turn, is fully owned by two Russian nationals, Maxim Naumchenko and Andrey Polouektov. The security concern, according to some reports, flowed from the fact that the Swiss holding company was initially untraceable.
Interestingly, the Russians are citing violations of the Cyprus and Russia BITs and not the Swiss treaty. TCI, too, has opted for the Cyprus treaty and not the UK BIT. Clearly, this offers more mileage to investors than the others.
All this may appear a regular commercial spat that investors have with the entities they invest in—and TCI’s managing partner Christopher Hohn is notorious for the ruthless methods he has used to force managements in mighty entities such as Deutsche Bank and ABN Amro to knuckle to his demands. But this is the first time TCI has invoked a BIT to get its way. What has gone unreported in last year’s brouhaha over TCI’s dispute with CIL is a very significant issue: the hedge fund has issued a threat against the Mines and Minerals Development and Regulation Bill of 2011. Should it be passed into law by Parliament, “the undue and disproportionate adverse effects of this Bill” on CIL would be a contravention of the Cyprus-India treaty, TCI warns.
India is in a cleft stick. It cannot—and presumably will not—dilute the impugned provisions of the Bill. This means it will be taken before an arbitration panel where three individuals who constitute the panel will decide whether the proposed legislation contravenes the Cyprus BIT.
Pia Eberhardt, researcher with Corporate Europe Observatory (CEO), points out that treaties are used by powerful companies to sue governments when they think policy changes are likely to impact their profits—even if these are to protect critical sectors such as public health and environment. CEO is a campaign group working from Brussels to expose and challenge what it calls “the privileged access and influence enjoyed by corporations and their lobby groups in EU policy making”, and it has done several detailed studies on how such cases work in international dispute settlement panels.
One reason this threat to the new mining policy may have been overlooked is that TCI was just one of several investors who had threatened to take India to arbitration last year. Of the five cases initiated against India in 2012, four resulted from the decision of the Supreme Court of India to cancel 121 licences issued in 2008 for mobile telephony frequency spectrum in the wake of revelations of wrongdoing by the government. The court’s declaration of allotment of spectrum as “unconstitutional and arbitrary” and its quashing of all the licences sparked international outrage since many of the companies allotted the 2G spectrum were foreign. In quick succession, Russia’s Sistema, Telenor of Norway, Loop Telecom of the UK and Axiata Group of Malaysia served notices that they intended to take India to arbitration under different BITs (see below ‘Notice of Intent’).
|Notice of intent
Company: BYCELL HOLDING AG
Treaty invoked: Russia-India, Cyprus-India
Why: Parent company holds 74% equity in ByCell India. The Swiss company is 97% owned by Cyprus-based Tenoch, which in turn is owned by two Russian nationals
Issue: Ministry of Home Affairs (MHA) revokes clearance given in 2007 to invest $500 million to set up mobile services on security grounds. Court cases against this fail. Firm sends notice claiming denial of fair and equitable treatment in both BITs
Company: AXIATA GROUP
Treaty invoked: Mauritius-India
Why: Company holds 19.92% stake in Idea Cellular through two subsidiaries in Mauritius
Issue: Loses seven of its operational licences after Supreme Court cancels 122 mobile permits in 2G case
Treaty invoked: Netherlands-India
Why: Subsidiary Vodafone International Holdings BV based in the Netherlands
Issue: Vodafone is facing the tax liability of Rs 11,217 crore after government amended a section of Income Tax Act retrospectively. The liability is on account of its 2007 acquisition of indirect interests in Hutchison Essar
Company: DEUTSCHE TELEKOM AG AND COLUMBIA CAPITAL LLC & TELCOM VENTURES LLC
Location: Germany and US
Treaty invoked: Mauritius-India
Why: The companies together hold 54% stake in Bengaluru-based Devas Multimedia through their subsidiaries in Mauritius. Case filed for arbitration with the UN Commission on International Trade Law
Issue: Contract awarded by Antrix Corp, ISRO’s commercial and marketing arm, to Devas to build and operate two satellites in orbit above India, was cancelled by government following reports of cronyism in deal and loss to nation. Devas was to pay about $340 million to Antrix to secure bandwidth on the satellites to offer broadband Internet services in India
Company: LOOP TELECOM
Treaty invoked: Mauritius-India
Why: Investment made by subsidiaries Capital Global and Kaif Investment
Issue: Loop has sought refund of Rs 1,454 crore licence fee paid for obtaining 21 mobile permits in 2008. Supreme Court had cancelled all licences in 2G spectrum case
Company: THE CHILDREN’S INVESTMENT FUND
Treaty invoked: Cyprus -India
Why: TCI Cyprus Holdings, a subsidiary, owns 1.01% stake in public sector undertaking Coal India Ltd
Issue: The Fund is demanding that Coal India push up its coal prices and increase dividends to shareholders. Claims CIL has lost over Rs 8,700 crore in pre-tax profits by reversing December 2011 price hike
Others in line: SISTEMA JFSC of the Russian Federation, Telenor of Norway
The claims they are threatening are huge. If Sistema has announced that it would seek to recoup the $3.1 billion it has invested in India, Norway’s Telenor has stated it will seek a whopping $14 billion in damages by invoking the provisions of Comprehensive Economic Cooperation Agreement (CECA) that India has signed with Singapore. The provocation for other notices ranged from a change in India’s taxation policy as in the case of Vodafone, to withdrawal of a project on security grounds (Bycell Holding of Switzerland).
| The bark and the bite
62 cases initiated in 2012, highest number of known disputes filed in one year
68% respondents are developing or transition economies
Of 42 arbitral decisions only 31 in public domain
In 70% of the public decisions investors’ claims accepted
Highest damages to date of $1.77 billion awarded to Occidental Petroleum against Ecuador
Overall 244 cases concluded, 42% in favour of the state;
27% of total cases settled
The UN is worried by the rising trend of such cases. “The number of investment disputes brought to international arbitration reached a new peak in 2012, amplifying the need for public debate about the efficacy of the investor-State dispute settlement (ISDS) mechanism and ways to reform it,” it said while releasing its report on Recent Developments in Investor-State Dispute Settlements on April 10.
There were 62 new cases in 2012, the highest number of known treaty-based disputes ever initiated in one year, “confirming the increasing tendency of foreign investors to resort to investor-state arbitration”. At the receiving end were respondents, developing or transition economies such as India.
A new report by CEO and Amsterdam-based Transnational Institute underlines the cost of such litigation to developing countries in the form of large legal bills and increased tax burden for people.
It warns that the “arbitration industry has vested interest in perpetuating an investment regime that prioritises the rights of investors at the expense of democratically elected governments and sovereign states.”
Alarming new dispute on patents
These arbitration cases proceed from the large number of investment treaties that are in existence today: an unbelievable 3,200. And increasingly, the range of cases, too, is expanding. The UNCTAD report says that in 2012, foreign investors challenged a range of government measures, including changes to domestic regulatory frameworks (related to gas, nuclear energy, the marketing of gold and currency regulations), as well as measures relating to revocation of licences (mining, telecom and tourism sectors).
But what it missed out was an alarming new investor dispute that could have significant repercussions on both developed and developing countries. This is a multinational drug company’s challenge to a country’s patent regime, the first time such a case has been initiated under the provisions of an investment treaty. The stunning challenge has come from top US pharma company Eli Lilly which has issued a notice of intent to challenge Canada’s patent policy under the North America Free Trade agreement or NAFTA. Such arbitration is likely to open a Pandora’s box. So far patent policies have not come under the investor-state mechanism for the simple reason that countries have ensured that their policies are compliant with WTO’s requirement on protecting intellectual property rights, known as the TRIPS agreement. What the Eli Lilly is doing is to test the frontiers of the investor-state dispute mechanism in trade treaties to challenge legitimate but inconvenient decisions.
The move comes in the wake of Canada’s rejection of Eli Lilly’s patent for a drug to treat attention deficit hyperactivity disorder because the drug had failed to deliver the benefits claimed by the firm when obtaining the patent. However, Eli Lilly’s notice to Canada goes beyond this patent. It is challenging Canada’s legal doctrine for determining a medicine’s “utility” under its patent policy.
This is an alarming development for India which has just successfully fought off a seven-year legal challenge to its patent regime. It was only on April 1 that the Supreme Court dismissed Novartis’ challenge to certain provisions in the Patents Amendment Act, 2005. These provisions are similar to the “promise doctrine” yardstick applied by the Canadian courts (see below ‘Bringing patents into it’) in determining the utility of a patent. Eli Lilly’s claim that invalidation of its patent constitutes an expropriation of its investment is, according to some analysts, extraordinary since NAFTA does not list patents as investment.
|Bringing patents into it
WHAT happens when a company is denied a patent? It usually approaches an appellate tribunal of the patent office or the courts. If courts reject the appeal, then it is the end of the story. Not so with Eli Lilly. In Canada, where the US drug firm was denied a patent for its attention deficit hyperactivity disorder (ADHD) drug atomoxetine, it took the extraordinary step of invoking the provisions of an investment treaty, NAFTA, to demand CN $100 million in compensation from the Canadian government to remedy what it claimed were violations of treaty obligations.
Eli Lilly launched its NAFTA attack after Canadian courts rejected its patent on the ground that it had provided no clinical data to prove that atomoxetine, sold under the brand name Strattera, was effective in the treatment of attention deficit hyperactivity disorder. At the time of filing the US patent, a clinical trial had begun but was not completed. The trial, a single study involving 22 patients, was completed before the filing, later, of the Canadian patent application. However, Canadian courts said that was insufficient evidence to prove that Strattera would deliver the long-term benefits promised by the US drug firm. This judgement is based on Canada’s “promise doctrine” which provides that a patent will be granted so long as the promise regarding an invention’s utility is demonstrated or soundly predicted at the time of filing patent claims.
Eli Lilly claims that the Canadian patent policy is “discriminatory, arbitrary, unpredictable and remarkably subjective”. This is similar to the challenge mounted by Swiss multinational Novartis against Section 3(d) of India’s Patent Act, which bars the patenting of new forms of old molecules unless there is a significant improvement in efficacy. That case, launched in 2006, has just ended with the Supreme Court upholding the validity of the section which multinationals have been claiming is not compatible with WTO’s TRIPS agreement. However, no drug major has been able to convince its country to challenge India’s patent law at the apex trade body where complaints can be made only by one government against another.
Eli Lilly’s NAFTA challenge to Canada’s patent policy may well change the rules of the game. If it is successful in its arbitration, it could open the floodgates to investor-state attacks on Canada from other drug companies that have had patents invalidated because their applications failed to show or predict that the medicines would provide the promised benefits. In its attack on Canada’s “promise doctrine”, which sets the standards for granting drug patents, Eli Lilly claims that the denial of a patent is expropriation of its property rights granted by NAFTA, a claim that Public Citizen, a Washington-based non-profit, finds both worrisome and audacious.
The non-profit which leads the charge against “undemocratic trade agreements that advance the interests of mega-corporations at the expense of citizens worldwide”, points out that NAFTA’s Intellectual Property (IP) chapter contains no requirement to comply with other IP agreements. If such “a bizarre obligation” is accepted, the repercussions could be huge. Investors and companies would increasingly try to privately enforce the terms of any public treaty on IP issues through claims made against sovereign governments in investor-state tribunals.
In the case of India, the worry is acute. Experts point out that the nebulous provisions in BITs signed by India can easily be stretched to give precedence to foreign investors’ rights over India’s policy space. “The broad treaty provisions are a characteristic of ‘one-dimensional-investor-centric’ BITs that have scant regard for the policy space of the host country,” points out Prabhash Ranjan, associate professor at National Law University, Jodhpur.
Such BITs, says Ranjan, who is a specialist on India’s investment treaty ramifications, are patterned on treaties developed by the US and Western Europe to further their economic hegemony and protect their investments in developing and least developed countries. “India cannot afford to base its BITs on such ‘one-dimensional-investor-centric’ model.”
BITs come home to roost
For India, 2012 was undoubtedly the year its BITS came home to roost. The UNCTAD report lists India among the top nine “most frequent respondents”, or states against whom such lawsuits have been filed, with a total of 17 known cases, of which seven were added last year. The emphasis on known cases is a reflection on the opacity of the system because quite often these arbitration or settlements are enveloped in secrecy. To date, the details of how the infamous Enron/Dabhol case was settled by India have not been made public. Reports generally put the figure of compensation paid to GE and Bechtel, the suppliers who took over the failed gas power project in Maharashtra and filed a case under the Mauritius-India BIT, at around $1 billion.
Ensnared in 82 BITs—one of the largest portfolios held by any country—in addition to four comprehensive economic cooperation agreements that have embedded investment chapters (see ‘Vulnerability Index’), India’s vulnerability is causing some concern in government. Till recently, it had remained impervious to the risks posed by powerful investors despite the Enron case.
|India’s Vulnerability Index
- 82 BIPAs^ or BITs plus 3 protocols; 72 already in force
- 4 CECAs* with investment protection features; 1 FTA** finalised
- All BITs have broad asset-based definition of investment
- All BITs geared to protecting foreign investment without safeguarding regulatory space of government
- Most BITs allow investors to take disputes to international arbitration without exhausting local remedies
- 71 provide fair and equitable treatment and national treatment to foreign investors
- Explicit provisions in all bar nationalisation or expropriation of assets and give protection against measures having equivalent “effect”
- Only 16 BITs say measures to protect legitimate public welfare cannot be deemed expropriation
^ Bilateral investment protection agreement or Bilateral Investment Treaty
* Comprehensive economic agreements;
** Free trade agreement
Last week, Finance Minister Palaniappan Chidambaram gave the first official indication that it would be taking a second look at BITs. At a meeting of the Canada-India Business Council in Toronto, the minister said that all 83 investment protection treaties, including the one under negotiation with Canada, had been put on hold. “All agreements are under review,” PTI quoted him saying. “We cannot allow the highest court of the land to be subjected to any foreign courts or tribunals,” Chidambaram told the meeting. He was clearly referring to the arbitration notices sent by the telecom companies affected by the Supreme Court decision in the 2G spectrum case.
According to official sources, the government has been rattled by the notices of intent to take India to international arbitration under various treaties. BITs, or the standalone investment treaties, are handled by the finance ministry unlike the comprehensive economic pacts or FTAs which are the responsibility of the commerce ministry.
However, analysts point out that India has not terminated any of its BITs. Ranjan says all BITs are valid for 10 years and are deemed to be automatically extended after this period unless either state gives notice in writing to terminate the treaty. “Where does this leave India? Even if the treaty is terminated, the protection for the existing investments made in India will apply for the next 15 years.”
He also cautions that the reported renegotiation/review by Chidambaram could lead to myths. Would the current review cover even the CECAs and FTAs or be restricted to the standalone treaties? “Any decision to review BITs should be used to re-examine India’s overall BIT policy and in a transparent manner that includes all the stakeholders,” insists Ranjan, who says such an exercise should spell out the processes to be followed before and during the negotiation of such treaties.
|Backlash against bits
A backlash against BITs and FTAs is setting in. Not only has the number of cases initiated by investors touched a new high, but also the claims awarded have reached an absurd high. The case that made waves last year was the $1.77 billion plus compound interest and costs awarded to Occidental Petroleum Corp of the US against Ecuador for terminating an oil concession to the American oil giant. The total damages that the tiny Latin American nation would have to fork out would amount to some $2.4 billion. It is the largest such award in arbitration history and has deepened concerns over the dispute resolution system.
The award decided by the International Centre for Settlement of Investment Disputes, the World Bank’s arbitration body, has been described as “so egregious in legal terms and so full of contradictions, that I could not but express my dissent” by one of the three members of the arbitration panel. It’s a case that highlights how one-sided such decisions can be. To start with, Ecuador terminated Occidental’s oil concession after it sold 40 per cent of its production rights to another firm without the mandatory government approval. That itself should have led to termination of the contract. Oddly enough, the panel conceded that Occidental could have reasonably expected that its contract would be terminated and its investment forfeited because of its contractual violations but then went on to define “Fair and Equitable Treatment” under Ecuador’s treaty obligations in an innovative way so as to penalise the country.
Ecuador has set up a commission to audit its BITs along with a review of the global investment arbitration system in what could be a prelude to the scrapping of the treaties. An outraged President Rafael Correa says the decisions in the Occidental case and another related to Chevron Corp lawsuit would bankrupt his nation. Other countries, too, are being cautious about BITs. While Brazil’s parliament has refused to ratify the 16-odd BITS signed by the executive, fearing an erosion of its powers, South Africa is re-examining its policy on investor-state disputes and has refused to renew its BIT with the EU. In the Trans Pacific Partnership (TPP), a NAFTA-style FTA is being negotiated between the US and 10 Pacific Rim nations. Australia, a TPP negotiating party, has refused to be subjected to investor-state dispute settlement as part of the deal, and other countries, too, have become wary of this condition.
It is not as if renegotiating an investment treaty is such a difficult task. UNCTAD says that in the past 15 years over 130 have been renegotiated worldwide.
Adding strength to the need for a thorough review is the recent letter of the parliamentary standing committee of the commerce ministry to the prime minister which urged the government to allow parliamentary scrutiny of investment treaties. Committee chairperson Shanta Kumar of the BJP said in a pointed reference to the EU-India FTA, which is in the process of being wrapped up, that there was no room for secrecy in trade negotiations in a democracy. “The power of treaty-making is so important and has such far-reaching consequences to the people and to our polity that some element of accountability should be introduced into the process.”
Broad based trade and investment agreements like the EU-India FTA must pass parliamentary scrutiny before they are signed by the government as they “have deep ramifications for Indian farmers, dairy, workers, financial services, local industries, intellectual property protection, government procurement, etc”.
Ranjan’s suggestion backs this. He thinks the government ought to provide reasons for entering into a BIT with a particular country by conducting feasibility studies. These studies then should be put up for public dissemination and discussion. That is a far cry from the way the Manmohan Singh-led government conducts its trade negotiations. Perhaps, the challenge it now faces from a host of powerful investors might prompt a rethink.
Or is it case of being a BIT too late?
With reports from Jyotika Sood
Tags: Cover Story
, Bilateral Investment Treaties (BITs)
, Canada Patent policy
, Chevron Corp
, Coal India
, Coal India Ltd
, Corporate Europe Observatory
, Down to earth
, Drug Industry
, Eli Lilly
, Eu-India FTA
, Intellectual Property Rights (IPR)
, Latha Jishnu
, Multinational Corporations (MNCs)
, Occidental Petroleum
, Prabhash Ranjan
, Public Citizen
, Rafael Correa
, The Children’s Fund
, Third World Network