A season for arbitration

The government has to rethink the legislative framework for settling disputes with foreign investors so that the process becomes transparent and quick

August appears to be the month of international arbitration for the Indian government. Three high-profile arbitration cases are likely to keep the government extremely busy — two of them have already figured in the news and one will do so in the next couple of weeks. And each of them will have a lesson for the government on what it should be doing to enhance international investors’ confidence in the Indian governance system and improve the ease of doing business in India.

Last week, it came to light that Nissan Motor of Japan may soon settle a dispute with the Indian government. The dispute was over the payment of dues to the Japanese car maker, which had set up a plant in Chennai. Media reports suggested that once Nissan received $292 million in unpaid dues after foregoing the damages it had sought for delayed payments, it would drop the international arbitration case it had initiated against the Indian government.

A day earlier, a three-member international arbitration tribunal rejected the Indian government’s claim of illegal gas production by Mukesh Ambani-led Reliance Industries Limited (RIL) along with its partners from a neighbouring block of state-controlled Oil and Natural Gas Corporation (ONGC) in the Krishna-Godavari basin. The tribunal also awarded costs of $8.3 million to be paid by the government to the consortium.

The arbitration arose over a penalty of $1.55 billion slapped by the Indian government on the RIL-led consortium for allegedly drawing gas from ONGC’s block. The penalty was based on the findings of a US-based consultant’s report in November 2015, which noted that 11.12 billion cubic metres of natural gas had migrated from ONGC’s block to RIL’s adjoining KG-D6 block from April 2009 to March 2015.

About a fortnight from now, arbitration proceedings will begin in The Hague to settle the dispute between the Indian government and Cairn Energy of the United Kingdom. The proceedings will end by August 31 and, most likely, a verdict will be known by the first week of September. The Cairn dispute is over a retrospective tax action, initiated in 2014, over an intra-group share transfer that took place in 2006 to facilitate the initial public offering (IPO) of Cairn India Limited that had struck oil in Barmer of Rajasthan and had developed an oil field that today accounts for over a fourth of India’s total domestic oil output.

Cairn representatives have explained how the intra-group share transfer was a capital transaction and the entire proposal had been vetted by different departments of the government before the IPO was approved. But almost eight years after the transaction, a tax notice for paying $1.6 billion plus penalties was raised and other punitive action followed. This matter is now being taken up by the tribunal under the Indo-UK bilateral investment treaty.

Many questions arise. What did Nissan Motor do to bring the government round to settle the dispute through an agreement without involving the arbitration tribunal? Remember that securing a verdict from an arbitration tribunal is not an end of the matter in India. As in the RIL case, the government has decided to challenge the arbitration tribunal’s order in a high court in India.

Most likely, the dispute will drag on for a couple of more years at least. From that perspective, what the Japanese company has achieved by settling it outside the arbitration tribunal process is creditable. For Nissan, the dispute will truly end once the agreement is signed. Not necessarily for RIL.

What do these two developments mean for Cairn? Even if it wins a favourable verdict in arbitration, the dispute will not end as the Indian government is likely to challenge the decision in a court of law in India, dragging the case for a few more years. The question also bothering Cairn would be: What did Nissan do that Cairn did not to reach a settlement outside the arbitration proceedings?

Also, these questions and doubts do not inspire an international investor’s confidence in India’s grievance redressal system and dispute resolution mechanism. At present, more than 20 international arbitration proceedings are being held to settle disputes with investors. This number is the highest for any country.

Last year, the Indian government cancelled bilateral investment treaties with over 50 countries. One of the reasons for taking such a step was to include a provision in the new treaties that would allow an aggrieved investor to approach an international tribunal only after exhausting legal routes of redressal within India.

Whatever may be the merits of each of these cases, it is clear that the Indian government has to rethink the legislative framework for settling disputes with foreign investors so that the process becomes more transparent and quick. Uncertainty over grievance redressal is as problematic as delays.