India’s Bilateral Investment Treaty (BIT) – An Overview

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Many foreign investors have pulled out of China in response to the tensions arising from the Trade War. This was made use of by countries like Vietnam, Singapore, etc., for their economic development.

India, in 2015, scraped the 2013 BIT model and brought in a new model which was in effect in 2017. This has caused an unfavourable investment environment within the country. India has also pulled out of BITs with 58 countries.

This model according to a Brookings Report is Pro-State with limited security to the foreign investors in India. India’s pulling out of BITs have created uncertainty amongst the foreign investors in India and Indian investors abroad.

India's Bilateral Investment Treaties (BIT) overview upsc ias notes essay mindmap

What are Bilateral Investment Treaties?

  • Bilateral Investment Treaties or Bilateral Investment Protection Agreements are those agreements between two countries that provide reciprocal protection of the foreign private investments in each other’s territories.
  • These reciprocal agreements provide security for the foreign investors and investments of the signatories.

Why are they significant?

  • It is meant to encourage foreign investors to invest in the country by providing attractive terms and conditions.
  • It provides investors security from arbitrary expropriations.
  • It increases bilateral investment inflows.
  • It provides a favourable investment environment for both the foreign investors within the territory and its private investments abroad.

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India and BITs:

  • India entered into the realm of Bilateral Investment Treaties in the 1990s to promote foreign investments within the country and increase the economic growth of the country.
  • The 1990s model provided favourable investment norms for the foreigners and also promoted the protection of the foreign investment within India. India first signed Bilateral investment treaty with the UK.
  • This, as a result, increased in the inflow of foreign investments into the country and provided the transfer of improved skills and technical knowledge.
  • Though the BITs differed from each other, the common characteristic of Indian BITs is that it provided security from unreasonable government intervention in the foreign investments within the country.
  • However, India still retains the freedom of deciding which sectors to be opened for investment.
  • India’s 1993 BITs model was first changed in 2013. This was further changed in 2015.

Why the change in the BITs model in 2015?

  • The Indian Government was faced with constant legal actions by foreign firms.
  • According to UNCTAD, the UN body involved in monitoring trade, investment and economic developments across the globe has reported that India is one of the most sued countries in the world as of 2016-17.
  • About 17 investor-state arbitration was filed against India by the end of 2015.
  • Of these, the Indian Government has lost in two of the cases and 6-7 remains pending. 9 cases have been settled. However, the trend of foreign companies suing the government remained.
  • This resulted in India, restructuring the 2013 BITs model and bringing in 2015 BITs model.
  • The change is significant because of the textual contents of the BITs model help in the success of the BITs arbitrations.

What are the key features of the 2015 BITs model?

  • The new model either brought in new provisions or modified the existing norms. The changes made are as follows:
  1. Definition of investment: The definition of investment was changed from Asset-based definition of Investment to enterprise-based definition of investment. This means that, in the new model, the investment is an establishment or acquisition of the enterprise within the host state. The earlier model, which was asset-based, other movable and immovable assets like intellectual property rights were considered assets. This shift narrows down the definition of investment. This helps the government reduce the liabilities that it faces during the Investor-State Dispute Settlement.
  2. Elimination of MFN status: The Most Favoured Nation clause was removed in the 2015 model. This was in response to India losing to White Industries, as Australian firm due to its existence in the India-Kuwait BIT. The White Industries have claimed that due to the MFN status between Kuwait and India, the Indian Government was partial towards Kuwait based firms. Therefore it demanded compensation from India, resulting in the government losing the arbitration. The MFN status provides for special treatment of certain countries over others.
  3. FPS: The Full Protection and Security (FPS) in the new model means India provides security only to the investors and tangible investments.
  4. Inclusion of State Governments: The State Governments are included as stakeholders.
  5. Fair and Equitable Treatment: The 2015 BITs model brings in the international laws into the FET. This narrows down the scope for interpretation during the arbitration. The international law, which is a mandatory state practice, gives minimum protection to the investors.
  6. Expropriation: “Expropriation” means nationalisation of the foreign assets by the host government. The government can nationalise a foreign asset for the public interest and must be done in due process with adequate compensation. The new BIT model states that any judicial proceedings on the investment within the territory are outside the purview of expropriation.
  7. Corporate social responsibility: This model urges foreign investors to voluntarily adopt internationally recognised standards of corporate social responsibilities.
  8. New Clause on non-discriminatory treatment: In the new model, the foreign investors can avail for just compensation in case of emergencies like natural calamities or armed conflict.
  9. Transparency: the 2015 BITs model includes a clause that provides transparency of the Government. This clause requires the government to ensure clarity of the rules, regulations, and proceedings of the BITs in the public domain. This ensures clarity of the regulations to the investors. It has also reduced the investor’s obligations.
  10. Pre-conditions for international arbitration: The new model mandates the investors to make use of all the locally available solutions before initiating international arbitration against the host state. The foreign investors can sue India only after 5 years of negotiations between the regulators and the investors. In the previous model, the foreign investors can directly approach ICSID (International Centre for Settlement of Investment Dispute) or initiate arbitration under UNCITRAL rules.
  11. Exclusion of certain matters: This model excludes any matters with regards to taxation, subsidies, compulsory licenses, etc.

What are the consequences of this change?

Positive consequences:

  • Prevention of unregulated suing against the government: The current model will prevent the foreign investors to directly sue the Indian government without pre-negotiations with the regulators.
  • Termination of MFN status: India will be able to settle or prevent arbitrations like the one faced by the government with White Industries. This also provides equal footing for all the stakeholders involved.
  • Increasing the scope for winning the cases: The Indian Government through this revision will be able to win the international arbitrations. The key players for this are the narrowing down of the definition of the investment and linking of FETs with the international laws.
  • Transparency: This model has well-defined regulations to all the parties involved, unlike the previous model, where there were possibilities of India launching counter-claims against the investors.

Negative Consequences:

  • Protectionism: This model is considered by many as a protectionist model. It protects the government during the arbitrations. This is unfavourable for investors. The main essence of BITs is lost as it is meant to make India an attractive investment hub.
  • Slow Dispute settlement: The investors must wait a maximum of 5 years to settle a dispute with the host State until they are able to seek arbitration from an international source. The history of India’s slow judiciary processes shows it in a negative light.
  • A blow to “Make in India”: The purpose of the ambitious Make in India is to make India a manufacturing hub. For this to be achieved, India must increase foreign investment inflow. To attract foreign investment, there must be long term protection for these investments. However, the new model does not give sufficient protection to investments.
  • Limited Protection: The new model is not Investor-friendly. The government provides limited protection of the investors during the legal proceedings.
  • Termination of BITs: As a consequence of the model, India has terminated BITs with 58 countries of which 22 are from EU as of 2017. This removes protection of the investments of and within these countries. This, in turn, created uncertainty with regards to future investments until further negotiations take place.

Way Forward

  • Clarity on terminations: India must provide clarity on what terminations are pending as of now and measures taken by the government to protect these investors for the foreseeable future.
  • Negotiations: India must undertake further negotiations to recreate the bilateral investment treaties with those countries it has terminated to increase the FDI.
  • Improvement within the model: Improvements should be made to strike a balance between the investor and the state.

Article by: K.G.Karishma

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