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India’s Flawed Approach to Bilateral Investment Treaties

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India’s Flawed Approach to Bilateral Investment Treaties

The model BIT of 2016 is vague, flawed, and offers little succor for Indian or foreign investors.

India’s Flawed Approach to Bilateral Investment Treaties
Credit: Flickr/S. A.

Recently, it was reported that India and the Philippines have commenced negotiations for a new Bilateral Investment Treaty (BIT) and have exchanged their model BITs. If talks are successful, it will be the fifth BIT India has signed since the release of its model BIT in 2016, four with countries where Indian companies have substantial investments. In the Philippines as well, Indian companies such as Wipro and GMR, have made substantial investments in recent times.

However, India’s model BIT and, in fact, its entire approach toward BITs have inherent contradictions. The Indian approach to BITs is riddled with inconsistencies that threaten to defeat the entire purpose and may, in fact, fail to achieve the anticipated objectives. These contradictions and inconsistencies can be seen by engaging in a three-faceted inquiry: the background to the model BIT; the text of the model BIT itself; and the effect and consequence of the model BIT.

Contextual Background to the Model BIT

India’s tryst with BITs started in 1994 when it signed its first with the United Kingdom. It subsequently went on to sign BITs with more than 80 countries. India’s love for BITs ended in heartbreak in 2011, when an international tribunal ordered India to pay 4.10 million Australian dollars (plus interest and costs) to White Industries under the 1999 Indo-Australia BIT. Shocked by the award, the Indian government commenced the process of revisiting its existing BITs. Simultaneously, India had started receiving notices under various BITs in relation to the retrospective tax amendments and cancellation of 2G licenses.

In this background, in 2015, India started drafting a new model BIT to replace the existing model Bilateral Investment Promotion Agreement (2003). Subsequently, the draft model BIT was released as the government sought public comments and feedback. The draft was protectionist to the extreme and reflected the anguish of Indian government, which at the time was receiving multiple notices under BITs, due to the retrospective taxation debacle and the cancellation of 2G licenses by the Supreme Court. The model BIT was finalized and released in public domain in 2016. While it has certain improvements on the draft model BIT, it continues to indicate the confusion in the government’s approach, in that it is not clear whether it wants to have a BIT in order to protect foreign investors or to reassert its sovereignty.

It is clear that the model BIT is reactionary in nature and was not prepared as part of a regular exercise to reform the existing framework. Pertinently, consequent to the release of the model BIT in 2016, India has given a notice of termination of its existing BITs to at least 74 countries and has released two joint interpretational statements with Columbia and Bangladesh. These terminations are ongoing since 2017 and a few BITs are set to terminate in 2021 on expiry of the notice period.

What Is Wrong With the Model BIT?

The model BIT of 2016, being a knee-jerk reaction to the White Industries case and the series of notices that India received, reflects a muddled approach. The BIT has more exceptions to protections than protections themselves. The sole focus on the entire model BIT is to limit the liability for the host state and raise the bar required to bring a claim under the BIT. It narrows down the definition of “investment,” creates high threshold of breaches, and removes much of the protections that investors largely rely upon.

The problem begins with the definition of investment itself. The “enterprise” based definition is riddled with vague qualifications such as “certain duration” and “significance for development of the party in whose territory the investment is made.” The model BIT, however, has no indication as to what these phrases actually mean — for how long the investment must be in existence and what actually would hold “significance for development” of the host country. There is also a requirement of the investment being “constituted, organized and operated in good faith,which is another example of the vagueness that the model BIT is riddled with. While the attempt is to incorporate the jurisprudence laid down in the awards of international tribunals in the Saluka v Czech Republic and Salini v Morocco cases, the model BIT creates unwanted vagueness and confusion.

Further, the model BIT completely omits the “fair and equitable treatment” standard. It has been replaced with protections that require steep thresholds to be triggered and/or invoked. The well-recognized doctrines of MFN” (Most-Favored Nation) and legitimate expectation are also absent. Further, the Vodafone tax experience is also reflected in the model BIT where “taxation measures” have been exempted from the protections offered under the BIT. The model BIT seems more like a restatement of international law on sovereignty rather than a treaty meant to protect cross-border commercial transactions.

However, the biggest disappointment of the model BIT is its insistence on the investor exhausting the domestic remedies for at least five years before commencing an arbitration under the BIT. In fact, this arbitrary period of five years is unheard of in existing BIT practice. In practice, India omitted this requirement in the BIT executed with Brazil, and with Taiwan, the said period of five years has been reduced to four years. Notably, these BITs were executed subsequent to the release of model BIT. It is clear that other countries are pushing back on such obligations.

Another unintended consequence of the model BIT is that Indian companies investing abroad will also have similar limitations on protections and be subject to the local judicial bottlenecks, as discussed next.

Will the Model BIT Actually Serve Indian Interests?

Since the release of the model BIT in 2016, India has signed a grand total of four BITs. India has signed BITs with Belarus, Kyrgyzstan, Taiwan, and Brazil and is in the process of signing one with Cambodia and negotiating another with Philippines. Except Taiwan, all the other nations are recipients of substantial Indian investments, significantly more than what India receives from these countries. While the BIT with Brazil is fairly balanced (and a substantive departure from the model BIT), the others are largely based on the model BIT.

However, even if BITs based on the model BIT are signed, will they actually be in India’s interest? The answer may not be in affirmative. Think of it in terms of an Indian investor seeking to make substantial investments in a Middle Eastern or African country with a relatively volatile political environment. It would be subject to the same exceptions, limitations, and lack of protections that the model BIT contemplates for foreign investors in India. In fact, countries characterized by political instability and judicial corruption would be more than willing to sign BITs based on the model BIT as investments flowing from such countries into India would be a rare occurrence, whereas Indian investors will be left in a lurch at the mercy of the legal and political instability that characterizes such jurisdictions. Adding to that, it is unlikely that the developed countries, which are home to the biggest investors in India, will sign BITs on the terms the model BIT proposes. BITs are meant to protect both the inflow and outflow of the investments, which the model BIT fails to do.

To make the case for the model BIT even weaker, there have been reports that India is planning to have a special law to protect foreign investments, which involves establishing permanent mediators and fast-track courts for foreign investors. If such a legislation is indeed underway, it would be inconsistent to have BITs based on the model BIT. This will lead to a scenario where the foreign investors in India will have the additional protection of fast-track courts and dedicated mediation facilities, whereas Indian investors abroad will be at the mercy of a self-defeating BIT and domestic legal system of the host country.

The Indian approach to BITs is confused, self-defeating, and will end up being a cause of worry for the Indian investors. The model BIT does not act as the cushion investors need while venturing into a foreign territory. There is no win for India or its investors in signing such BITs. Rather than pursuing a confused BIT approach, India should focus on reforming its domestic judicial system. While a few steps have been taken in the right direction through the Commercial Courts Act, 2015 and the amendments to the Arbitration and Conciliation Act, 1996, there are a number of administrative and substantive aspects that need a complete overhaul.

If that is not enough and India wishes to regulate foreign investments with absolute control, it should rather enact a legislation like South Africa’s Protection of Investment Act, 2015 and discard BITs completely. Such a legislation will allow India to make its commitments to foreign investors embedded in the domestic law. The said legislation will not only provide requisite comfort to foreign investors, but it will also align with India’s ultimate goal to avoid international litigations. However, it can have no protections for Indian entities investing in foreign countries.

In the likely scenario of India pursuing both — BITs and domestic legislation — New Delhi should revisit the model BIT with fresh perspective. The model BIT and the domestic legislation will have to be aligned to ensure a consistency in commitments as well as the dispute resolution processes. The idea should be to have an approach that takes into consideration India’s likely emergence as a capital exporting nation in near future, its Make-in-India policy, as well as its goal of becoming a $5 trillion economy by 2025.

Abhishek Dwivedi is an independent advocate and arbitration counsel practicing in Lucknow and Mumbai, India.