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Tough stand on bilateral pacts

New Delhi: India has decided to harden its stance on a model bilateral investment protection agreement (BIPA) it is negotiating with a number of countries, including the European Union, one of its largest trading partners.

The Narendra Modi-government is insisting there should be no international arbitration without first exhausting domestic legal options and has ruled out arbitration on the constitutional validity of laws.

New Delhi has strengthened its terms in the wake of its experience in the Vodafone case.

Vodafone has started two separate arbitration proceedings on the same tax case invoking two different bilateral treaties - the India-Netherlands BIPA and the India-UK BIPA.

The Indian authorities see the use of two BIPAs as a way to prolong the case and get at least one favourable ruling, "especially as Vodafone may lose the India-Netherlands BIPA case".

Vodafone has also informed the Delhi high court it will not accede to the jurisdiction of the Indian courts. The Indian government had moved the Delhi court seeking a restraint on Vodafone against the second arbitration while the first is undecided.

India has now told a number of EU countries - whose investment pacts have lapsed - that renewals will be on the condition of international arbitration only after all domestic options have failed.

New Delhi has in fact urged the EU to either conclude a separate India-EU BIPA or wrap up a ten-year old trade and investment treaty over which the Europeans have been dragging their feet. A meeting held earlier this month, however, failed to reach an agreement.

The new treaty will also specify that the constitutional validity of tax laws cannot be challenged.

"We cannot have a foreign arbitration court deciding whether a law made by the Indian parliament is constitutionally valid.

"There can be a challenge on whether the law violates the treaty or an international agreement or whether it is fairly applied but not on its constitutional validity," said officials.

Negotiations with the EU are stuck because the latter is unwilling to accept clauses that force a foreign investor to first exhaust domestic legal challenges before seeking international arbitration.

"The main difference between the model BIPA which many of our investment partners have already signed, and previous BIPAs, is that it forces foreign firms to first exhaust all legal remedies in India before approaching an international tribunal and second, it excludes government procurement rules, taxes, subsidies, licences and national security from being challenged in a court abroad," said the officials.

Treaty shopping

New Delhi has also inserted two specific clauses in the model BIPA to stop treaty shopping.

Officials said BIPA was void for companies actually owned and controlled by investors from a third country or which were really Indian companies or a shell company set up merely to take advantage of the treaty.

Another clause specifically states the treaty shall not apply to "government procurement, subsidies and grants".

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