An Indian company goes treaty shopping…

Amidst reports of yet another investment treaty arbitration against India over the cancellation of 2G licenses by the Indian supreme court (ToIIE), the ICSID has registered an arbitration that may well represent the first time an Indian TNC has gone treaty shopping.

According to its website, on 27 September 2013, the ICSID registered an arbitration proceeding initiated by Spentex Netherlands, B.V., against the Republic of Uzbekistan (ICSID Case No. ARB/13/26). A quick Google search reveals that the Claimant in this case, Spentex Netherlands, B.V., is actually a subsidiary of Spentex Industries Ltd., a textile company registered and incorporated in New Delhi and managed by Indian nationals. The 2012-13 Annual Report of Spentex Industries Ltd. provides some insight on the relationship between the Indian parent and the Dutch and Uzbek subsidiaries. Note 42 of the Financial Statement states that:

The Company [Spentex Industries Ltd.] has an investment of Rs. 56,10,11,339 [approx. USD 89,83,362] and Rs. 93,23,779 [USD 1,49,301] in its subsidiary Spentex Netherlands B. V. (SNBV) and its step down subsidiary Spentex Tashkent Toytepa LLC (STTL) respectively. Further it has Rs. 7,00,12,404 as export receivable from STTL and advances of Rs. 9,50,70,902 in SNBV as on March 31, 2013.

The ICSID website does not yet give any further details about the arbitration, except that its subject matter relates to the “Textile Industry.” Spentex India’s statements provide some insight on the details of the dispute. Spentex India describes its version of the developments in Uzbekistan in a press release (apparently) dated 31 May 2012:

An Indian investor SIl (Spentex) through its project company STTL invested and commenced its business in Uzbekistan in right earnest and made investment vide Investment Agreement dated 26th September 2006 entered between the Government of Uzbekistan and Spentex (investor). However, in the midst of term of the Investment Agreement certain changes in legal provisions, economic and business conditions and policies were adversely changed by the authorities in Uzbekistan. These changes being contrary to the provisions of Investment Agreement jeopardized the legal stability of its project company and its business became completely unviable. Spentex made many representations to Uzbek authorities and its financers for rectifying the situation but the same went unheard and ultimately project company was forced to shut down all its factories in Uzbekistan and bankruptcy was thrust upon it. Harassment by tax authorities and prosecutors was another reason which never allowed STTL to function normally as arbitrary penalties were imposed and pressure from the prosecutor was a common feature

The arbitration proceeding also finds a mention in Spentex India’s 2012-13 Annual Report:

During the period of investment Government of Uzbekistan changed certain laws and policies by breaching the investment agreement and rendered operation of STTL unviable. Since treaties entered between the Governments of India and Uzbekistan and the Investment agreement entered between Govt. of Uzbekistan and STTL were breached, company has issued notice claiming in excess of USD 100 Mn. towards protection of investment and payment of dues & compensation for the losses suffered by the company.

Interestingly, although the above quote from the Annual Report refers to the the bilateral investment treaty (BIT) between India and Uzbekistan being breached, the claimant in the arbitration proceeding is the Dutch subsidiary of Spentex India, suggesting that the claimant has sought protection under the Netherlands-Uzbekistan BIT. This is not unusual, as transnational corporations investing in foreign countries often structure their investments through a subsidiary in The Netherlands in order to avail the benefits of the vast network of Dutch BITs. The IISD, in a critical piece, notes that Dutch BITs “invite[] ‘treaty shopping,’ – i.e. routing investments through third countries to acquire the protection of investment treaties that investors would not, otherwise, have in their home state jurisdiction.” Even though the merits of the practice continue to be debated, there is no general international legal rule prohibiting investors from structuring their investments in a manner that allows them to avail of the greater protection available under certain treaties.

This development is interesting because it, once again, shows the blurring of the traditional capital-importing/capital-exporting dichotomy in discussions on investment treaties and investment arbitration. While investment treaties and investment arbitration may initially have emerged in a world where capital exporting countries primarily sought to protect their investors operating in capital importing countries, the scenario today does not allow for such a clear distinction to be easily drawn as traditional capital exporting countries gradually find themselves fending off claims by foreign investors. This, for example, is reflected in the evolution of the United States BIT program, which was focused mainly at investment protection abroad in its early days. In recent times, however, as the flow of investments into the United States has increased, its BITs have evolved to take into account not just the need for protecting investments abroad, but also the impact of such treaties and claims by foreign investors on the domestic regulatory space available to the government.

Faced with several claims by foreign investors under different BITs, there has been widespread criticism of the Indian BIT program as being too “pro-investor.” The Indian government has gone back to the drawing board and is currently reviewing its BITs. Cornered by the many treaty claims it faces, the government may well see BITs and investment arbitration as liabilities that expose it to unnecessary international litigation. However, as the Spentex case well illustrates, Indian investors are also increasingly investing abroad. Given the reciprocal basis of BITs generally, if India dilutes the standards of substantive and procedural protection in its BITs in immediate response to the claims filed against it, this would also weaken the protection available to Indian investors abroad. Therefore, as India undertakes to review and rationalize its BIT program, it must strike a careful balance between its domestic regulatory interests, on the one hand, and the interests of the Indian investor abroad, on the other. In its attempt to shield itself from claims by foreign investors, India should not deprive its own investors the benefits and protection promised by BITs.

Hat-tip to Aditya Singh for the alert about the Spentex arbitration.

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Repercussions of the 2G Judgment: A BIT Claim Against India?

Reacting to the Indian Supreme Court’s judgment in the 2G spectrum case, Sistema, a Russian company, has invoked its right under Article 9.1 of the bilateral investment treaty between the government of the Russian Federation and the Government of India by filing a notice of dispute against India. Sistema has a joint venture with India’s Shyam Group — SistemaShyam Teleservices , in which the Russian government also has a stake of 17.14%. (see reports in the Economic Times and LiveMint)

This is the official explanation from the Sistema website:

[Sistema] has today sent a formal notice to The Republic of India notifying it of a dispute under the Bilateral Investment Treaty (BIT) between the Government of the Russian Federation and the Government of the Republic of India arising from the decision of the Supreme Court of India issued on February 2, 2012 regarding the cancellation of 122 telecom licenses, including 21 licenses belonging to Sistema Shyam TeleServices Ltd (“SSTL”), in which Sistema owns a 56.68% share. Sistema believes that the cancellation of SSTL’s licenses following Sistema’s investment of billions of dollars into the Indian cellular sector is contrary to India’s obligations under the BIT, including obligations to provide investments with full protection and security and obligations not to expropriate investments.

The formal notice requests The Republic of India to settle the dispute relating to the revocation of SSTL’s 21 telecom licenses in an amicable way within six months.  If the dispute is not amicably resolved by August 28, 2012 Sistema reserves the right to commence proceedings against The Republic of India as provided in the BIT.

Hat-tip to Luke of IA Reporter.

ICSID Panels of Arbitrators and Conciliators – South Asian Appointments

An ICSID News Release notes:

Today, Mr. Robert B. Zoellick, … announced a new list of Chairman’s designations to the ICSID Panels of Conciliators and of Arbitrators. These designations were made pursuant to Article 13(2) of the ICSID Convention, which allows the Chairman to name 10 arbitrators and 10 conciliators of different nationalities to each Panel. Members of the Panels are available for appointment by disputing parties or by the Centre in proceedings at ICSID.

As the Release notes, a list of the Members, as well as their short biographies can be found on the ICSID website (here and here, respectively).

Re: South Asian arbitrators, the new arbitrator designated to the Panel by the Chairman of the ICSID Administrative Council is Muhammad Makhdoom Ali Khan, a senior advocate from Karachi and Pakistan’s former Attorney General (2001-2007). Mr. Ali Khan replaces India’s Fali S. Nariman, a senior advocate at the Supreme Court of India and a preeminent Indian arbitrator and counsel. Over the past ten years, Mr. Nariman has been an arbitrator in six disputes (five concluded and one pending), including Wintershall, which adopted a restrictive approach in determining the applicability of the MFN clause to dispute settlement provisions of investment agreements. It is also pertinent to note that India cannot designate arbitrators as other Contracting States, such as Pakistan, can since it has not ratified the ICSID Convention. Mr. Nariman was designated by the Chairman of the ICSID Administrative Council (the head of the World Bank). Mr. Nariman, thus, was perhaps India’s strongest link with the ICSID process.

ILCurry congratulates Mr. Nariman for his contributions to the ITA system, and wishes Mr. Ali Khan the best for the duration of his designation.