The ongoing review of the bilateral investment promotion and protection agreements (BIPAs) and the comprehensive economic cooperation agreements to make the rules more stringent by disallowing investments through holding companies could put off foreign investors, say experts.
They caution that not recognising the holdco route might create a perception that doing business in India is difficult. Equally harmful, they feel, is the move to compel companies to exhaust local remedies before opting for international arbitration in the event of a dispute, which they say might not go down well with multinationals.
Said Punit Shah, co-head, tax, KPMG, “It could definitely discourage foreign investors because organisations have various reasons for using the holdco route which may not necessarily be tax-related. They may want the investment to be one level removed from the parent entity so that there is an element of protection against a liability. Moreover, a holdco brings a certain flexibility in operations allowing the company to invest in different jurisdictions.”
The restrictive draft norms, experts say, limit investors’ options in the event of disputes. Diljeet Titus of corporate law firm Titus & Co argued that such norms would definitely impact foreign investment into the country. “The remedies available to investors if their investments are jeopardised through a change in government policy, for instance, would be limited,” Titus observed.
He believed that the government is attempting to prevent the recurrence of a situation where a few foreign telecom players have wanted to take recourse to BIPA, some after the government cancelled their 2G licences and others like Vodafone that are embroiled in tax disputes.
In 2012, both Norway’s Telenor and Russia’s Sistema wanted to invoke various BIPAs when the Supreme Court cancelled their telecom licences, originally awarded in 2008, in the wake of the A Raja corruption case. In April 2012, Vodafone’s Dutch subsidiary, Vodafone International Holdings, served the Indian government a notice of dispute under the India-Netherlands BIPA over a tax demand of around R20,000 crore through retrospective amendments to the Income Tax Act. In January this year the British telecom major served the government a supplementary notice. The tax disputes relate to Vodafone’s 2007 acquisition of Hutchison’s 67% stake in the then Hutch Essar; conciliation talks have broken down after the government refused to include a transfer pricing case in the scope of the talks.
Vyapak Desai, partner, international litigation, Nishith Desai Associates, pointed out that thus far the definition of investor was wide enough to cover a holdco. “If the definition is narrowed, and the investor has opted for the holding company route to avail of tax benefits, he will weigh the benefits of the treaty against that,” Desai said.
Sumant Batra, a consultant to IMF and World Bank, questioned the government’s rationale for disallowing the holdco route, asserting the move would lead to loss of foreign investments in a big way.
“The government should understand that these channels are perfectly legal and the way to approach it is to demand disclosures to ensure more transparency. Not offering an option is not the right way,” Batra told FE.
The government’s move to insist that foreign investors take recourse to local legal options before seeking international arbitration, Titus said, won’t work in India although it might be an international convention.”Litigation takes a long time in India and if this clause is incorporated, the risk factor would increase tremendously. As it is litigation in India is protracted and if this becomes a reality, the situation would become even worse as the number of cases would rise,” he explained. Currently, BIPAs allow companies to explore both local and international remedies concurrently.
Batra also decried the move to first exhaust local judicial remedies before moving for international arbitration. “Arbitration is an alternate process. It is shorter in time and bring about clarity through its pronouncements. The only flip side is that it is very expensive,” he said.