India and South Korea have a long history of bilateral relations. South Korea is the 14th largest investor in India with more than US$3.69 billion in investments since 2000, while India-South Korea bilateral trade touched US$19.7 billion last year. Invest India’s Startup Hub and the Korea Trade-Investment Promotion Agency’s Korea Plus initiatives have helped attract Korean investment into India.
The governments of South Korea and India signed a Comprehensive Economic Partnership Agreement (CEPA), which came into effect on 1 January 2010, after 12 rounds of negotiations over three years. The CEPA classifies 11,200 South Korean and 5,200 India tariff lines into six categories for the reduction or elimination of tariffs. The preferential tariffs, which were in the progressive elimination categories, have now become fully operational. As a result, about 70% of tariff lines in the Indian schedule and 88% in the Korean schedule are already at zero duty under the CEPA. The governments of both countries are engaged in talks to upgrade the CEPA to further increase trade between the two countries.
Under the CEPA, investments made by Indians in South Korea, and vice versa, are accorded national treatment, which means that these investors are treated at par with each country’s own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. The agreement provides for a minimum standard of treatment, which includes “fair and equitable treatment” and “full protection and security” to the investments made by investors of one state in the other. The CEPA establishes a mechanism for settlement of investment disputes between the investor and the state or between the states. A dispute between an investor and the state concerning an alleged breach of obligation by the state that causes losses or damages to the investor or its investments may be adjudicated under article 10 of the CEPA.
Once the state is notified of the dispute by an investor it is mandatory for the parties to try to settle the dispute amicably within six months from the date of the request for consultation. If the dispute is not resolved, the investor has the option of approaching international forums such as:
- the International Centre for Settlement of Investment Disputes (ICSID) Convention and the ICSID Rules of Procedure for Arbitration Proceedings, provided that both the disputing party and the disputing investor are parties to the ICSID Convention;
- the ICSID Additional Facility Rules, provided that either the disputing party or the disputing investor, but not both, are a party to the ICSID Convention;
- the UNCITRAL Arbitration Rules; or
- any other arbitral institution, or in accordance with any other arbitral rules, if the parties to the dispute so agree.
The submission of a dispute to arbitration should be within three years from the date on which the disputing investor becomes aware, or should reasonably have become aware of a breach of obligation by the state, or incurred a loss.
According to news reports, Korean utility company, Korea Western Power Company (Kowepo), has begun arbitration proceedings against India for not honouring a fuel supply commitment to a gas-based power plant that it part-owns in western India. The utility sought resolution of the issue within six months or US$400 million in compensation for loss and damages. Kowepo owns 40% of Pioneer Gas Power that operates a 388-megawatt project in Raigad, Maharashtra. The company is protected under the CEPA.
Besides the CEPA, the two countries have a double taxation avoidance agreement (DTAA), which was signed in July 1985 and notified in September 1986. The DTAA was revised on 1 April 2017. The revised DTAA aims to provide tax stability to the residents of India and Korea, and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between the two countries. To protect investments, India and South Korea have also signed a Bilateral Investment Protection Agreement (BIPA) in 1996. However, the BIPA was terminated in 2017 and now a new model agreement proposed by India is being negotiated.
India, with a stable and rule-of-law-based justice system, remains an attractive destination for trade and investments for Korean businesses. Korean investors can also benefit from the CEPA, in case of disputes with the state, and the favourable tax treaty to make investments in India.
Rajat Prakash is the managing partner of Athena Legal and Siddharth Mahajan is a partner at the firm.
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