Law & Justice in Globalising World

Balance of Power Between MNCs

and States:
Issues of Law and Justice in a Globalising
World

Shikhar Gupta, Assistant Professor

School of Law, Forensic Justice & Policy Studies, National Forensic Sciences University
Delhi Campus, New Delhi
Sources and References:
• Article: Corporate Obligations under International Law - Menno T.
Kamminga

• Article: Multinational Enterprises And State Sovereignty Under

International Law - Tania Voon

• Bhumika Indulia, Vodafone versus India: A Never-Ending Saga, SCC Blog

(Nov. 29, 2022), https://www.scconline.com/blog/post/2022/11/29/vodafone-
versus-india-a-never-ending-saga/

• India and Investment Treaty Arbitrations: A Chequered Past and Uncertain

Future | SCC Blog, https://www.scconline.com/blog/post/2021/09/29/india-
and-investment-treaty-arbitrations/
MNCS
• Companies that produce or control production of goods and services in at least
one country apart from their home country.
• (Aka: Multinational Enterprises, Transnational Corporations, Transnational Enterprises
• Features:
1. Subsidiary branches in other countries
2. Major Decisions by Parent Organisation
3. Sole/Primary aim: Pro ts
4. Strong technical background and competitiveness
5. Huge nances
6. Monopolist Control
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Introduction and Objective of Study

• The balance of power in the global arena has witnessed a seismic shift
over recent decades, with multinational corporations (MNCs)
increasingly wielding substantial in uence on par with, and in some
cases surpassing, that of nation-states

• Need to delve deep into the multifaceted dynamics of power struggles

between MNCs and states and explores the intricate issues of law and justice
that permeate this evolving relationship in the context of an ever-globalizing
world.

• To decide the legal-regulatory course that is required to deal with challenges

arising from the increasing power of MNCs and their a ects on interests of
States and State sovereignty.
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The Emergence of MNCs
• The emergence of multinational corporations is deeply rooted in historical
developments that date back centuries. However, their rapid ascent to global
dominance can be primarily attributed to the post-World War II era, which laid
the foundation for their expansion:
a) Colonial Origins: Multinational corporations can trace their roots to
colonial trading companies of the 17th and 18th centuries, which served as
precursors to contemporary global businesses.
b) Post-World War II Global Order: The aftermath of World War II
necessitated economic reconstruction, leading to the establishment of
international institutions like the United Nations, the World Bank, and the
International Monetary Fund, setting the stage for global economic
integration.
c) Technological Revolution: The latter half of the 20th century witnessed
the advent of globalisation, driven by advances in technology,
communication, and transportation.
Catalysts of Increasing Growth and Power of MNCs

• a) Globalisation: Technological advancements and improved

transportation have enabled businesses to transcend national
borders, fostering the globalisation of markets and production.
b) Technological Innovations: The digital revolution, epitomised
by the internet, has revolutionised business operations, allowing
for the seamless exchange of information and resources across
the globe. Allowed them to operate in global scale, conduct R &
D across continents and maintain e cient supply chains.
c) Trade Liberalization: The dismantling of trade barriers and
the promotion of open markets have incentivised corporations to
expand their operations globally.
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 The Power Perspective: States and MNCs
ECONOMIC DOMINANCE AND POWER PLAY

• Multinational corporations often possess greater nancial resources than

many nation-states, granting them the power to:

• a) In uence Policy, Laws & Enforcement : MNCs exert signi cant sway
over governments through lobbying, campaign contributions, and other
forms of political engagement, often shaping policies in their favour.

• Corporate in uence over both lawmaking and enforcement tends to

structurally increase with liberalisation.

• b) Compete Nationally: The revenue of certain MNCs can surpass the

Gross Domestic Product (GDP) of smaller and even mid-sized countries,
a ording them substantial economic leverage.
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The Power Perspective: States and MNCs
ECONOMIC DOMINANCE AND POWER PLAY

• c) Privatisation of key sectors: Privatisation of key sectors e.g. Telecom, Oil

etc furthers the economic control of MNCs over key resources and a
weakening of overall political power of States, in absence of stringent
regulatory mechanisms.

• d) Increasing dependence on FDI: Host States (particularly developing

states) are increasingly becoming dependent on MNCs for FDI and foreign
money in order to strengthen their economy, enhance their infrastructure,
technology transfers and employment of their citizens. This gifts MNCs with
increased bargaining powers wrt to the host states and are further able to
press states into shaping economic and political as well as social policy as
per their objectives.
The Power Perspective: States and MNCs
TRANSNATIONAL MOBILITY

• One of the de ning features of MNCs is their capacity to relocate

operations to more favourable jurisdictions, exploit tax loopholes,
and minimise their nancial obligations to host countries.
• This mobility allows them to circumvent speci c regulations and taxes,
potentially undermining the economic stability of nation-states.
• It also enables them to press nation states into accepting their many
demands (which may be negatively impactful upon states’ citizens in the
long run) on the threat of moving their operations to another state.
• e.g Vodafone-India case
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The Power Perspective: States and MNCs
UNDER INTERNATIONAL LAW

• Under International Law, MNCs have acquired signi cant rights particularly in the eld
of Investment and IPR enforcement.

• BITs often prioritise investor protection, making it challenging for governments

to regulate MNCs in the public interest.

• National states are also being dragged to International Arbitrations and often the
result is favourable to MNCs, and the States are being made to pay compensations to
MNCs. This re ects a trend of loosening up of traditional absolute sovereignty of
nation states and shifting of some power to these transnational corporations
under International law at the cost of political sovereignty of the nation states.

• e.g Vodafone-India Arbitration

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The Vodafone-India Arbitration Case
Background

• The bilateral agreement between Hutchison Telecommunications Limited (Hong Kong)

and Vodafone International Holdings (VIHBV) (an entity of Netherlands) was signed in
2007, in which a Hong Kong based entity through a series of subsidiaries sold its stake
and led to the bilateral agreement.

• The agreement resulted in transfer of shares of Indian company to the Netherlands entity
for approximately eleven billion as consideration.

• The pro t that the Hong Kong entity earned through this deal, triggered the Indian
Government, which demanded tax payment by VIHBV for the acquisition of the stake of
the Indian company.

• The decision of the Supreme Court supported the VIHBV and quashed the order
concerning the demand for payment of INR 25 billion by the company.
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The Vodafone-India Arbitration Case
The award
• The judgment triggered the Government which in turn led to the retrospective amendment of
the taxation law (Through Finance Act 2012). The amendment clari ed that the payment of
taxes by VIBHV was now necessary.

• The award favoured Vodafone and stated that the amount of tax that was demanded
by the Indian Government was not payable, as per the treaty. The amount was approx.
INR 22,100 crores. The key aspects which form a part of the award are as follows:

1.Netherlands was entitled to have the bene t of fair and equitable treatment under the
treaty.

2. The challenge put forth by the Indian Government to the nal judgment and order of
the Supreme Court constituted a breach of the agreement.

3. The breach was not avoidable and might lead to international responsibilities on India

4. India needs to pay damages to Vodafone

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The Vodafone-India Arbitration Case
A similar past: White Industries v Coal India

• Similarly in White Industries v Coal India Arbitration case Indian Government

accepted the decision of the Tribunal and paid approximately AUD 4 million to
the investors.

• The White Industries debacle ensured that Indian authorities had nally
seen the potential harm that such investor-friendly BITs could do to both
the economy of the country and their political image.

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The Vodafone-India Arbitration Case
The Implications of the award

• India lost huge amount of tax collection, and tax revenue is the primary
source of income of the government.

• PCA warning to India: “failure to comply with will engage “international

responsibility”. This to an extent dents upon the sovereignty of India

• The outcome at the PCA is a serious loss of face for the country in a
matter where at least in principle, the issue was of ensuring that foreign
investors meet their tax obligations.
The Vodafone-India Arbitration Case
The Implications of Award on State Sovereignty
• VODAFONE CHOSE TO CHALLENGE THIS RETROSPECTIVE AMENDMENT IN PCA
(Permanent Court of Arbitration) under India-Netherlands BIT, RATHER THAN UNDER
INDIAN DOMESTIC SYSTEM.

The shift of the case from India to international arbitration shows that the international parties rely
more on the proceedings of arbitration and capacity to chose a forum beyond the State Authority

• It is also noteworthy that when domestic jurisdictions assert their sovereignty over Transnational
Corporate Entities (as Indian govt did by over ruling the SC decision by a legislative amendment),
the MNCS UNDER INTERNATIONAL LAW POSSESS THE CAPACITY TO UNDERMINE (TO
LIMITED EXTENT) THE SOVEREIGNTY OF NATION STATES.

• THE FACT THAT INDIA, DID NOT OUTRIGHTLY DENY ITS RESPONSIBILITY OF
ENFORCEMENT OF PCA’S AWARD BUT PREPARED TO FILE AN APPEAL AGAINST THE
AWARD, shows India’s acceptance of the International law and will to abide by its rules
rather than reject its implications altogether if it goes towards undermining its sovereignty
thus shifting balance of State from absolute sovereign to a kind of porous sovereignty.
However, States can still assert sovereignty.

• However, India terminated around 50 such BITs with many nation states after
this case, to prevent loss of revenues in taxation and being subjected to
arbitration under them.

This still hints as the consensual nature of International law and states
still have the power to an extent to assert their sovereignty by refusing to
be a member of the particular treaty/convention.
Concluding Remarks
(You may have for your own similar or distinct opinions)

• As MNCs continue to expand their Global presence and authority, the Nation
States along-with International Organisations need to come together and
Collaborate on ensuring a framework that ensures corporate responsibility
and accountability and requires them to respect human rights and
environment rights of individuals of hoist states.

• Requiring a framework in International Law also means Nation States’ need to

be willing to shred away the notion of their absolute sovereignty (which as
the evidence shows has already been de-consecrated to an extent under the
International Law) in favour of a concept of restricted sovereignty of
states, where states along with Transnational Corporations can be subjected
to International Law and duties and obligations under it.