March 08, 2018

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To Make in India, we must Resolve in India

- Siddharth Goud, Associate (FDI Promotion & Facilitation) [ ]


India achieved a 30-rank jump and entered the top 100 in the World Bank’s ease of doing business index but continues to fare low on “enforcing contracts”, with a ranking of 164.

The nation saw an 8-rank rise from the previous year owing to reforms like the National Judicial Data Grid, dedicated commercial divisions within high courts and digitalization efforts. However, it still takes 1445 days for enforcement (Mumbai and New Delhi), which is more than double the average enforcement time of 577 days in the OECD high-income countries.

As one of the most attractive destinations for foreign direct investment (FDI), India must lay greater emphasis on expediting dispute resolution through alternative dispute resolution (ADR) to maintain investor confidence for increased investment inflows under the Make in India initiative.

According to the United Nations Conference on Trade and Development, India is one of the most frequent states in investor-state disputes and is currently facing an estimated 17 investment treaty claims, challenging various regulatory measures like the imposition of retrospective taxes (Cairn India tax case), cancellation of spectrum licenses (Ras-AI-Khaimah Investment Authority v. India), revocation of telecom licenses (Astro and South Asia Entertainment v. India), amongst others.

Being a frequent respondent began to impact India’s global reputation as a secure investor-friendly destination. The Indian Government, in response, terminated its investment treaties with 58 countries and adopted a new Model Bilateral Investment Treaty (BIT), with a diluted investor-state dispute settlement (ISDS) mechanism that significantly reduces the scope for foreign investors to initiate international arbitration proceedings against India. Although investments made prior to the termination of these treaties may remain protected under the ‘sunset’ clauses in relevant BITs, the reduced scope of recourse to treaty-based arbitration may make it harder to attract new big-ticket investments (in infrastructure, energy, natural resources and oil and gas where arbitration disputes are rampant owing to the nature and exigencies of these sectors).

The Model BIT, which will be used for re-negotiation of existing and future BITs, will impact as many as 84 countries. India’s decision to adopt a new Model BIT should be welcomed, owing to the need to reconcile investment protection with India’s right to regulate and reduce its exposure to liability in international forums.

However, the Model BIT renders the ISDS mechanism practically ineffective by requiring foreign investors to exhaust all domestic legal remedies for a period of at least 5 years before being able to initiate arbitration proceedings under the BIT. This requirement seen in light with the status of India’s judicial system that is excessively burdened with a backlog of approximately 26 million cases necessitates the creation of a business environment conducive to arbitration.

India has seen 200% growth in disputes that have been referred to arbitration over the past 3 years. Indian parties also became the largest foreign contingent to use the Singapore International Arbitration Centre owing to their involvement in 153 disputes in 2016 alone (reflecting a 68% jump from 2015).

An ‘Institutional’ Shift

In line with Prime Minister Narendra Modi’s vision to transform India into a global arbitration hub for comfort to international investors, the country has seen notable developments in the arbitration ecosystem. As the trend of international finance centres emerges in India, stakeholders have begun moving to institutional arbitration due to its advantages over ad-hoc arbitration, like bespoke administration of proceedings, uniform rules and procedures, access to a panel of screened arbitrators, quality physical infrastructure, and most importantly, fixed resolution timelines.

Establishing the Mumbai Centre for International Arbitration (MCIA) was a welcome step towards developing an international financial centre in Mumbai. Launched as a joint initiative between the Maharashtra State Government and the business and legal communities, the MCIA has already been delegated the power to appoint an arbitrator by the Supreme Court of India. As an additional impetus, the Maharashtra Government recently announced that all state government commercial contracts of value more than INR 50 million will have to compulsorily contain institutional arbitration clauses as the mode of dispute resolution.

The Singapore International Arbitration Centre (SIAC) signed a memorandum of understanding (MOU) with the Gujarat International Finance Tec-City (GIFT) to promote SIAC's services in GIFT City. This tie-up is a first of its kind aimed at attracting investors to set up and do business in GIFT by providing easier access to speedy and effective arbitration institutions.

Creating a ‘Vibrant’ Ecosystem

The Government’s aim to add vibrancy to the ADR ecosystem can only be realized if it creates an enabling environment with sufficient infrastructure and access - both physical and financial. There must be a focus on promoting sector-specific arbitration forums to resolve complex disputes in a streamlined manner.

The Kelkar Committee recommended the setting up of the Infrastructure Project Review Committee and Infrastructure PPP Adjudication Tribunal to speed up dispute resolution in public-private-partnership (PPP) projects. With an estimated USD 5 trillion of investment needed to sustain its economic growth, India has seen phenomenal growth in its infrastructure spending.

But wherein lies an opportunity, also lies a challenge. The value of stalled projects rose to more than a record INR 13 trillion last year, accounting for more than 13% of total infrastructure projects under implementation. Although the Finance Ministry in its Budget 2017 announced measures to institutionalize dispute resolution for PPP projects, timely implementation of the Kelkar Committee recommendations are crucial to clear infrastructural bottlenecks. High levels of stalled projects have shown to have an adverse impact on new project announcements, with 2017 seeing a sharp decline in new project announcements from 2016 and 2015.

While the Supreme Court is currently adjudicating on the entry of foreign lawyers in India, there is an expectation that foreign lawyers will be allowed to practice on a fly-in/fly-out basis where international commercial arbitrations are concerned. To become a global arbitration hub, the Government must enable seamless physical access for international businesses to their counsel through faster, bespoke visa and immigration facilities as commercial disputes are highly time sensitive.

Another way to boost arbitration is by improving financial access for stakeholders, third party arbitration funding.

Third party funding is the practice of financing an arbitration case in return for a portion of the proceeds awarded in the financed party’s favour. An increasingly popular recourse for parties involved in commercial and investment arbitration, the practice is no longer banned in common law jurisdictions like Australia, the United Kingdom, and the United States in recognition of its ability to improve access to justice. Hong Kong and Singapore have gone one step ahead and become the first jurisdictions to explicitly regulate third party funding.

As stakeholders respond to the global growth of this practice, Indian regulators must rise to the opportunity and draft guidelines around third party funding, which can mitigate the increasing costs of arbitration and also create significant traction for banks and insurance firms.

While stakeholders in India have shown strong intent to adopt arbitration as a preferred dispute resolution mechanism, the Government has been perceived as giving mixed signals to international investors owing to its protectionist approach adopted through the new Model BIT. Implementing the above-mentioned measures will help the Indian Government bolster investor confidence and reaffirm its commitment to international investment protection standards.

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