The Supreme Court’s cancellation of 122 2G telecom licenses last year came as a shock to many and particularly foreign investors in the sector. They found themselves in a cul de sac of sorts and were forced to use every trick in the book to find a plausible solution. Amongst the several opinions and strategies that were discussed and debated by experts and investors alike, an intriguing one emerged; the ability of foreign investors to seek protection under the bilateral investment protection or economic cooperation treaties that India has with more than eighty countries across the world.

An International Investment Treaty (IIT) is an agreement signed by two or more nations to build better relations by mutual cooperation with the objective of achieving sustained economic development for both nations. If one considers the fundamental basis of these IITs and exchange control regulations in India, the contradictions are hard to miss. One of the fundamental concepts of these IITs is that of ‘National Treatment’, which means that the host will not discriminate against foreign investors irrespective of whether this discrimination is a result of legal, administrative or other decision making. When countries enter into such IITs they agree that each of them will provide treatment that is ‘no less favourable’ than the way its domestic investors are treated. For example, the Comprehensive Economic Cooperation Agreement between India and Singapore provides that “each party will accord to investors of the other party and investments of the other party, in relation to the management, conduct, operation, liquidation, sale and transfer (or other disposition) of investments, treatment no less favourable than it accords in like circumstances to its own investors and investments.” This principle has been upheld and recognised in several international commercial arbitrations as well. It is therefore exceedingly difficult to reconcile the principle of ‘National Treatment’, with the pricing guidelines set out in the Indian foreign direct policy (FDI Policy). The recently introduced discounted cash flow (DCF) method of valuation and (i) the ceiling price for sale by a foreign buyer; and (ii) floor price for purchase by a foreign buyer of shares of an Indian company certainly discriminate between domestic and foreign investors and is a perfect example of this contradiction.

The second fundamental concept of these IITs is that of ‘most favoured nation’, which requires that a foreign investor must be accorded the highest standard of treatment available to an investor from any other foreign country. Another issue that has been debated extensively in this regard is the meaning of the terms “fair and equitable treatment” and “full protection and security” and its applicability. The FDI Policy specifying shareholding limits for foreign investment in specific sectors like telecommunications, insurance, print media and defense and the requirement of approvals from the Foreign Investment Promotion Board (FIPB) ignores the mandate of the IITs and discriminates against foreign investors.

Most IITs such as the one between India and Singapore provide for a provision dealing with ‘repatriation’ where the parties to the treaty undertake to assure investors of the other country free transfer of their capital and returns on investments. The only exceptions to availing benefits under such IITs are usually conditions such as protection of public morals and maintaining of public order, protection of human life and natural resources, preservation of national treasures and circumstances crucial to protection of security of the countries. Repatriation of proceeds by foreign investors under the present regulatory regime is ridden with restrictions for foreign investors which do not apply to similar investments made by Indian investors. Investments made by foreign investors may also be subject to minimum capitalisation requirements and lock in periods in certain sectors like banking and real estate. The lack of flexibility with respect to returns on investments is certainly an obstacle in the path of foreign investors looking to capitalise on their investments and could be a discouraging proposition for such investors, not to mention, prohibited by the IITs.

The aftermath of the Supreme Court judgment in the 2G case has left behind several disgruntled investors who besides their money also want answers from the Indian government. The world at this time is looking to see what action the Indian government will take to resolve this issue. The government now needs to take a hard look to decide what its next steps should be. Does it want to send out the message that India only claims to be ready to welcome foreign investments into the country but at some level is still hesitant to completely embrace it?  Will India be able to comply with its international obligations? If we want to continue to pique the interests of foreign investors, our policies must ensure that foreign investors are not treated arbitrarily merely owing to their foreign nationality. It is important that we are in a position to guarantee other nations that India will uphold the fundamental principles of international law and honour the IITs that it has signed.

Murali Neelakantan
Kaushalya Shetty