Expropriation In the Infrastructure Sector In India.
Legal News & Analysis - Asia Pacific - India - Energy & Project Finance
9 August, 2019
Expropriation refers to either the direct acquisition by an act of a state, or the indirect appropriation of foreign investment through interference with the host state incentives that, an entity, as an investor may be entitled to. Such conduct could give rise to an actionable claim against the host state by a foreign investor, if there is a valid and subsisting Bilateral Investment Treaty (“BIT“) or Bilateral Investment Protection Agreement (“BIPA“) between the host State and the foreign investor’s state of nationality.
LEGISLATIVE AUTHORITY OF THE STATE TO EXPROPRIATE
There have been several laws enacted by the government to acquire land from private individuals. Significant among those is the Land Acquisition Act of 1894 (“LAQ Act 1894”). The lack of adequate safeguards in favour of the landowner led to the enactment of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (“LARR Act”) which replaced the LAQ Act 1894.
Unfortunately, the LARR Act was widely criticized by the then government upon assumption of office in 2014 on the ground that it interfered with government’s right of acquiring property for public purpose and was thus bound to make a negative impact on the growth of the nation. In view of this background, the government introduced the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Second Amendment) Bill, 2015 (“Bill”).
INSTANCES OF DIRECT EXPROPRIATION INITIATED BY GOVERNMENT OF INDIA
Instances of Direct Expropriation (pre-1990, economic liberalization era):
• Coal Industry
In 1973, the government of India passed the Coal Mines Nationalization, Act 1973 which ensured that coal mining operations in India could be carried on only by a government managed, owned or controlled company.
• Banking sector
In 1969, under the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the government of India nationalised 14 (fourteen) of the largest Indian banks, having over 75% (seventy five percent) of the deposits of the country. Subsequently, in 1980, a few more commercial banks were nationalised and this ensured that government of India controlled 90% (ninety percent) of the banks in India.
TREATMENT OF EXPROPRIATION EVENTS UNDER CONCESSION AGREEMENTS/GOVERNMENT CONTRACTS
Government expropriation or attempt towards nationalisation of private assets can be examined under the following categories:
Political Force Majeure
Political or direct force majeure is treated as political force majeure events under concession agreements in Indian infrastructure contracts. Typically, such events may not provide any remedies to the private entity that holds the assets and will eventually result in termination of the concerned concession agreement. Usually where the contracts are with the state or central government entities, there is a possibility of termination payments being issued to the private entity whose assets have been expropriated, and this is commonly undertaken in ports, roads and airports sectors.
End of the term of concession
Upon determination of the concession agreement, the parties to a contract can agree in the manner and price at which various assets would be handed back to the Government. Though it can be argued that this is done on a mutual basis and not forcibly, however it must be noted that, many concession agreements do not provide flexibility to the developers to cherry pick assets that are to be handed over, making this a form of indirect expropriation.
Temporary step in
Many concession agreements deal with temporary periods of step in, during which all the assets comprising the project as well as the contractual rights are expropriated. This could be during situations of emergency or during a default event attributable to the concessionaire.
OTHER CONTRACTUAL REMEDIES AVAILABLE TO AN INVESTOR
An aggrieved investor may also proceed against the government by invoking contractual remedy of specific performance, if the same has been provided for in the underlying contract. The specific performance of a contract is governed by the Specific Relief Act, 1963.
It has been largely observed that the courts were reluctant to award specific performance and tend to award damages instead.
However, the Specific Relief Amendment Act, 2018 (“Amendment Act”) has introduced provisions which tend to increase the enforceability of the contracts.
ROLE OF BITS IN RESOLVING EXPROPRIATION DISPUTES
The unprecedented growth in technology has led to a significant increase in foreign investment. Such increase in foreign investment has been accompanied with increased expropriation of foreign projects and concerned countries have been entering into BITs with dispute resolution mechanisms. Here are a few examples of BITs being invoked in previous instances:
• Dabhol Power Project, 1990s
The Government of India (“GOI”) has acquired various assets, companies and utility projects, including the famous Dabhol Power Company (“Dabhol“). The acquisition of Dabhol was a result of the backlash following the bankruptcy of Enron International and its scandals in India.
• White Industries, 2002-2011
In a contractual dispute with Coal India, White Industries obtained an arbitral award in its favour, and sought enforcement of the award before the Delhi High Court. On the other hand the Calcutta High Court set aside the award on the request of Coal India.
Thereafter, White Industries took the matter to arbitration on grounds of fair and equitable treatment and expropriation.
• Vodafone Case
Vodafone invoked the dispute resolution mechanism of the India-UK BIT for demand of INR 11,000 crore by the GoI. The demand arose after the GoI introduced a retrospective clarification to the Income Tax Act, 1961.
• NTT DoCoMo
In the TATA-DoCoMo deal, TATA, the Indian Company agreed to buy back shares in its joint venture with DoCoMo. The GoI blocked the purchases by invoking a wrong regulation to prevent equity investments flowing in a disguised manner as a debt. DoCoMo sought an international arbitration at London and won $1.17 billion in compensation and government has blocked them from receiving this payment as well and initiated termination of old BITs and institution of new BITs.
• Nokia Dispute
Tax authorities issued a tax demand notice on Nokia’s Indian subsidiary on ground that the Nokia India had paid royalty on the software used in the manufacture of mobile to its parent company, thus it attracted a 10% (ten percent) tax to be deducted at source.
Thereafter, Nokia India asked the Indian government to invoke dispute settlement clause in the India-Finland Bilateral Investment Promotion and Protection Pact.
MODEL BIT INTRODUCED IN 2016 BY THE GOVERNMENT OF INDIA
The India Model BIT, 2016 (“2016 India Model BIT”) is an outcome of India’s substantially changed attitude towards disputes arising out of BITs. The 2003 Indian model BIT was structured in a way that it protected the investors by providing easy and quick access to the dispute resolution mechanism in case of breach of the underlying BIT. However, the 2016 Model BIT adopted by the government of India as a result of substantial number of claims initiated by foreign investors is substantially different and drafted in a way as to support the host state (the government of India in this case). Under the 2016 India Model BIT, investors will now have to exhaust all local remedies before going to international arbitration.
This would mean that, going forward, expropriation disputes are likely to be resolved more through local remedies available with local courts, and domestic arbitrations, rather than relying on BITS. This would mean that a lot of importance will be placed by investors on speedy enforceability of contracts in India, particularly in case of expropriation claims.
For further information, please contact:
Prashanth Sabeshan, Partner, AZB & Partners