Aggrieved by the cancellation of the Unified Access Service Licenses granted to Loop Telecom, Khaitan Holding (Mauritius) Ltd. (KHML), a 26.95% shareholder in Loop Telecom, has initiated proceedings under the umbrella of the Bilateral Investment Treaty between India and Mauritius (BIT). This BIT was executed between the 2 governments in order to promote and protect investments made by “investors” of either contracting party in the territory of the other contracting party (Host State). Article 6 of the BIT deals with expropriation, and requires a host state to pay for fair and equitable compensation, in the event the investments of an investor of the other contracting party are subjected to expropriation, nationalization or measures having effects equivalent to nationalization or expropriation in the territory of the Host State.

Playing the aggrieved investor, KHML, a company which as per newspaper reports is 100% owned by an Indian national, has filed a claim for compensation against India under the BIT. Whether or not KHML will succeed in its claim is a question that does not deserve much attention.

The question that we need to ask ourselves right now is: whether or not, a company that is 100% owned by an Indian national should be allowed to drag India to international investment treaty arbitration by making use of a BIT which is meant to protect the investments made by investors of  a contracting state.

The BIT under consideration defines an Investor in respect of either contracting state to include a company that has been incorporated and constituted in accordance with the law of that contracting state and provides such a company all the protections under the BIT. There are no qualifiers to this definition, not even a denial of benefits clause,which has led to the filing of the claim by KHML.  The denial of benefits clause is commonly found in international investment treaties as it gives the host state the authority to carve out from the definition of “investor” shell companies owned by nationals of the host state or third – country.

In my view, a judiciously drafted investment treaty should require an investor seeking to bring a claim against the host state, under an investment treaty, to satisfy all the following tests:  the investor should be a company that has been incorporated and constituted in accordance with the laws of the contracting state; the investor should have its seat and/or effective management in the contracting state; and should also be controlled and owned by nationals of the contracting state. Most treaties use a combination of these as a qualifier for an investor claim, while some of them use all the tests.

While there is plenty of jurisprudence to guide India in its investment treaty drafting and negotiation, I fail to understand why we will have to contest a claim brought by an Indian national under the garb of being an investor under the BIT. The BIT should have had a denial of benefits clause.

In this investment treaty claim, India may make arguments of economic realities in view of KHMLs ownership but such arguments have been made before in investment treaty arbitration and have been rejected. Take the case of Tokios Tokelis v. Ukraine, where the claimant investor was 99% owned by nationals of the host state, but the tribunal allowed the claim as the BIT under consideration did not provide a denial of benefits clause and stated that “it is not for the Tribunals to impose limits on the scope of BITs not found in the text”.  Even in Saluka V. The Czech Republic, the tribunal discussed the disadvantage of having the seat of incorporation as the sole test and pointed to the risk of “treaty shopping”. Nevertheless, the tribunal respected the contracting parties’ choice of definition of investor.  

Given India’s growing needs for capital and thus foreign investment, it is important that we offer foreign investors a safe and stable environment. At the same time it is imperative that we take stalk of our commitments under various investment treaties that bind us and revise them judiciously, wherever needed and as soon as possible.

On that note, I’d like to make one last observation with respect to the investment claim brought by KHML, which is that before threatening to go up against its own, maybe KHML should have examined the ICJs ruling in Barcelona Traction where it was opined that the treaty language may be avoided and the corporate veil theory may be applied, if it could be shown that there was “abuse” and “fraud”. 

Should KHML worry?