Foreign Investors Threatened By Indian Measures Seek Remedies Through International Investment Arbitration

Author:Mr Mark Beckett, Rachel W. Thorn, Sebastian Seelmann-Eggebert, Charles Claypoole and Christina Hioureas
Profession:Latham & Watkins
 
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The Indian government recently began implementing taxation and telecom license cancelation measures that may affect a large number of foreign investors. Several foreign companies and governments are concerned about the worsening investment climate in India. Some investors have already taken steps to seek recourse through international investment arbitration to obtain compensation for breaches of India's obligations under relevant bilateral investment treaties (BITs).

BITs are treaties between two States, whereby each agrees to provide certain protections to qualifying investors and their investments from the other State. These protections relate to the acts and omissions of the State acting as a sovereign. The "State" includes the central government, any subsidiary governments (such as states or municipalities), courts, the legislature, and any entity that is deemed to be engaging in sovereign acts, including regulatory agencies. As BITs are treaties, their governing law is public international law. Some investors have already invoked their rights under BITs in response to the Indian government's recent actions.

A New Retroactive Tax Affects Foreign Companies in India

In March 2012, Indian Finance Minister Pranab Mukherjee announced the 2012 Budget proposal and Finance Bill, which would amend the 1961 Tax Act with retroactive effect. The proposed amendment would enable the authorities to issue retroactive tax claims on overseas corporate deals involving Indian assets that have occurred over the past 50 years.

Several governments, including the United States and the United Kingdom, have urged India to scrap the tax, and seven international trade organizations, representing 250,000 corporate members, have written to the Indian government, indicating that in light of the proposed tax companies are reconsidering their investments in India.

The Ministry of Finance issued a press release on April 20, 2012, clarifying that the amendment would not allow any tax case to be reopened beyond six years (rather than 50 years) and the retroactive amendment would not affect cases that have been assessed and finalized up to April 1, 2012.

Vodafone's Claim Against the Government of India

In 2007, Vodafone Group PLC, a UK company, acquired a controlling stake in India's Hutchison Essar Limited. In 2012, the Indian Supreme Court heard a US$2.2 billion tax claim against Vodafone Group PLC by the Indian authorities stemming from this deal. The Supreme Court ruled that Vodafone...

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