In this blogpost, Ayush Jain, Student, Jindal Global Law School, Haryana, writes about what is bilateral investment treaties, its role and importance

What are Bilateral Investment Treaties

Bilateral Investment Treaties (or, BITs) are agreements between two countries which protect the investments made by investors from each state in the territory of the other. The basic purpose of a BIT could be said to reduce political risk by laying down certain protections as we can see from Article 6 of the United States Model BIT. Instead of listing down what generally these protections would consist of since this article is about how a BIT would impact my decision to do business in a specific country, hence, I would directly go on to list down the basic things which I would be looking for in a BIT. If a BIT can ensure security from political risks, rationality, fair and equitable treatment, access to international arbitration, transparency and non-discrimination, then that would act in favor of carrying out business in that particular state.

Role of BIT

BIT is mostly known to attract Foreign Direct Investments (FDI), however, disputable the statistics may be over how successful or unsuccessful has the process been, one thing that cannot be disputed is the motive behind drafting a BIT. Any BIT is designed keeping in mind the need to look into the concerns of the investors with respect to the political gimmicks and legal tangles. The question that might arise is why is there such emphasis given in the presence and framework of a Bilateral Investment Treaty. This could be settled by understanding the law of business. Business being a decision-making process involving financial transactions, there needs to be proper planning and math done behind the amount which one plans to invest, and the return on investment depends on the economic scenario. None of these can happen in the absence of proper risk management. Hence, the role of Bilateral Investment Treaties become a major factor when one thinks of investing in a foreign land. Pakistan and Germany were the first to enter into a Bilateral Investment Treaty in the year 1959 itself. Today there are around 3000 such treaties already. Hence, we understand the pace at which the importance of BIT is growing. Every investor demands these are basic necessities without which the risk factor is too big for anyone to proceed with.

Importance of BIT

Even though BITs are generally of standard form, but still there can be really important differences between two BITs. Hence, the framework becomes of great importance. In fact, we do not even need to look far ahead in order to understand this. India is a good example. As we might be aware, India is undergoing a draft model of Bilateral Investment Treaty as it wishes to promote FDI and our Prime Minister wishes to implement the Make in India scheme. Now the problem over here is that the draft that has come to light earlier is not one which would in any way attract FDI instead one which might scare the investors further. When I say that yes I would prefer investing in a country with a BIT, I do not mean any and every BIT but one which helps serve the purpose of it being made in the first place. The major criticism of India’s model of BIT is that it is not good enough to ensure investors’ confidence instead it portrays India to be more protective and conservative in nature. The importance of BIT came back into light in 2013 when Ethiad only made investments in Jet Airways after India and UAE entered into a bilateral investment treaty. This was, according to me, a very decent demand raised by the UAE investor before entering the Indian market, especially considering how stable India’s political scenario remains and how fast and corruption free are legal systems are. India had to carry the burden of cancellation of the 2G licenses and introduction of retrospective tax laws in 2012, claims of which continued to increase with White Industries (an Australian investor) successfully raised a claim against India for such actions of theirs. It rightly argued that by entertaining Coal india’s application to dismiss the allocations of the year 2002, it contravened the New York Convention and hence India had failed to act in accordance with certain legit expectations that White Industries had as an investor.

When I, as an investor, would not want to enter a market with such history and unhealthy business environment, it is only fair on our part to first bring about a fresh draft of the BIT which would remain true to the spirit of it being created and ensure investors are confident of India being a safe investment hub. If we see the US BIT, the investors are being provided with six major benefits which ensure that they feel safe and secure of their investment made in the US. The same include National Treatment and Most-Favored nation treatment, expropriation and compensation, transfers, performance requirements, dispute settlement and senior management and boards of directors. These act as such great investment incentives that would probably make me invest in the US even if I was not even considering doing so. Such needs to be the standards being set by India if they wish to ensure the success of Make In India scheme of our Prime Mister Shri Narendra Modi.

I cannot more emphasize on the importance of a Bilateral Investment Treaty which fits the purpose it is meant to serve. If I want to make an investment in another country, the fact that I am not well aware of their politics, law and order situation, dispute redress mechanism it is a Bilateral Investment Treaty that can give me assurance and clarity over what I am entering into.  If I may now list down what BIT usually contains, as without that it might remain incomplete, I would probably have the following:

(a) promotion of favourable conditions for investors;
(b) fair and equitable treatment of investors;
(c) national treatment standards, ensuring that investors of a contracting party receive treatment no less favourable than that accorded by the host country to the investments of its own investors;
(d) most favoured nation treatment, requiring the host state to treat foreign investments no less favourably than investments from any other third state;
(e) protection against expropriation and nationalisation; and
(f) the requirement to permit the free transfer of funds.

However, I still would say, these are not the a, b, c, d’s to be followed while drafting a BIT. Till the time the core principles are being served, that is a good enough, in fact, what is required.

Conclusion

BIT is the most appropriate tool used to promote FDI by seeking investors’ confidence. Free Trade Agreements (FTAs) even though is similar to BIT, but only eliminate discrimination and hence it can never act as a substitute for BIT. As an investor, BIT provides me protection while I invest in a foreign land. Hence, BIT definitely helps promote FDI, in providing an effective international arbitration for dispute settlement, and ensuring investor protection while both the investor and the country the investment is coming into benefits. I personally would feel much comforted and secure to invest in a country with a BIT than in one without it as in that case I would have to depend on that country’s legal system where I have put in my investment which we never know is free from political pressures and corruption or not. BIT would also remove the problems of change in political hands during the business being carried out and hence give stability to the investment and the environment there. To conclude I would say that BIT has the power to get the economy growing, improve the employment scenario and raise the standard of living of the people if used effectively and in the true spirit.