India's Half-Closed Door

New rules are likely to scare off much-needed FDI.

Tata Steel could lose its British assets to NTT DoCoMo.

Photographer: Christopher Furlong/Getty Images

Once again, India is in danger of sabotaging its own efforts to raise foreign investment to China-like levels. The latest salvo in this undeclared, self-defeating war is the government’s reported decision to block Tata Sons from paying what arbitrators say the company owes to a former partner, the Japanese company NTT DoCoMo.

The decision is particularly odd because, under Prime Minister Narendra Modi, the Indian government has highlighted its outreach to foreign investors. Modi has called India “the most open economy in the world” when it comes to inward investment. He’s boasted about the recent dramatic increase in FDI -- and justified his frequent and controversial international jaunts as efforts to attract more.

QuickTake India's Aspirations

It’s an uphill battle. In spite of India’s growth rate -- highest among the world’s large economies -- political risks continue to deter many investors. The administration before Modi’s incensed many of them by retrospectively changing tax law in order to win a dispute with Vodafone, the Anglo-Dutch telecommunications company. While senior officials in Modi’s cabinet have promised not to repeat such mistakes, the Vodafone case drags on, as do other such disputes.

Now, new flashpoints have emerged. In the Tata-DoCoMo deal, the Indian company agreed to buy back shares in its joint venture with DoCoMo if certain conditions weren’t met. The government first blocked those purchases, wrongly invoking a regulation meant to prevent equity investments from flowing into India disguised as debt. Then, after DoCoMo sought international arbitration and won $1.17 billion in compensation, the government has sought to prevent even that payment.

The effort is not only a blow to India’s image. If the government doesn’t relent, DoCoMo could well go after Tata Sons’ assets in the rest of the world. There’s a very real possibility that Jaguar Land Rover or Tata Steel’s European operations -- including steel mills in Britain -- could fall under the control of the company’s erstwhile Japanese partner. (In a statement, Tata Sons disputed this characterization. "These companies are not party to the arbitration proceedings, and no award has been issued against them," it said. "It follows that the award cannot be enforced against those companies." Tata also said that its arguments haven't yet been heard in court. "Tata Sons has from the outset underlined its commitment to honoring its contractual obligations to DoCoMo, and has taken every possible step keeping in mind the interests of all stakeholders and in accordance with Indian law," it said.) Such fears are unlikely to suggest to most investors that India is the open and welcoming environment that Modi claims it is.  

Unfortunately, if you thought the government couldn’t make things even harder for itself, you’d be wrong. DoCoMo’s arbitration victory is only the latest in a series of such awards won by investors who have argued they were defrauded or had their assets expropriated by the Indian government. Many of these cases have been brought under bilateral investment treaties (BITs) signed between India and countries around the world. Tax disputes involving Vodafone and Cairn Energy are perhaps the most prominent; the latter is asking, in an ongoing arbitration, for $5.6 billion in compensation from the Indian government. For foreign investors, the possibility of arbitration -- guaranteed by treaty -- is at least some small hedge against the arbitrary behavior in which Indian government agencies often engage.

Now the government has stunned investors by serving notice to 57 countries demanding that existing BITs be terminated, and new ones signed.

The new treaties will be based on a draft approved last year, which significantly weakens investor protections. Tax disputes -- such as those involving Vodafone and Cairn -- will be kept out of the new treaties entirely. That means foreign investors will lose what was, in effect, their main protection against capricious Indian tax collectors.

Even worse, investors will now have to exhaust all local remedies before going to international arbitration. Given that the Indian government automatically appeals cases that go against it, this means that a case would have to work its way through the entire Indian legal system, from sessions to Supreme Court, before arbitrators could get a crack at it. And remember, this is the Indian judicial system: It works so slowly, and is so overburdened, that India’s Chief Justice actually broke down in tears while talking about it recently. For investors, years -- perhaps decades -- of delay is pretty much the same as losing money, perhaps worse.

Often in India, the government’s left hand doesn’t know what its right is doing. Hopefully, that’s what’s happening here. While Modi’s reaching out to foreign investors, government agencies are making it impossible for them to commit the kind of money that India’s economy desperately needs. The promise of good returns isn’t enough. India also has to assure investors of transparent and good-faith dispute resolution. Otherwise they’ll be perfectly justified in taking that money elsewhere.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Mihir Sharma at

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