BIT

In this article, Gautam Kumar Swain who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses India’s current policy regarding BIT.

India’s current policy regarding bilateral investment treaties

A bilateral investment agreement (BIT) is an accord establishing the terms and conditions for private investment by nationals and companies of one country in another country. Details and scope covered under BIT’s are as follows:-

  1. Its applicability

A General concept is that the Indian BITs apply to existing and future investments in accordance with the date on which India entered into the BIT. Few exceptions to this rule are BIT’s with countries like Egypt, Sweden and Romania have limited scope and their applicability is only to investments which arise after treaty came into existence. It even allows Foreign investor whose country is not having BIT with India, can invest by creating a Special Purpose Vehicle(SPV)/ Special Purpose Business (SPB) in a country which has BIT with India.

  1. Fair and Equitable Treatment and Full Protection & Security of the investors

FET creates minimum standards of treatment for the investors which have to be followed by India. It orders the host to have a stable and derogatory legal framework regulating investments which should meet the expectations of the investors. Four pillars upon which FET stands are the protection of legitimate expectations of investors, transparency and stability, non-denial of justice and the banning of coercion and harassment.

FPS aims to protect the investors from physical violence which can also be against the assets of the investments. Exceptions BIT’s are with countries like Egypt, Ghana, Sri Lanka, Australia, etc. which have only “Protection and Security” not “Full Protection and Security” clause.

  1. National treatment and most favored nation treatment for the investors

The principle of “National Treatment” is the perfect part of all the Indian BIT’s but the “Most Favored Nation Treatment” is not present in the “CECA”( Comprehensive Economic Co-operation Agreement) with Singapore and “CEPA” (Comprehensive Economic Partnership Agreement) with Korea. The Principle of National Treatment assures that a foreign investor is treated at equal with any domestic investor and shouldn’t be part of any unfair or unjust treatment whereas MFN clause allows the investors to claim any favorable right which is allowed to any other State having BIT with India. But both the MFN and National Treatment clauses are not absolute in nature.

  1. Expropriation

As recognized the hosts have limited conditions of depriving foreign investors of their investments.

A legal action of dispossessing investors from their investment should satisfy following conditions:

  1. it should have public interest,
  2. it should not be biased or irrational,
  3. it should have been conducted by following due process and
  4. it must be accompanied by adequate compensation.

Expropriation is of two types,

  1. Direct Expropriation: Where the host nation takes the title of the confiscated asset.
  2. Indirect Expropriation: It happens where there is a meaningful and lasting or long drawn out interference with the investment which deprives the investor of a host of incentives.

Indian constitution only allows direct expropriation as per Article 300A.

  1. Dispute settlement mechanisms, both between Countries and between an investor and a Country

Essential factor that makes BIT important for investors which allow investors to adopt arbitral proceedings against a State without approaching its own As per Indian BIT’s, investors can access ICSID (International Centre for Settlement of Investment Disputes) or can approach for arbitration under UNCITRAL (United Nations Commission on International Trade Law) rules. As India is not a party to ICSID convention, the Foreign investors can access Additional Facility Rules of ICSID for dispute resolution.

Different types of Trade Agreement

Trade agreements generally target economic collaboration which consists of removal of disputes, removal of trade barriers, protection of investments and investors, influencing the economy of scale, influencing combined financial productivity etc. There is an order of trade agreements from simple to a complex unification of economies into a familiar market. The least complicated are TIFA (Trade & Investment Framework Agreement) and BIT.  TIFA establishes the foundation for economic cooperation and removal of outstanding disputes between two countries. In BIT, two countries decide the conditions of private investments by citizens and firms of two countries.  After TIFA and BIT, next are PTAs and FTAs in line. PTA (Preferential Trade Agreements) aims at lowering trade barriers whereas FTA (Free Trade Agreements) reduce the tariffs and make them least possible. After PTAs and FTAs, CEPA and CECA were introduced in the hierarchy. Those cover trade, investment, services, intellectual property rights, fair competition etc. The main difference between CEPA and CECA is the partnership in CEPA is acknowledged to be more inclusive than co-operation. Fourth categories of trade agreements bring down all tariffs and trade obstructions to all time low and combine two economies into one common market are the most complex adaptation. Examples of such assimilation are EFTA (European Free Trade Association) and EEA (European Economic Area).

India’s history with BIT

  • BIT’s encourage foreign investors to invest in a Country and thereby contributing towards overall developments and advancements in the economy.
  • India’s previous model agreement of 1993 had a more expansive ‘assets-based’ definition for investments. In its new model agreement, India has adopted an ‘enterprise-based’ definition of investment which necessarily equates investment, with an enterprise incorporated in the home state. The purpose of having an enterprise-based approach was to narrow the scope of protected investments and reduce the potential liability of the state under ISDS (Investor-State Dispute Settlement) claims.
  •  India signed its first BIT in 1994 with the United Kingdom. During the signing of first BIT, the aim was to offer favorable conditions and agreement based protection to the foreign investors and investments. For example, the India-Singapore CECA provides exemption on import duties for investment in infrastructure sector. India has suffered many losses in BIT-related disputes with regard to White Industries Case, for e.g. Cairn Energy dragged India to India-UK BIPA.
  • Previously, India Govt. had created a Model BIT2 in 2003 also known as “2003 Model” which served as a relevant document for negotiation between India and other countries for few years. Cases like White Industries case, where White Industries was awarded an amount of USD 4.08 million and Cairn Energy who started international arbitration under India-UK BIPA (Bilateral Investment Protection and Promotion Agreement) wherein it sued India for a compensation of USD 5.6 billion acted as an eye-opener for India to make necessary amendment to the BIT model.

India’s important BIT decisions

The Dabhol Case

In this incident, Enron, an American Company made an investment in India through its Dutch ancillary, to build and operate a power plant in India with a sole view of selling power in India. Then Govt. of Maharashtra tried to abort the project demanding that non-competitive bidding process was used for the project. Thereafter, Enron call upon arbitration clause under the Dutch-India BIT, as a result of which India had to pay a significant sum.

White Industries Australia Limited Vs. India

In 2011, India’s Coal India Limited had then entered into a long-term agreement with White Industries, an Australian mining company for the supply of necessary equipment for the development of a coal mine near Piparwar in Bihar. A dispute on bonus, penalty payments and the quality of extracted coal emerged. In this case, the award was against India as India were accused of contradicting productive means to its Australian investor and thereby breaching its terms and conditions to the India-Australia BIT. This case gave rise to new standards in BIT law like ‘effective means’ clause which would ensure investor to seek protection under a BIT. But it took almost White Industries nearly ten years to enforce the decree due to long delays in Indian Judicial system (the reason for the same has been elaborated in “IMPORTANT FEATURES OF NEW BIT”). The White Industries decision was quite significant for India in many ways as it sends out a clear and strong signal that any form of expropriation of an investment or repudiation of justice under a BIT, to which India is a party, the concerned Investor can have the arbitral remedy. It ultimately showed that India cannot remain slack about its administrative and legislative systems while dealing with foreign investments.

India’s new bit model

  • India’s new model bilateral investment agreement created in December’ 2015 provides the framework for new negotiations with trading partners such as the USA which is based on the 260th report of Law Commission of India. Although the new draft doesn’t include all recommendations by the Law Commission but suggestions like includes protection of investment as an objective were included.
  • The model draft favors both domestic and foreign investors. New concepts of requiring arbitrators to be impartial, independent and free from conflict of interest, clarity in arbitral proceedings etc.  have been introduced in the new model.  Moreover, India is hoping to use the model agreement to renegotiate existing treaties including the ones with several European countries.
  • There have been concerns regarding India’s model treaty adopting the safe approach. India has signed BIT’s with 83 different countries. As per UNCTAD (United Nations Conference on Trade and Development), 17 ISDS cases were filed against India of which India lost one case and won nine. Seven cases are still lying pending.

The new model revealed by the govt. doesn’t balance the protection of foreign investment with India’s right to control and was diametrically opposed to the governments’ favorite activities to solicit foreign investors as “Make In India” and “Digital India”.

Negotiating abilities of India

As per Wolfgang Alschner, a post-doctoral research fellow in international law at the Graduate Institute in Geneva “ a successful negotiation is the one which varies as little as possible from a proposed model”. India had been rule-maker in many of its BIT’s negotiation. A Model treaty is not considered as an entire document for BIT’s, it is bargaining power which is the ultimate depending factor. At the moment due to enormous market potential, India is in good bargaining position as there are many investors who want to invest in India and India can set the framework in which the interested investors can come in.

Important features of new BIT

  • India’s adoption of “enterprise based” definition of investment covers up the problem India faced in “assets based” definition where every kind of asset whether movable or immovable can qualify as the investment and can enjoy protection under treaties, irrespective of whether such assets can contribute to the development of host countries. “Enterprise based” usually excludes intellectual property.
  • The enterprise based definition allows an investor to be incorporated as legal entity according to domestic law to qualify as a protected investor. But when the issue of compulsory licenses (CLs) of patented drugs does come into the picture, the model treaty refers to the specification set by the TRIPs (Trade-Related Intellectual Property Rights) agreement under WTO.
  • Article 2.4[iii] of the model treaty mainly addresses issuances of mandatory licenses persistent with the international commitment of the Parties with regard to WTO Agreement which implies that CLs will no longer be classified as protected investments given they are issued in unison with the WTO agreements.
  • As per draft models, tribunals will have to obey the decision of the Indian Courts as Indian Courts are the better entities to judge whether CLs have been issued complied with domestic law or not but as per final model the tribunal can examine whether the CLs has been issued in conformance with WTO’s agreements on trade connected matters of intellectual property rights.
  • The tribunals will be less obedient to Indian courts because the concern needs to be decided in agreement with international law only.
  • The most antagonistic clause of the new model is the MFN (Most Favored Nation) status. MFN clause was to make sure that a nation is not differentiated or discriminated as against other nation. The level of investment protection across different countries varies with different BIT’s in existence.
  • MFN arrangement has granted linking of various BITs which allows the foreign investors to choose the BITs which allows maximum benefits to its investors.  This provision allows investors from country “X” to claim identical favorable treatment that host country offers in another BIT to say another country “Y” even if “X” is entitled to different levels of protection.
  • For example, the Australian firm in White Industries case constructed a favorable clause from the Indian-Kuwait BIT to claim damages. The Australian firm argued that India had not provided them with “effective means” to accomplish the ICC award. However, they alleged that “effective means” provision had been included in the India-Kuwait BIT and the same was not provided to the Australian firm, thereby accusing India of discriminating against Australia as Kuwait has been provided with same but not Australia. MFN clause had not been incorporated in the India’s model treaty which many cited as a direct consequence of the White Industries Case.
  • Fears regarding “problematic” provisions promises made in treaties to be converted into newer or renegotiated agreements through the MFN clause have compelled India to drop the same from the model treaty. India’s approach of excluding MFN clause is inviting mixed reactions from every corner. Investors can use MFN as a tool to counterbalance any other elements in a new BIT which pursue to reduce investor protection, by simply conferring other BIT that has stronger investor protection.
  • For example, if host defines FET (Fair and Equitable Treatment) clause more restrictively, investors can invoke MFN clause and can rely on older FET definition in pre-model BIT.

Fair and Equitable Treatment clause has been invoked by investors and accounts for a bulk of fruitful claims in investment arbitration.

In model treaty, Article 3.1 on FET states: “No party shall subject investments made by the investors of the other party to measures which constitute a breach of traditional international law through:

  1. Disapproval of justice in any judicial or bureaucratic proceedings; or
  2. Fundamental breach of due process; or
  3. targeted discrimination on clearly unwarranted grounds such as gender, race or religious belief; or
  4. evidently abusive treatment such as coercion, duress and harassment.
  • To prevent misuse, the model treaty links FET to customary international law as the same provides a minimum standard of protection to investors. Every breach needs a violation of customary international law for a claim to be justified. Linking of FET to international law provides greater scope to the regulatory authority of governments as against broad clarifications by investment tribunals. But the currently drafted clause in the model treaty gives rise to the risk of expansive interpretation. FET can be interpreted in a extensive manner when the government has agreed to protect the nominal investments of a foreign investor in the country.
  • The new model treaty’s ‘enterprise based’ definition tends to safeguard all the investments made by the affiliates of a foreign company which has invested in India through a single enterprise. The model treaty makes it compulsory for foreign investors to first wear out domestic remedies before ensuing international arbitration. Advancing to domestic courts is a requirement made mandatory in several investment agreements. Arguably, the investor doesn’t have to go through the hollow process and can directly proceed to an arbitral tribunal.

The draft model stated that host state can seize investments of foreign investors directly as per Expropriation clause which was missing in the previous draft. Indirect expropriation of foreign investment is hardly followed by allocation of the value of investment by the State. Removal of the requirement of allocation of the value of an investment and limiting the test of indirect expropriation to considerable or perpetual dispossession of foreign investment was the right thing to be mentioned in the new model.

Investor obligations and transparency clause have also been toned down by the new model treaty. It has also deserted the feasibility of India to launch counter-claims against the investor, as were allowed in the earlier drafts of treaty. For the greater security of host countries concerns, it is useful to lay down that a breach of the obligations set on the investor would cause in the investor losing the advantages of the treaty preservations including ISDS and the same would allow the host state to demand to compensate against the investor. Treaty demands the investors to deliberately include recognized standards of corporate social responsibility. A country can charge responsibilities on investors in particular sectors under the domestic law without imposing conditions all at once on all investors. On transparency, the model treaty has an arrangement on clarity in arbitral proceedings as per Article 22.

Drawbacks of the model treaty

Following are the points which framed India’s defensive-minded approach in its new model BIT,

  1. Like the previous model treaty, the new treaty also re-establishes absolute support for the Indian Judicial system. It frequently assigns the need for ‘exhaustion of local remedies’.  The model clearly states that the foreign investors can raise a treaty argument with India and likewise, an Indian investor can lodge claim against a foreign state only after approaching local courts and removing feasibility of domestic decision, which can also be an alluring invitation for foreign investors as the 245th Law Commission Report states that Indian Judicial system is overstretched by large accumulation of cases.
  2. The model also amends the restraint period for such disputes, requiring the cases to be filed before local courts within one year of obtaining knowledge of the disputed claim. As per new model, Investors will have to wait for more five years before looking for arbitrated resolution which results in irrational delays and fundamental problems of quality of judgment.
  3. Eradication of ‘Most Favored Nation’ clause from the new policy which was expected by countries like the U.S.A looks like an uncompromising approach to the model.
  4. Furthermore, exclusion of taxation from its acumen is a clear expression of the Government’s reaction to several conflicts with firms like Vodafone, Nokia and Cairn on tax related matters.
  5. The Model has allowed rigid grievance redressal mechanism like local remedies, lesser limitation, compulsory waiting period etc. as a result of diverse disputes faced by India in its previous BIT’s.
  6. There is no specific reference to ‘FET’ clause which is commonly included standard of protection in investment treaty disputes. Instead of ‘FET’ clause, the model BIT protects against “scopes which constitute a breach of customary international law”.
  7. The BIT protections doesn’t apply to steps taken by local government.
  8. The model definitely excludes treaty protection for pre-investment activities related to the establishment, acquisition or growth of any investment.
  9. The model BIT includes a broad dismissal of benefits clause, excluding the benefits of the BIT provided to investments or investors.
  10. The model BIT includes general exceptions, as mentioned in GATT Article XX which are related to public morals and public order, health, abiding by laws and regulations, the environment and cultural protection.

India’s new model is an improvement over the previous model but still it stumbles in appearing to decide that India will remain a largely capital-importing economy, that too with greater negotiation power on its side.

Implications

The main implication as expected would be on the ongoing India-USA BIT bargaining, as India’s model is quite different from U.S.A. One of the major hurdles in the current model is the absence of ‘pre-establishment’ protection, which will help the USA to be protected before an investment is made. The U.S.A’s model consists of ‘MFN’ clause, it recognizes that taxation scopes could result in confiscation of foreign investment, it doesn’t recognize ‘enterprise-based’ definition of foreign investment and does not need the exhaustion of local remedies before starting or adopting international arbitration. The USA had already signified that it has a doubt regarding India’s new model BIT which in turn is making it difficult for Indian delegators to assure their American counterparts to accept the Indian model.

The problems that India can face while deciding future course of action is:

  1. If India starts renegotiating BITs based on the new model, India will have to do same with many African and Asian countries where India is the current beneficiary.
  2. If a country refuses to renegotiate India have to consider whether to carry on or terminate the agreements because if terminated the country can still use survival clause which ensures BIT for next 15 years.
  3. Newly negotiated BITs based on new model will spell doom for Indian importers as they will have less treaty protection for investment abroad as outward foreign investment from India has increased seriously over past few years.

On July 6’2016, it was confirmed by the Dutch Govt. that Indian authorities are seeking termination of the older BIT signed in 1995. As many as 57 countries like UK, France, Germany, Spain and Sweden have also received the termination notice from Indian delegates. Remaining countries like China, Finland, Bangladesh, Mexico etc. were requested to sign a joint explanatory statement to clarify the doubts in the treaty texts to avoid expansive interpretations by arbitral tribunals. The termination order sends to various countries doesn’t end the protection to the existing investments as the treaty contains a ‘sunset’ clause which extends protection for more 15 years.

Post-Brexit, UK govt. had been trying to create a closer BIT with India. In contrast, the Cairn Energy case had compelled the Indian authorities to explore a new BIT. The chances of entering into a BIT with the UK are bigger than that of with the EU.

India’s investment scenario has changed considerably as it is no longer considered as an importing nation. Since 2005, Indian companies are expanding their global footprint by investing abroad. As per new BIT model, Indian investors are increasingly exploring investment protection tools in those jurisdictions which are generally noticed to have greater likely risks and uncertainties related to the regulatory framework and political climate.  The model’s success will depend on India’s delegates ability to use this model while negotiating new treaties or renegotiating existing ones, while not compromising on its economic goals and interests.

References:

1.Wikipedia

  1. http://www.gktoday.in/iaspoint/current/draft-model-indian-bilateral-investment-treaty/
  2. https://thewire.in/66558/deconstructing-indias-model-bilateral-investment-treaty/

4.https://thewire.in/22423/india-seeks-protection-with-new-model-bilateral-investment-treaty/

5.https://casi.sas.upenn.edu/iit

6.www.nisithdesai.com

  1. http://www.hlregulation.com

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