Legal security of business transactions and financial instruments-New Challenges

Following is the text of the Speech of Dr. M.Veerappa Moily, Union Minster for Law and Justice, while addressing the Round Table on Legal security of business transactions, investments and financial instruments-New Challenges of the Global Crisis in St.Petersburg today :-

˜Globalization™ refers to the process of integration and convergence of economic financial, cultural and political systems and interests across the world by adopting a holistic approach. From an economic or commercial perspective, so as to understand international business, globalization may be defined as the increasing economic integration and interdependence of national economies across the world through a rapid rise in the cross-border movement of goods, services, technology and capital.

Since the global financial crisis disturbed the nations and turtled their financial position, the global financial crisis has become a ˜credit tsunami™.


(i) Subprime crisis in the US and Euro zone debt crisis along with the global financial slowdown.

(ii) Collapse of Lehman brothers in September 2008 and thereafter the fall of entire wall-street.

(iii) Commodity-dependent economies are exposed to considerable external shocks stemming from price booms and busts in international commodity markets.

(iv) Many Asian countries have seen their stock markets suffer and currency value going on a downward trend. Asian products and services are also global, and slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest.

(v) A number of developed countries have seen several sectors struggling and asking for bailouts. We know even some countries have not been an exception to the bailout syndrome.


Fortunately, India is the least hit by recession as far as internal financial disturbances are concerned and probably most important reason for this is that India™s 95% of debt is financed internally. Because of global recession, Indian economy which was projected to grow at approximately 9% is now expected to see a little slow down. However, now it has been projected to grow approximately at the rate of 9% by 2012. One of the reasons for this lowering of growth projections has reduced foreign direct investment inflows pursuant to global financial crisis.

India is the 7th largest and 2nd most populous and 4th largest economy in the world. A series of ambitious economic reforms aimed at deregulating the economy and stimulating foreign investment has moved India firmly in to the front runners of the rapidly growing Asia Pacific Region and unleashed the latent strength of a complex and rapidly changing nation. India™s time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investment. These include a free and vibrant press, an independent judiciary, a sophisticated state of art legal and accounting system and a user friendly intellectual infrastructure.

The Parliament has enacted the foreign Exchange Management Act, 1999 to replace the Foreign exchange Regulation Act, 1973. This Act came into force on the 1st day of June 2000. The object of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.


India realizing the need of a credit information system in order to enable informed credit decisions and aid fact based risk management on the basis of the recommendations of the Working Group a Credit Information Bureau (India) Ltd., (CIBIL) was set up in January 2000 under the Companies Act, 1956 with equity participation from commercial banks, Financial Institutions (FIs) and Non Banking Finance Companies (NBFCs) registered with the Reserve Bank, making it a functional PPP initiative.


Since the onset of liberalization in India, tax structure of the country is also being rationalized keeping in view the national priorities and practices followed in other countries. A Foreign national working in India is generally taxed only on their Indian income and income received from sources outside India is not taxable unless it is received in India. Further, foreign national have the option of being taxed under the tax treaties that India may have signed with their country of residence and India has so far signed and notified 70 Bilateral Agreements for Avoidance of Double Taxation (DTAA) with 70 different countries. In order to have a comprehensive tax law to regulate the tax regime further the Direct Tax Code and the Goods and service Tax law have been proposed.

Today we have the system of investment treaties between member States governing multifarious foreign investment transactions taking place to and fro between the nationals of member states. Much before the investment treaty system in 1959, there was another system of investment protection which MNCs had virtually devised themselves for the protection of their investments, i.e. the contract system. Every foreign investment entry was accomplished through a contract, except where entry is made through a merger or acquisition.

Arbitration as a method of settling disputes was the greatest innovation of this system of foreign investment transactions. Arbitration under contract continues to be significant despite being overtaken in volume by arbitration of investment disputes under the treaties. It is interesting to note that MNCs, through private actors, are denied personality under international law.

There is an important pre-emptory norm of international law ˜Pacta Sunt Servanda™,i.e agreements and stipulations of the parties to a contract must be observed. The question has been debated numerous times whether this principle which applies to agreements between foreign states be extended to foreign investment agreements between a foreign state and a multinational corporation. Although many foreign scholars suggest that it should be extended but the suggestion has some theoretical defects. The principle is premised on the mutual surrender of sovereignty by member states entering into a treaty transaction which is missing in case of MNC. However, a cursory look at the long line of international jurisprudence demonstrates that State promises to foreign investors have been strongly presumptively enforceable as a matter of consistent international law and practice.


The capital-importing States assert control over process of foreign investment as a potential strategy to contest norms at the international level by enacting legislation which exerts national control over the entry, establishment and operation of foreign investments. The aim of such legislation is to attract foreign investment into the State while ensuring that the investment is geared to the economic goals of the state and that the potential harmful effects on such goals are eliminated. Every state tries to do it at three levels namely Domestic, Bilateral and Multilateral. But the state sovereignty over natural resources and economic activities is subject to the principles of customary and treaty based international law.


At the outset, let me state that India has been a signatory to MIGA for several decades now. The Indian BIT/BIPA was initiated as part of Economic Reforms Programme started in 1991, with a view to increase the integration of Indian economy with the global economy by fostering inward and outward investment flows. The main objective of Indian (Bilateral Investment Treaty) BIT/(Bilateral Investment Promotion and Protection Agreement) BIPA is to promote and protect the interest of investors of either country in the Territory of the other country and such Agreements increase the comfort level and boost the confidence of investors by assuring a minimum standard of treatment on a non-discriminatory basis in all matters while providing for justifiability of disputes with the host country. The Government of India so far has signed BIPA™s with 75 countries till 31st March, 2009. In addition, the Government has also begun to conclude CECA (Comprehensive Economic Cooperation Agreements) that include both trade and investments.

Conflict of laws (or private international law) is a set of procedural rules which determine which legal system, and the law of which jurisdiction, applies to a given dispute. The rules typically apply when a legal dispute has a foreign element such as a contract agreed by parties™ located in different countries such as United Kingdom and the United States. These rules determine the place or jurisdiction where a dispute may be filed and the applicability of law i.e. law of which state would govern the transaction.


The policies of the Government of India have changed radically from 1991, the year in which or economy was opened up to foreign investment in a big way. Privatization, liberalization and globalization have resulted in a big boost to our economy.

The Commercial Division in each of 21 High Courts shall follow Fast Track procedure for the disposal of cases. The said procedure is prescribed in the Bill itself. Power of execution of decree and orders passed by the Commercial Division are also proposed to be vested in the Commercial Division. Fast Track procedure would definitely curtail the time taken in disposal of such cases.

The commercial Division shall, within thirty days of the conclusion of argument, pronounce judgment and copies thereof shall be issued to all the parties to the dispute through electronic mail or otherwise. A single judge sitting in the Commercial Division may hold one or more case management conferences.

There has been increasing trend in the commercial litigation which is taking most of the time of the existing court resulting in delays in justice to the common man whose cases are not taken up for years together. To ease the situation, other Government proposes to set up Commercial Courts within the High Courts.


In order to ensure prompt payments of money by buyers statutory and to regulate assignment of receivables by making provision for registration therefore and rights and obligations of parties to contract for assignment of receivable and for matters connected therewith or incidental thereto the Regulation of Factor (Assignment of Receivables) Bill, 2011 has been introduced in the Parliament and is under process for consideration.


The Arbitration and Conciliation Act, 1996 deals with law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. The Ministry of Law and Justice has initiated steps to bring comprehensive amendments in the Arbitration and Conciliation act, 1996 in order to make arbitration more popular, make India as a hub of international arbitration and overcome problems due to certain judgments of Supreme Court and High Courts.


Private International law has a dualistic character that ensures the following functions:

(i). balancing international consensus with domestic recognition and implementation,
(ii). Balancing sovereign actions with those of the private sector.

With globalization, commercial transactions are becoming more and more international. Subject such as the appropriate degree of harmonization of domestic laws, choice of law in commercial transactions, the proper scope of international arbitration and litigation, etc will inevitably increase its importance in the immediate future.


The International institutions can guarantee the security of the investments:

– by assuring legal certainty and protecting the legitimate expectations of the foreign investors.
-by ensuring protection against unlawful expropriation.
-by observance of international minimum standards of treatment and ensuring fair and equitable treatment.


The globalization of business is causing companies to become more reliant on markets around the world. As such, if all multinational companies apply the same set of accounting standards while creating their financial statements, the statements will be more transparent and will save costs for both investors and companies themselves. Cost saving and transparency are two goals of the process of harmonization of international accounting standards. The harmonization process has been successful so far, but there is one major flaw there is no global enforcement mechanism, which would provide more legitimacy to the process. Without an international agency, enforcement is left to each individual nation. Not only has this led to skepticism about the uniformity of enforcement, but it has also led to actual enforcement discrepancies.


Although in the last four decades, national and international legal polices and rules concerning trade and investments have repeatedly changed, the investment and its varieties have also undergone substantial transformation in its magnitude and content. In the national laws and policies, the trends towards liberalization and increased protection have gathered strength and the controls and restriction have been relaxed in many countries. Non-discriminatory treatment after admission of investment either way of FDI or portfolio is becoming the rule rather than an exception. However so far no international investment related dispute has been raised against India and this glaringly speaks the effectiveness of the investment agreements concluded by India. But Law being a living organ has to grow in order to satisfy the needs of the fast changing society and to keep abreast with the economic developments taking place in the country. As new situations arise the law has to be evolved in order to meet the challenge of such new situations. Law cannot afford to remain static. We have to evolve new principles and lay down new norms, which would adequately deal with the new problems, which arise, in a highly industrialized economy. The rule of law is the foundation for success of democracy. Hence capacity building for evolving challenges of emerging areas in the legal world coupled with capacity building for enforcement, will have to get highest priority.

It is an admitted fact that Global Financial Crisis had an impact on majority of the States. Studies also reveal that in addition to the above discussed the other factors responsible for the severe financial crisis are attributable to lack of:

-uniform accounting standards
-stringent securities protection law
-stringent legal provisions controlling the dealings of real-estate-transactions
-proper collateral security system
-uniformity in the BITs

Therefore the question today is not about the global financial crisis but is about making suitable enforcing legal mechanism both at the domestic level as well as at international level and to institutionalize the same to avoid any further credit tsunami. I hope and wish this platform will pave a way for that and each and every one who is present here will contribute for the same. I hope and wish this Regional Conference will highlight the pros and cons of the issue and will stimulate innovative ideas to boost cross border trade. I am confident that this entire initiative will also enable India to emerge as a preferred destination for international investments. The Government of India is now on a trajectory of fastest and inclusive growth and justice with a focus on quality. With these words I conclude and once again thank the organizers and each one of you for giving me this opportunity.

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