Arbitration awards and the public interest

Topics BS Opinion | Arbitration | tax

The arbitration awards against India’s retroactive tax claims now pose a serious threat. Cairn Energy has a freeze order on Indian government assets in Paris, and similar developments are possible in the US from actions by Cairn and Devas Multimedia. Are there ways to mitigate these threats and reputational damage? Objective analysis of the facts is advisable before deciding the balance of interest in choosing to continue as before, or to consider changes. The issues go beyond the legitimacy of awards and India’s sovereign rights, to India’s exposure and its commercial .....
The arbitration awards against India’s retroactive tax claims now pose a serious threat. Cairn Energy has a freeze order on Indian government assets in Paris, and similar developments are possible in the US from actions by Cairn and Devas Multimedia. Are there ways to mitigate these threats and reputational damage? Objective analysis of the facts is advisable before deciding the balance of interest in choosing to continue as before, or to consider changes.

The issues go beyond the legitimacy of awards and India’s sovereign rights, to India’s exposure and its commercial implications. The country’s rights are not being questioned; the scrutiny is of fair and equitable treatment under investment treaties, and changes in agreed terms. The choice is to continue as before and take the consequences, or to undertake an informed, objective analysis of likely costs and benefits of resisting or accepting awards before deciding what to do in our interests.  The options are to litigate endlessly, or accept awards, or to negotiate acceptable settlements. Resolution would enable reallocation of our energies — our political, administrative, and judicial resources, and society’s productive capacity and mind-share — to more constructive purposes.

Additional considerations include substantial, continuing damage to India’s business reputation for not honouring agreements and awards, and for resorting to repeated appeals.  Ideally, dilatory tactics need to be replaced with being more reasonable and less arbitrary.  Strategies in the public interest need to be developed, such as the attitude to arbitration in not accepting unfavourable awards. The indirect costs and collateral damage are enormous, such as to the telecom and energy sectors since 2012, to affected companies and employees, to the investment climate, and the cascading effects through the economy. The disarray and inadequacy in telecom, for instance, are partly attributable to this factor. While foreign investment is increasing, the type of investors also matters. Present investments favour quick profits from the market, with less emphasis in building productive capacity in infrastructure, manufacturing, agriculture and so on.

Pranab Mukherjee, who introduced the retroactive tax as finance minister in 2012, wrote in his memoirs that despite the angst, his successors maintained the same stance. He had said at the time that if the law had not been changed, it would have cost the government Rs 40,000 to Rs 50,000 crore, as companies who had not contested similar demands would claim refunds. If this is a fact, how should it affect government decisions?  The most important criteria presumably are cash flows, including awards if enforced, and reputational effects going forward.

Illustration: Binay Sinha
Compulsions for retaining a law begin from inception, because once the government makes a law, there is a due process to be followed, or the appearance of it. International tax claims cannot be surrendered easily because of the political price for appearing to be weak, or selling out the public interest. While resolution can be by full or partial payment or by litigation, in practice, the default is litigation, followed by protracted appeals. Political and civil decision-makers have no invested commitment — “skin in the game” — to push for an early settlement.  Anyone who exercises judgement that results in settling for a lesser amount runs the risk of being subjected to ignominy and accusations of bias or corruption. For politicians, the reputational risk in not pursuing claims is very high.  Even Arun Jaitley as finance minister, who was earlier Vodafone’s attorney and called it “tax terrorism”, did not or could not undo it. Further, many officials, including finance and tax authorities and politicians, behave as if they are obliged to defend the indefensible. They seem unaware that similar compulsions drive legitimate private sector concerns.  Shareholders expect companies to prosecute fair claims and defend against unfair demands, and companies cannot give up prosecution or defence if they have reasonable chances of winning.  In legal battles of attrition, if the government takes a stand that others consider unreasonable, the country pays, while lawyers prosper.

Awards against India include Cairn’s $1.7 billion, Rs 22,100-crore tax claims against Vodafone that was disallowed by an international court (with legal costs of about Rs 85 crore to be paid), and possibly Vedanta’s claim of $3 billion related to Cairn’s transaction that is pending but could be upheld. India’s appeals against Vedanta’s and Vodafone’s awards are pending. If these appeals are dismissed, together with awards to Devas and its shareholders of $1.2 billion for the cancellation of its contract with Antrix, the total rises to over Rs 40,000 crore.

The government has resisted Devas’ awards successfully for years, and has raised the accusation of fraud in a still pending arbitration with Deutsche Telekom, a former investor in Devas. Meanwhile, internally, the government has probed these accusations repeatedly, and apparently accepted that they are unwarranted. (1)

If this defence fails and/or if there is actual seizure of assets abroad,India may be forced to reconsider. Accepting the awards is also not easy, because it needs radical changes in the government’s approach and behaviour, carried through by changes to all of society/us, in adhering closely to terms. Governments everywhere are sometimes not transparent, and ours has a colonial and feudal legacy of rulers and subjects with pernicious practices on both sides. It is a legacy that has become worse with time, and perpetuates problems in many areas of governance, the economy, and society, because it is pervasive. This mindset will have to change for a more open approach, objective analysis, and decisions based on facts and reason. If this process is begun, it augurs well for our prospects. Cairn, Vodafone, and Devas have reportedly shown willingness to settle. The government should seriously consider evaluating the pros and cons of asset seizure and indirect damages, compared with other options, including possible settlements. By ending these disputes quickly and well, we can hope to build a more reasonable and stable business and investment environment, and better business practices.
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1.a:  This article summarises the details: https://thewire.in/government/india-isro-arbitration-antrix-devas 
1.b: India’s treaty-based disputes: https://investmentpolicy.unctad.org/investment-dispute-settlement/country/96/india


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