Calling for a bit of caution


The proposed disinvestment of Coal India Limited must take into account commitments under India’s bilateral investment treaties

The government of India has announced its intention to sell five per cent stake in Coal India Limited (CIL). It is expected that the process will formally commence in the first week of October. Without getting into the merits and demerits of the proposed disinvestment, this piece argues that any move towards disinvestment should be taken with extreme caution, taking into account commitments under India’s Bilateral Investment Treaties (BITs) that may be set into motion during such a transaction. While caution with regard to India’s BIT undertakings is warranted in relation to all foreign investment covered by BITs, additional caution is recommended in this instance, given CIL’s recent history with BIT claims and the nature and extent of interactions that the potential investor will have with the government of India.
Troubled history
BITs are treaties between two countries aimed at protecting investments made by investors of one of them in the territory of the other. These treaties allow individual investors to bring cases against host states if the latter’s sovereign regulatory measures are not consistent with the BIT. This is known as investment treaty arbitration (ITA). India started its BIT programme in 1994 and since then has entered into BITs with 86 countries out of which 73 have already come into force.
Despite the existence of the Indian BIT programme for more than quarter of a century, the first ITA award involving India was rendered in November 2011. White Industries, a foreign investor sought arbitration under the rules of the International Chamber of Commerce (ICC), Paris against CIL on a contractual dispute. The ICC arbitral tribunal ruled in favour of White Industries. CIL challenged this award before Indian courts while White Industries in parallel sought enforcement of the award before Indian courts. After protracted litigation, the matter reached the Supreme Court of India. While the matter was pending before the court, White invoked arbitration under the India-Australia BIT against the Republic of India arguing that the delay on the part of Indian courts in enforcing the ICC award amounted to a violation of the BIT provisions. The ITA tribunal ruled in favour of the investor and the government of India was forced to pay monetary compensation.
CIL became the centre of another BIT claim in early 2013. The Children’s Investment Fund Management (TCI), a United Kingdom-registered company which had acquired 1.01 per cent of CIL’s shares and thus had become the second largest shareholder in CIL, threatened arbitration over the government of India’s decision to roll back a hike in coal prices. TCI alleged that the government involvement in coal pricing and in the functioning of CIL amounted to breaches of assurances given to it as an investor. As its investments were routed through a Cyprus subsidiary, TCI threatened arbitration under the India-Cyprus BIT.
Thus, CIL has been the subject of one ITA award and of another threatened arbitration against India.
Disinvestment and obligations
The proposed disinvestment is to be carried out through an Initial Public Offering (IPO). Under the extant regulatory framework, foreign institutional investors will be able to acquire shares of CIL if they wish to do so. The texts of Indian BITs include shares in their definition of “investment.” This would mean that any foreign investor from one of India’s BIT partners, acquiring shares in CIL, will be an “investor” entitled to protection under the relevant BIT. Foreign investors may also route their investments in CIL through Indian companies and still be eligible for protection under BITs.
As investors protected by BITs, these entities will be entitled to substantive rights including protection against expropriation, fair and equitable treatment (which has been defined to include protection of legitimate expectations), non-discrimination vis-à-vis domestic investors and other foreign investors (“national treatment” and “most favoured nation treatment”), etc. It is important to note that representations made by the government in the course of the transaction may form the basis of legitimate expectations and what would otherwise have been contractual claims against the government could escalate to violations of BIT standards if BIT protection is available to the investor.
Where an investor feels that its rights under the BIT have been violated, the investor also has the procedural right of referring the matter to ITA.
Causes for caution
The need for caution in relation to India’s BIT obligations is not unique to the disinvestment of CIL alone. However, apart from the above mentioned history of CIL’s involvements in ITA claims against India, the nature and extent of the interactions that any investor in CIL will have with the government of India calls for heightened caution.
After the disinvestment, the government will hold most shares in CIL. As the majority shareholder with such consolidated shareholding, the government will have near absolute control of affairs in CIL. It is common for minority shareholders in similar situations to have concerns about their position in the company. These concerns are usually addressed through contractual or statutory mechanisms for the protection of minority shareholders. However, a foreign investor with the protection of a BIT may choose to address such concerns through ITA like TCI threatened to do.
Coal being an important natural resource, the government is involved in every stage of operation of CIL in another capacity — that of a regulator. Regulatory actions on the part of the government may not be palatable to the foreign investor who may seek to challenge that action through ITA.
Finally, an investor may also argue that the actions and omissions of CIL itself are attributable to the government and bring ITA claims against India for such actions and inactions. In the White Industries dispute, though the investor argued that the actions of CIL were attributable to the government, the tribunal did not pronounce on that question.
The proposed disinvestment can expose India to added risks of ITA claims. If the government decides to go ahead with the disinvestment, it will need to take this fact into account and exercise caution as to what representations and promises it makes to potential investors and what language the contracts with the investors contain.
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