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Why 17 MNCs took Indian govt to international arbitration

May 15, 2014 15:41 IST

Why 17 MNCs took Indian govt to international arbitration

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Surajeet Das Gupta and Ruchika Chitravanshi

There’s a distinct rise in the number of MNCs going for arbitration or invoking treaty protection, for good reason, though most still refrain

In corporate circles, an arbitration clause in a contract is viewed as a fire extinguisher. You use it when a fire breaks out and nothing else works.

However, while frequent use of fire extinguishers would douse a fire, it also points to a deeper malaise in the system.

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Image: MNCs say, India is gradually becoming a difficult place to do business.in.
Photographs: Reuters
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Why 17 MNCs took Indian govt to international arbitration

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India Inc has been increasingly seeking recourse to arbitration as a last resort.

Nokia, Vodafone, Reliance Industries with BP and Niko have all, in the past one month, given notices invoking investment treaties or going for arbitration against the government.

And, according to some estimates, as many as 17 multinational corporations (MNCs) have already taken the Centre to international arbitration.

It is a desire to secure a binding and speedier resolution of disputes, whether with the government or an Indian shareholder, that has prompted MNCs to increasingly go for international arbitration as the final resort.

Especially when in many cases, their avenues of recourse through Indian courts have been exhausted.

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Image: Nokia has sought international arbitration to resolve the multi-million dollar tax disputes related to its manufacturing plant in Chennai.
Photographs: Reuters

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Why 17 MNCs took Indian govt to international arbitration

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A prime example is the much-talked Rs 20,000-crore (Rs 200-billion) demand on Vodafone from the income tax department.

The UK-based MNC took the dispute to international arbitration on April 17 in London only after it had no recourse to a binding resolution in India.  

It had even got a favourable judgment from the Supreme Court, which clearly said it didn’t have to pay the money.

Yet, a retrospective amendment to the laws forced by the government brought the case back on the table, forcing them to pay.  

Says a source in the case: “The government offered a 90- day window for a non-binding conciliation.

However, such a process has no value because it is tails you win and if it is heads, you also win.

Even if the issue was resolved, there is nothing (stopping) a new government to come and say it is not binding on us. Clearly, there is no recourse in India to a binding resolution of the dispute.”

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Image: Vodafone is keen to end its tax related dispute in India.
Photographs: Reuters

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Why 17 MNCs took Indian govt to international arbitration

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Why the recourse  

That is also because mediation or conciliation, unlike in the UK or US, is not institutionalised here; it is also not binding.

“In the US and UK, agreements increasingly are adding in a conciliation mechanism, which in many cases is binding for dispute resolution.

In India, it is just an informal arrangement, as was done between the government and Vodafone, which can hardly work,” says an international arbitration expert.

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Image: Vodafone took its income tax related dispute to international arbitration on April 17 in London only after it had no recourse to a binding resolution in India.
Photographs: Reuters

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Why 17 MNCs took Indian govt to international arbitration

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What is also making MNCs go to international arbitration is that it is cheaper and faster, which Indian courts cannot promise.

Says Lalit Bhasin, head of the Confederation of Indian Industry’s task force on dispute resolution, who also handles international arbitration cases: “You can get a binding decision in a year to 18 months. That is because arbitration is institutionalised in London, Singapore and the US. In India, it could take you five years.”

Adds senior advocate Aman Lekhi: “Besides, once a conclusion has been achieved, the scope of interference by the court is narrow. Another opinion is not a ground for interference.”

Also, there is greater scope to maintain secrecy about company affairs, since these are not open for the public but held behind closed doors.

Arbitration is not very cheap but considering the speed of resolution becomes more economical than pursuing cases in the courts.

In Britain, costs for arbitration are £2,000-3,000 a day, compared to Rs 3-5 lakh you might have to fork out in India in a court.

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Image: MNCs prefer international arbitration because its faster.
Photographs: Vivek Prakash/Reuters

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Why 17 MNCs took Indian govt to international arbitration

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Should they?

On the other hand, many Indian shareholders say MNCs are using international arbitration to ride roughshod over the Indian judicial system to put pressure on their estranged partners.

Those watching McDonald’s case say the company went for international arbitration against their equal partner, Vikram Bakshi, when the case was already before the Company Law Board (CLB). 

These experts give a strong argument against international arbitration. In the McDonald’s case, they note, the two companies are Indian, the retail outlets are all in the country and all business is generated in India.

“So, why should a dispute resolution be taken outside the country? Especially when the matter is already in the CLB?” asks a source monitoring the case.

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Image: McDonald's business in India could get severely impacted if the dispute between two equal shareholders isn't resolved quickly.
Photographs: Reuters

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Why 17 MNCs took Indian govt to international arbitration

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Bhasin says unlike some years earlier, MNCs are now increasingly ready to take the government to arbitration if they find they are not getting justice, especially under a bilateral investment treaty (BIT).

That could have motivated Nokia after it could not get favourable orders from the Indian courts.

Experts say Nokia’s decision to invoke the bilateral investment protection agreement between India and Finland was well-timed, as talks for a dispute resolution will take place with a new government, which could make a new assessment, rather than a government that had already made up its mind.

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Image: MNCs are keen to sort out tax or policy related issues on a fast-track basis.
Photographs: Vivek Prakash/Reuters

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Why 17 MNCs took Indian govt to international arbitration

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Responding to a Business Standard query, a company spokesperson said, “Nokia is keen to work with authorities in India to resolve the tax disputes. As one of our actions, Nokia has sent a letter under the Finland-India BIT to the prime minister. The letter seeks amicable resolution of the tax disputes.”

As with Vodafone, it is going towards arbitration after recourse to the courts ended. 

Yet, many MNCs have decided not to take the government head-on despite the initial action, even if it meant losing money.

To most, it is still a weapon to be used only in the last resort, especially if the government is on the other side.

 For instance, after its licence was cancelled Sistema Shyam invoked the BIT between India and Russia, giving the government six months to resolve the dispute or it would go for international arbitration.

But the company, which participated and won in the CDMA spectrum auction, has taken no further action.

Similarly, Telenor served a notice on the government, threatening international arbitration and claiming damages of nearly $14 billion (Rs 70,000 crore). Yet it participated in the auctions and operates a much smaller network than when the licence was cancelled. Last week, they also withdrew the arbitration notice.


Image: Currently, Vodafone is going through international arbitration.
Photographs: Allessia Pierdomenico/Reuters

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