Minefields in investment relations
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Economic & Political Weekly | 8 July 2017

Minefields in investment relations

by Shalini Bhutani

Shalini Bhutani (emailsbhutani@gmail.com) is a legal researcher and policy analyst

The Government of India and the Government of Andhra Pradesh are facing an arbitration suit due to the cancellation of bauxite mining approvals in Visakhapatnam. A case has been filed by the investment authority of Ras Al-Khaimah, a member of the United Arab Emirates, that set up a joint venture company in the state to refine bauxite. This is the latest in a series of legal actions by foreign investors in the country. The claim, being made under an India–UAE bilateral investment agreement and the investor–state dispute settlement mechanism therein, will test India’s efforts to attract foreign investments and impact centre–state relations.

When economic reforms were announced in India in 1991, the country’s foreign investment policy was also liberalised. In 1993, the Government of India (GoI) developed a model bilateral investment promotion and protection agreement (BIPA) to encourage prospective investors from foreign countries. It was based on the Organisation for Economic Co-operation and Development’s Draft Convention on the Protection of Foreign Property, 1967. BIPA is a form of bilateral investment treaties (BITs). From 1994 to 2013, India has signed 83 BIPAs with countries around the world.1

In March 2013, the then Union Minister of State for Finance Namo Narain Meena announced that the government was going to review India’s BIPAs. This was partly due to a number of cases filed against India by foreign investors under the BIPAs (Table 1). These investment treaty arbitrations (ITAs) led to the review of India’s BITs by the government. No new BIPAs were to be signed by India until the review process was over (Table 2). Curiously, one exception was made for the India–United Arab Emirates (UAE) BIPA, which was signed in December 2013.

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The Narendra Modi government put out a draft model text for the Indian BIT in March 2015, and in August, Prime Minister Modi visited the UAE. In the same month, the Law Commission (2015) of India gave its comments on the model text for BITs. The union cabinet cleared the model text in December 2015.2 The revised model text was to be the basis for revision of existing BIPAs as well as for negotiating future BITs and investor provisions in foreign trade agreements (FTAs) (PIB 2015).

India–UAE BIPA

Meena and Obaid Humaid Al Tayer, UAE’s minister of state for financial affairs, signed the India–UAE BIPA on 12 December 2013. The BIPA, comprising 18 articles, was agreed for a period of 10 years, with a specific provision (Article 18) to commence revision of the agreement no later than 1 January 2016. Meena’s office was clearly aware that India’s new BIT model was to be in place by then (Singh 2014). The India–UAE BIPA was agreed to at a time when India was transitioning from its 2003 model. Nevertheless, the agreement was reached with an intent to create favourable conditions for fostering more investment by the investors of UAE in India and vice versa.

Since the UAE investors in India have run into rough weather in the past (Zee News 2013), it was looking for future protection for its investors. It may be recalled that UAE’s telecom major Etisalat lost whatever little business it had in India as a result of the Supreme Court decisions in the 2G (second generation) telecom spectrum scam. The company had to wrap up operations after the Court cancelled its 15 licences in 2012. Etisalat had acquired 45% of Swan Telecom, renaming the joint venture as Etisalat DB. Etisalat later sued its Indian partners for fraud. There was no India–UAE BIPA in place at the time, or else the company may perhaps have sued the GoI. The BIPA came into force on 21 August 2014.

Current Claim

On 8 December 2016, Ras Al-Khaimah Investment Authority (RAKIA)3 sent an arbitration notice to the Prime Minister’s office in India; three ministries of the central government—mines, external affairs and environment; and the state Government of Andhra Pradesh (hereinafter GoAP) (Inter-ministerial Group Meeting 2017). It made a $44.71 million arbitration claim, seeking to recover the cost of its investment in Anrak Alumimium Limited (hereinafter Anrak), a company set up in India to process bauxite.

Article 10(5)(b) of the India–UAE BIPA of 2013 allows for disputes between the two parties to be submitted to the United Nations Commission on International Trade Law (UNCITRAL), which was set up by the UN General Assembly in 1966. Interestingly, India hosted the 50th anniversary celebrations of UNCITRAL in November 2016, where the President of India delivered the opening address.4

According to the arbitration rules of UNCITRAL, parties have to appoint their arbitrators within 60 days. The last date for conveying the appointment of the arbitrator from the Indian side was 8 February 2017. Since then, there has been no information in the public domain on the appointment of arbitrators in this case. The UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration came into effect on 1 April 2014 (UNCITRAL 2014). The rules on transparency are applicable to BITs that came into force after 1 April 2014, such as the India–UAE BIPA.

Executive Actions

The present dispute arose due to the decisions of the GoAP with respect to bauxite mining, which directly affected the operations of Anrak. The India–UAE BIPA makes it clear in its Article 10(2) that any measure taken by “the Central and/or the state governments while exercising their executive powers in accordance with the Constitution of India” can be an underlying cause for a dispute. Such a situation can result in demands for relief and compensation by investors.

The GoAP entered into a memorandum of understanding (MoU) with the Government of Ras Al-Khaimah (GoRAK), one of the seven emirates that make up the UAE, on 14 February 2007. The MoU was for a collaboration to set up an alumina plant and aluminium smelter in AP.

Pursuant to the MoU, Anrak Aluminium Limited was registered in Visakhapatnam on 23 February 2007 as a joint venture between the Penna Group and RAKIA. RAKIA initially held 30% shares in Anrak, which later came down to 13%. The state-owned Andhra Pradesh Mineral Development Corporation (APMDC) was to supply bauxite to Anrak’s refinery at Rachapalle in the Makavarapalem mandal of Andhra Pradesh. The contract was awarded by the then Congress chief minister of the state Y S Rajasekhara Reddy at a high-level meeting chaired by him. APMDC was to take all the necessary forest and environmental clearances from the central government before supply of bauxite ore to Anrak.

APMDC was to mine bauxite in 1,212 hectares of forestland in the Visakhapatnam Agency areas, which were allotted to Anrak to source the raw material for the refinery. These areas fall under the category of “reserved forest.” In 2008, the Union Ministry of Environment and Forests (MoEF) gave the requisite environmental clearance for production of bauxite ore from four blocks in Jerrela village. While the Stage I clearance was granted and the Stage II clearance was awaited, there were concerns raised by the tribal population in these areas.

In 2011, the MoEF set up a four-member committee to examine this issue in the Visakhapatnam district in AP. While the committee recognised that mining would “conflict with conservation,” yet in its report in 2013 it held that “(t)he vicious cycle of poverty leading to ecological degradation and in turn more poverty will be broken only through development in the area” (Report of Committee on Bauxite Mining in Visakhapatnam 2013). However, the Union Ministry of Tribal Affairs wanted a cancellation of the mining leases.

The Comptroller and Auditor General (CAG) of India undertook an audit of public sector undertakings (PSU) for the year ended March 2013 (CAG Report 2013), and APMDC, wholly owned by the GOAP, came under scrutiny as well. The CAG concluded that the bauxite deposits were grossly undervalued (Patnaik 2014). There are those who also point out that APMDC, a near defunct PSU, was shown as a legal owner of mines to actually circumvent a Supreme Court order that prohibits private companies from mining on tribal lands (Nemana 2015).5

Local protests against the mining of bauxite grew in the now divided state of Andhra Pradesh. In October 2015, there were media reports that Maoists had abducted three members of the ruling Telugu Desam Party (TDP) (Chakravarti 2015). In January 2016, a former village headman and member of the TDP was reportedly killed for supporting bauxite mining (IANS 2016). The state cabinet met in March 2016 to reconsider the issue. Interestingly, the idea of bauxite mining in the area was first mooted by the TDP in the 1990s much before Congress chief minister Rajasekhara Reddy’s time. On 4 April 2016, the state cabinet cancelled the approval for bauxite supply to Anrak (GoAP 2016). This was communicated to Anrak by the industries and commerce department of the GoAP. The cancellation led to the UAE investor raising the claim under the India–UAE BIPA.

Dispute in Domestic Courts

On 11 April 2016, Anrak filed a case in the Andhra Pradesh High Court against the government decision.6 Apart from the GoAP, the APMDC; the secretary, union Ministry of Mines; and the State Bank of India were impleaded as respondents. The main prayer to the court in Anrak’s petition is

“to issue an appropriate order, direction or writ, more particularly one in the nature of Writ of Mandamus declaring impugned order passed by the 2nd respondent in GO Ms No 44 dated 6 April 2016 And Commerce (M-II) Department, Government of Andhra Pradesh, by which GO Ms No 222, Industries & Commerce (M III) Department dated 13 August 2008 and in GO Ms No 289, Industries & Commerce (M III) Department dated 30 October 2008 were cancelled, as illegal, arbitrary, violative of fundamental rights of the petitioner guaranteed under Articles 14, 19 and 300(A) of the Constitution of India and consequently direct the Respondent No 3 to commence the process of bauxite mining process in Block III of Jerrela Bauxite mines, in Chintapalli and Jerrela RF, Narsimpathnam Forest Division, Visakhapatnam district and to supply the bauxite mineral to the petitioner as per the bauxite supply agreement dated 30 October 2008 in the interest of justice ...”

On 14 July 2016, Anrak filed another case in court, which it withdrew on 19 July 2016.7

Given the fact that the UAE investor has filed for arbitration, the inter-ministerial group in India set up to deal with the matter will need to agree if the “fork-in-the-road” clauses in the India–UAE BIPA can be invoked. Such clauses in BITs require investors to choose one of the options for dispute settlement to the exclusion of the others. Article 5 of the BIPA clearly states that once the investor has submitted the disputes under any of the procedures (ICSID/UNCITRAL/competent domestic court of the host government) that choice shall be final and binding on the investor. Anrak has filed cases before a court in India and has also asked for arbitration.

The secretary of mines had suggested in the inter-ministerial group that

“other bauxite bearing areas available in AP which may be processed for grant to APMDC may be used for supply of bauxite to Anrak and to explore ways of settling the dispute without prejudice.
Not mining the areas is not considered an option, given the reality of the BIPA. ITAs can often pre-empt any other policy options to be thought of. Moreover, making a state’s mineral wealth available to commercial enterprises set up by foreign investment is seen by many as necessary for development.”

Locally, the tribal population itself is divided on the matter, and political parties thrive on the divide (Prasad 2016). The matter has certainly not been settled vis-à-vis the tribals, irrespective of how the governments will now chose to deal with the foreign investor involved in the ITA. But investor rights have to be balanced with the government’s right to regulate. At the heart of the matter is the freedom of governments to take decisions, particularly those in public interest, on social and ecological considerations.

BITs Blind to Local Concerns

BITs are typically blind to the concerns of local population. But there are also governments that have been pushed to provide protection for their indigenous peoples and local communities in their BITs. For instance, in Canada’s BIT with Venezuela (1982) there is express mention that the rights and preferences provided to aboriginal peoples can be lawfully denied to investors.

This case also points to the complicated centre–state relations in investor protection. The central government negotiates BITs with foreign governments. The difficult task of clearing the way for the foreign investors to operate on the ground is left to the state governments. Ironically, despite the UAE dispute, in October 2016, Andhra Pradesh was ranked first amongst states in India in ease of doing business. This was based on the implementation of the World Bank and GOI’s Department of Industrial Policy and Promotion’s 340-point Business Reforms Action Plan (DIPP 2016). Chief Minister Chandrababu Naidu led a delegation to the World Economic Forum in Davos 2017 to woo more investors. BITs pose many challenges in investor–state relations and test the country’s centre–state relations. They require better relationship management by governments with their own people.

Notes

1 The full list can be viewed on the Ministry of Finance, Government of India web site, http://finmin.nic.in/bipa/bipa_index.asp.

2 For full text of the new model Indian Bilateral Investment Treaty see Government of India (2015).

3 An investment authority set up by the Government of Ras Al-Khaimah in 2005, http://www.rak-ia.com/.

4 For details of the President’s speech on the occasion of the celebration of 50 years of establishment of the United Nations Commission on International Trade Law (UNCITRAL), see President’s secretariat’s press release dated 28 November 2016, http://pib.nic.in/newsite/PrintRelease.aspx?relid=154461.

5 The state of Andhra Pradesh has previously faced legal challenge by tribals on the leasing of lands in the Borra Reserved Forest Area and neighbouring villages to private companies for mining purposes. This is what led to the Samata v State of AP and Others (1997) case in the Supreme Court of India. In a historic judgment therein, the court had cancelled the mining leases in Scheduled Areas. Two out of the three-judge bench had held that the grant of mining leases to non-tribals, companies and partnerships, etc, is void, unconstitutional and inoperative. The prohibition was, however, not extended to state instrumentalities like APMDC.

6 Anrak Aluminium Ltd v the Government of Andhra Pradesh & 4 Others, Writ Petition 12474 of 2016.

7 M/s Anrak Aluminium Ltd v State of AP, Chief Secretary, Hyderabad & 4 Others, Writ Petition 23222 of 2016.

References

CAG (2013): “Report of the Comptroller and Auditor General of India on Public Undertakings for the Year Ended 31 March 2013,” Report No 4, Comptroller and Auditor General of India, Government of Chhattisgarh.

Chakravarti, Sudeep (2015): “Andhra Pradesh Boxed in by Bauxite, Maoists,” LiveMint, 9 October, http://www.livemint.com/Opinion/pH4tW1s anj6Cuz0xzrYUeP/Andhra-Pradesh-boxed-in-by-bauxite-maoists.html.

DIPP (2016): “Assessment of State Implementation of Business Reforms 2016,” Department of
Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, https://www.apindustries.gov.in/APIndus/Data/EODB_2016.pdf.

GoAP (2014): “Report of the Comptroller and Auditor General of India on Public Sector Undertakings for the year ended March 2013,” Report No 5, Government of Andhra Pradesh, http://www.cag.gov.in/sites/default/files/audit_report_files/Andhra_Prad....

— (2016): “Cancellation of Bauxite Supply Agreement Made Between M/s APMDC Ltd and M/s Anrak Aluminium Limited,” Government of Andhra Pradesh, Order dated 6 April 2016, http://apgoa.in/wp-content/uploads/2016/04 /GO-NO-MS-44.pdf.

Government of India (2015): “Model Text for the Indian Bilateral Investment Treaty,” https://www.mygov.in/sites/default/files/master_image/Model%20Text%20for....

IANS (2016): “Maoists Kill TDP Leader for Supporting Bauxite Mining,” Zee News, 6 January, http://zeenews.india.com/news/andhra-prad esh/maoists-kill-tdp-leader-for-supporting-bauxite-mining_1842220.html.

Law Commission of India (2015): Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty Law, Report No 260, Law Commission of India, Government of India, http://lawcommissionofindia.nic.in/reports/Report260.pdf.

Minutes of the 1st Inter-Ministerial Group (IMG) Meeting on Arbitration under BIPA by RAKIA, UAE held on 5 January 2017 at Shastri Bhawan, New Delhi under the chairmanship of Shri Balvinder Kumar (Secretary Mines), http://www.italaw.com/sites/default/files/case-documents/italaw8083_0.pdf.

Nemana, Vivekananda (2015): “Bauxite Mining Threatens to Bring Back Violence to the Tribal Hills of Andhra Pradesh,” Scroll.in, 2 November, https://scroll.in/article/763869/bauxite-mining-threatens-to-bring-back-....

Patnaik, Santosh (2014): “CAG Report Puts Question Mark on Bauxite Mining Issue in Visakhapatnam,” Hindu, 15 September, http://www.thehindu.com/news/cities/Visakhapatnam/cag-report-puts-questi....

Prasad, B Krishna (2016): “Cong to Back Tribals Protest against Bauxite Mining in AP,” Times of India, 2 August http://timesofindia.indiatimes.com/city/hyderabad/Cong-to-back-tribals-p... 53497319.cms.

PIB (2015): “Model Text for the Indian Bilateral Investment Treaty,” Press Information Bureau, 16 December, Government of India, http://pib.nic.in/newsite/PrintRelease.aspx?relid=133411.

Report of Committee on Bauxite Mining in Visakhapatnam 2013, http://www.landconflictwatch.org/sites/default/files/Report%20of%20Commi....

Singh, Kavaljit (2014): “Assessing India’s Bilateral Investment Protection Agreement with UAE,” Madhyam, 27 October, http://www.madhyam.org.in/assessing-indias-bilateral-investment-protecti....

UNCTRAL (2014): UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, United Nations Commission on International Trade Law, http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2014 Transparency.html.

Zee News (2013): “Government Clears India–UAE Bilateral Investment Protection Treaty,” 9 December, http://zeenews.india.com/business/news/economy/govt-clears-india-uae-bil....