India’s proposed investment treaty terms leave foreign partners cold

New Delhi: Having cancelled investment treaties with about 50 foreign governments last year, India is struggling to convince some to accept new terms that make it harder to seek international arbitration for disputes, sources familiar with the talks said.

From New Delhi’s perspective those treaties, mainly struck in the 1990s when it was desperate for foreign capital, left it too exposed to potential claims awarded by international arbitrators.

To reduce that exposure, India has drafted a new model agreement that legal advisors say is similar to those used by other big emerging market economies like Brazil and Indonesia, but some of its foreign partners are baulking at the more restrictive approach.

“India is getting nowhere with the negotiations,” said one of the sources, who is aware of the meetings with government officials over the past 10 months, but does not want to be named as the discussions are private.

Negotiators from countries including Australia, Iran and the European Union have told the Indian side that investors are waiting to come in but the new treaty terms give too little protection, the source said.

Foremost among their concerns are a requirement for investors to fight any case in the Indian courts for at least five years before going for international arbitration, and other provisions narrowing the scope for companies to make claims, the source said.

The new model treaty also has no provision for investors to bring claims against India for any tax-related matters and for disputes arising due to actions taken by local governments.

Currently, India is entangled in more than 20 international arbitration cases, and could end up paying billions of dollars in damages if it loses.

Companies like Vodafone Group, Cairn Energy and Deutsche Telekom have initiated arbitration proceedings against India seeking to protect their investments against retrospective tax claims and cancellation of contracts.

Covered by a bilateral trade and investment agreement between New Delhi and Tokyo, Japanese automaker Nissan is the latest company to sue India, claiming damages of over $770 million in unpaid tax incentives.

While several countries limit the type of tax-related claims that can be made, lawyers say India’s step to omit all tax matters goes too far and could expose investors to sudden changes in tax rules or retrospective claims.