Should the Indian State chaperone Indian Companies abroad

Recently the news media has been abuzz with the dispute between the Maldivian Government and Infrastructure Company, GMR. The Government of India has taken up the issue with the Maldivian Government on behalf of GMR. Such an intervention raises the debate as to whether a State ought to support a private individual in a foreign country, in a contractual dispute. If yes, then what ought to be the extent of that intervention?

Recently the news media has been abuzz with the dispute between the Maldivian Government and Infrastructure Company, GMR. The Government of India has taken up the issue with the Maldivian Government on behalf of GMR. Such an intervention raises the debate as to whether a State ought to support a private individual in a foreign country, in a contractual dispute. If yes, then what ought to be the extent of that intervention?

There are legitimate criticisms of the support extended to a private company; those against the move point out that GMR is neither a Public Sector Company nor an agent of the State. Thus for the State to act on its behalf will be “crony capitalism”. It can be also pointed out that India herself been accused of high handed behavior to foreign investors (remember the Vodafone, 2G scam?). It will be hypocritical for India to now condemn others for similar behavior.

Such criticism is however misplaced. To begin with, India is under a Constitutional obligation to support an Indian Company. Under the Constitution, a company does not enjoy rights of citizenship per se but its shareholders do, such right including the right to property. This has been well understood since RC Cooper v Union of India in the early 1970s.The Government of India being the custodian of the rights of its nationals is obligated to protect its nationals from any unfair treatment in a foreign country.

This obligation under domestic law is reinforced by a right under international law of the State to intervene even in contractual matters. Such a right extends even to situations where the company itself is not registered in the country but a significant shareholder is a national. Thus India can intervene not merely for GMR in Maldives (GMR being registered in India) but also in a case like the dispute between Arcelor-Mittal and France over nationalization of one of the smelters, even though the Company is registered in Netherlands. The International Court of Justice reads this right in customary law (see Barcelona Traction 1970 and Diabello).

Beyond the esoteric legal arguments however, there are hard economic and political realities. Outward FDI creates value in the home country as well in terms of remittance of profits, consultancy, taxes etc. Thus one could argue that India is protecting her legitimate economic interests.

In addition, the larger geo-political context needs to be considered. The Indian commercial expansion in the Indo-Pacific (Indian Ocean plus Asia-Pacific) depends heavily on private companies such as GMR. So an identity of strategic interest of the State and the private economic interests cannot be denied.

Private companies naturally value this diplomatic protection; the idea that India does not protect such companies can itself be a valid ground for companies to shift to other regions such as the UAE, the UK etc.

The next question pertains to the extent of the protection. The home State providing the protection can do so only within the ambit of international law. This rules out the use of force , but does not rule out the use of economic coercion (freezing of aid, threatening other contracts etc) since under international law (See Art 7 of the UN Charter) force means only physical force.

The host State is similarly accountable under international law and cannot plead national law as a defense to its actions. From a legal point of view, these kind of agreements (i.e. between a State and foreign investor) are internationalized i.e. lie in an international plane under international law and whatever national or transitional law the parties subject it to (in the GMR case it was the law of Singapore).Thus it is not a valid defense on the part of Maldives to plead procedural improprieties or even a lack of capacity under national law. It is also not a defense that their Civil Court has voided the contract since in the international plane, a Court’s order is also imputed on the State (Bentler v Belgium).

All these rights and obligations exist under customary international law and are recorded in international instruments and decisions of International Court of Justice. Such and duties are elevated to the status of a treaty right when there is a Bilateral Investment Treaty (BIT) between the home and the host States. A BIT gives the investor certain additional rights like “non-discrimination”, “fair and equitable treatment” as well as create a specific dispute resolution clause .In case of a BIT subsisting between home and host States, a private dispute under certain circumstances can become elevated to a treaty dispute.

It is particularly to avoid situations such as the present GMR dispute that India has aggressively pursued BITs over the past twenty years. Nonetheless, out of the 190 odd countries, India has signed about 70 BITs. Unfortunately in the instant case there is no BIT between India and Maldives. A BIT with specified rights and structured dispute resolution clauses would have greatly simplified matters.

Having said that, there is one pertinent issue that a BIT cannot address properly: that of integrity. The State of Maldives has insinuated procedural improprieties and flow of illicit considerations from GMR.The gist of the allegations seems to be that GMR was acting in concert with the former President of Maldives.

It is understood that corruption is against international public policy and a contract can stand vitiated if it has been formed through corruption (See World Duty Free v Kenya  ICSID Tribunal 2006). However corruption is extremely difficult to prove and its nexus to the contract is even more difficult to establish. In international law, there exists a basic contradiction between the principle that, “The State is liable on international plane for acts of its officials even if outside the scope of duty” and the principle that “corruption vitiates a contract”. Thus international investment law does not effectively deal with this issue.

The failure of the law has two contradictory results. On one side, it creates a certain amount of impunity in unethical investors while on the other hand it creates a chilling effect on international investment. The very fact that corruption is so difficult to establish or conceptualize creates a presupposition in the public mind that all investment is potentially corrupt. Such a sentiment can then be cynically exploited by the States to meet their own ends.

The whole situation is compounded by the fact that an independent judiciary is a rare phenomenon across the world. In most parts of the world, the Maldives included, it is either an appendage of the State or simply unreliable.

It is important to create a proper balance between global free flow of investment, contractual freedom and regulatory autonomy of the State. It appears that the UK and the US have discovered a way out of the problem. These two countries, while very proactive in supporting their businesses, have also tried to ensure that their Companies maintain integrity and meet certain basic standards. The main framework legislation has been to outlaw bribery of foreign public officials by domestic companies. The Foreign Corrupt Practice Act 1977 (US) has led to a large number of prosecutions while the British have their Foreign Bribery Act 2011.

Even otherwise the Americans have their Alien Torts Act of 1789 and the British their own legislations that allow foreigners to bring a host of actions before courts for tortuous claims abroad. The purpose of these laws is not merely to enforce accountability but also to give the home companies the protection of the jurisdiction of the home Courts. In other words, it sort of preempts the jurisdiction of the foreign Court and, to some extent, also disarms foreign criticisms of corruption, and other mala-fide actions.

If India had similar legislations, the country’s diplomatic position would have been much stronger. Also such legislation has a reputational impact on outbound investment; to put it simply, such legislation could act like a kind of quality control. At present the institutional ability of India to enforce such acts is limited but if the country wants to be counted in the world, this is something it needs to work on.

In the end the status of the Indian outward FDI is directly related to the question of the dignity and gravitas of the Republic. Economic diplomacy shall be the substance of 21^st century foreign policy, rather than grand ideological issues. If this situation cannot be satisfactorily handled, it will set a bad precedent and Indian companies will be disadvantaged in several areas like Africa, Latin America etc where they are vying with Chinese companies for markets.

Subhrajyoti Gupta is a Assistant Professor at Jindal Global Law School. He completed his first degree in law from the NUJS, Kolkata in May 2006. Between 2006-2009, he practised as an appellate litigator, primarily based in the Supreme Court of India and the High Court of Delhi. During this time he was attached to the Chambers of Ms. Meenakshi Arora, Advocate on Record and Standing Counsel of the Election Commission of India and he worked closely with the Election Commission of India in sensitive matters like the challenge to the Delimitation Act, expulsion of MPs, Office of Profit Bill, among others.