By A. Saravanan and Dr. S.R Subramanian
Arvind Panagariya, Vice-Chairman of the National Institution for Transforming India (NITI) Aayog, recently remarked that the Indian Bilateral Investment Treaties (BITs) are restrictive. While on the other hand, China is emerging as a major force for overseas investment. This is viewed as a powerful critique of the New Model BIT, 2015 unveiled by the Ministry of Finance earlier this year. In this context, it is incumbent to analyse what a bilateral investment treaty is and why the Revised Indian Model BIT of 2015 is viewed as a restrictive formulation.
How BITs Protect the Investor-State
A bilateral investment treaty is an agreement between two countries guaranteeing legal protection of investments made by investors of one state in the territory of other states. Though the content of each of the BITs may vary depending on the actual negotiation of investment partners, the BITs have certain basic commonalities. The typical function of BIT, as its name suggests, is to promise the investors that their investments will be given the full protection and security in accordance with the agreed standard of protection. For this purpose, BITs usually lay down the definition of investment and declare that it is the legal obligation of each of the contracting states to create a favourable condition of investment.
It is followed by references to standards of treatment provided by the Host-State. It is usually based on the principle of non-discrimination, which is well-established under the international economic law. For instance, the requirement of National Treatment (NT) ensures that the investments of other contracting states shall not be treated less favourable than the treatment accorded to domestic investors. Similarly, it is also provided that if the host state is granting special favourable treatment to one foreign investor, the same treatment shall be extended to all other investors without any discrimination, popularly known as the Most Favoured Nation (MFN) treatment.
The other protections include guarantees against both direct and indirect ‘expropriations’. This is a guarantee to ensure that the state does not impact the right of the foreign investors to gain profits from their property and to secure that the value of their investment is not unduly diminished. These standards of treatment have to be enforced through binding Investor-State Dispute Settlement (ISDS) provisions. These elementary clauses of Indian BITs proved to be controversial as they protect foreign investment at the cost of national interests.
India and BITs: A Crooked Road
It may be noted that India had embarked on the course of ambitious BIT programme in 1994, as a part of the economic liberalization programme, with the start of the India-UK BIT. It has signed around 86 BITs till date. Indian BITs were mostly based on the OECD Convention on the Protection of Foreign Property.
While India is a ‘capital-importing’ nation, it had adopted a model which is more suitable for ‘capital-exporting’ countries, ostensibly for an outright attraction of foreign investments.
However, the scope of Indian BITs had not been judicially tested until the news of White Industries v. Republic of India (2011) broke out, wherein, the UNCITRAL investment treaty arbitral tribunal ruled that India had violated its obligations arising under the India-Australia BIT. It had ruled that nine years of delay in the enforcement of arbitral award will constitute a breach of ‘effective means standard’ by use of MFN provision in India-Kuwait BIT and ordered the payment of a whopping AUD 4.08 million by the Indian government.
This award holds significance as it was the first investment treaty award rendered against India. It also brought the risk of opening a Pandora’s Box on further investment claims against India. Currently, 13 such notices have been served on the government of India involving a pay out of several billion US dollars.
As a sequel to these developments, demands have been raised from several quarters including the academics and civil societies to revisit the Indian BIT program. This led to the release of the Draft Model BIT in March 2015 for wider consultations and deliberations. Later, the Law Commission of India also undertook a study of the draft BIT and gave its recommendations in its 260th Report. Finally, the Cabinet approved the revised Model BIT in December 2015.
Revision of Clauses: In India and Around the Globe
Even on the international level, in the recent years, several countries have attempted to impose limitations on the general standards of investment protection. The much-criticized is the investor-state dispute settlement system process by linking it to the customary international law. For instance, countries such as Brazil, South Africa, Bolivia, and Germany have already initiated sweeping changes to their BIT programmes.
It is submitted that though there is no difference of opinion on the need for revision of Model BIT, discerning stakeholders feel that the Model BIT had gone overboard, making BITs less attractive for investors. For instance, the new dispute resolution procedure requires that the investors should exhaust their local remedies in India before resorting to international dispute resolution system. It needs to be noted that in any international dispute involving two disputants, it is natural that the parties expect to refer the matter to the neutral forum rather than relying upon domestic remedies.
Challenges to Model BIT, 2015
The Revised BIT has a number of proposals to protect the national interests, such as the ‘enterprise-based’ definition, limitation of full protection and security obligation only to physical security of investment. But the sweeping changes in the dispute resolution signifies sheer protectionism at the cost of inward investment. Seen in this light, one can very well see the point of measured criticism of Mr. Arvind Panagariya.
Also, the 2015 Model BIT assumes importance as the government is preparing for BIT/FTA negotiations with the USA and the EU. It would be difficult for India to convince its counterparts on its new propositions. The US considers the undiluted investor-state dispute settlement system as an integral part of the investment dispute resolution system. Hence, the negotiations with the US is going to be extremely difficult.
In the light of pouring criticisms, it is expected that the government will rethink on its policy on international investor protection so that India continues to remain a top attractive destination for foreign investment.
Mr. A. Saravanan is currently a Ph.D. candidate at the Rajiv Gandhi School of Intellectual Property Law, Indian Institute of Technology (IIT) Kharagpur. Dr. S.R. Subramanian is currently working as an Assistant Professor of Law at the Rajiv Gandhi School of Intellectual Property Law, Indian Institute of Technology (IIT) Kharagpur.
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