In what is probably the biggest show of no confidence in both the government as well as the legal system—where cases can drag on for years—Nokia has become the third company in as many weeks to file for global arbitration against the government. Vodafone is the other MNC while Reliance Industries Limited has filed two arbitration cases. Disputes with the government, the taxman in particular, are not unique to India; what is worrying is that with the government often seen as not being a neutral umpire, investors want to take their disputes to an international panel. In the Vodafone case, the government’s role was seen as biased since it went ahead and overruled the verdict of the Supreme Court. In the first Reliance case, government delay ensured it took 29 months to appoint the presiding arbitrator. This was then compounded by the oil ministry refusing to implement a government decision on hiking gas prices—what adds to the problem is that the Prashant Bhushan case against the gas price hike in the Supreme Court will have to be heard again as one of the judges who has heard the case so far is to retire the day the Court reopens after its summer recess. And in the Nokia case, despite the court’s involvement, the Finnish telecom major had to conclude its Microsoft deal without its Indian manufacturing unit.
Such loss of investor confidence has to be a serious problem and tackling it a priority for the new government likely to be sworn in next week. Getting courts to speed up cases is a noble idea, but unlikely to make much of a difference given the backlog. What is important is to remove the big defects in the 1996 Arbitration Act, so that the arbitration can at least take place in India. The power of granting ‘interim protection’, for instance, has been routinely abused—giving clear deadlines to appoint arbitrators should also be put in place; and once an award has been given, setting it aside should not be possible except in rare circumstances. Since most of the new tax disputes are related to retrospective amendment of tax rules, the government also needs to inquire into whether the demands raised were just. An easy way to do this is to examine the taxman’s record—if the bulk of tax demands raised in the past have been rejected by the courts, surely there is a case