Bilateral Investment Treaties (BITs): India’s Approach and Concerns – Explained, pointwise

Introduction

India is negotiating Free Trade Agreements (FTAs) with several trading partners. The European Union (EU) is also negotiating an Investment Protection Agreement (IPA) along with the negotiations for an India-EU FTA. The IPA will contain investment protection standards and an independent mechanism to settle disputes between investors and the Government under international law. Over the past decade, several Multi-National Corporations (MNCs) have been involved in investment disputes with the Government of India including Cairn Energy, Vodafone and White Industries among others. They had invoked proceedings under Bilateral Investment Treaties (BITs) India had signed with trading partner nations. To avoid such proceedings, the Government had amended the text of Model Bilateral Investment Treaty (Model BIT) in 2015 and renegotiated its Agreements with trading partners. However, experts have pointed out several concerns with the provisions of India’s Model BIT which may have an impact on India’s FTA negotiations and foreign investments in India.

What is a Bilateral Investment Treaty Agreement (BIT/BITA)?

Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other’s territories.  The Agreements establish minimum guarantees between the two countries regarding the treatment of foreign investments, and protect them from arbitrary decisions of national Governments. BITs typically have provisions like National treatment (treating foreign investors at par with domestic companies), Fair and equitable treatment (in accordance with international law), and Protection from expropriation (limiting each country’s ability to take over foreign investments in its territory) etc. among others.

India’s BITs

The Government had released the first Model BIT text in 1993. Under this model, India signed its first Bilateral Investment Treaty (BIT) with the United Kingdom in 1994. The Government had released Model Bilateral Investment Promotion Agreement (BIPA) in 2003. As of 2015, India had signed BITs with 83 countries (of which 74 were in force).

The BITs were invoked by several MNCs in context of their disputes regarding sovereign actions of the Government of India. In 2011, an International Chamber of Commerce (ICC) Tribunal ordered the Government of India to pay US$ 4.10 million to White Industries under the 1999 Indo-Australia BIT. The Government also received notices under various BITs concerning retrospective tax amendments and the cancellation of 2G licenses. Post these developments, the Government initiated a review of its existing bilateral investment treaties (BITs).

In 2015, India started drafting a new model BIT to replace the existing model BIT (1993) and BIPA (2003). In 2016, the model BIT was completed and released to the public domain.

Since the release of the model BIT in 2016, India has signed only four BITs with Belarus, Kyrgyzstan, Taiwan, and Brazil. The Government is negotiating with 37 countries/blocks, and has terminated its older BITs with 77 countries (i.e., older BITs with only 6 countries are in force).

What are the benefits of Bilateral Investment Treaties (BITs)?

First, BITs provide security against arbitrary actions of sovereign Governments. This enhances confidence of investors. Thus BITs have a potential to attract Foreign Direct Investment (FDI).

Second, BITs generally provide a mechanism for settling disputes between investors and the country of investments. The most preferred mode of settling such disputes is arbitration, where parties agree to have their dispute decided by a neutral person (the arbitrator) instead of going to Court.

Third, BITs encourage the adoption of market-oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory manner.

Fourth, BITs support the development of international law standards consistent with the objectives of trade and investment promotion.

What are the issues with India’s Approach to Bilateral Investment Treaties (BITs)?

First, the review of the then existing Model BIT texts and the formulation of the Model BIT of 2016 was a knee-jerk reaction to the White Industries case, instead of an initiative to promote foreign investment.

Second, the Model BIT of 2016 has a very narrow definition of ‘investment’ and creates high thresholds for what can be considered as breach. There are several ‘vague’ phrases. The definition of investment is full of vague terms like ‘certain duration’ and ‘investment…operated in good faith’. There are uncertainties related to how long is the duration of investment or what constitutes good faith. Such ambiguities in the text and the lowering of protection standards may act as a deterrent to foreign investment.

Third, the Model BIT has omitted the  well-recognized doctrines of ‘fair and equitable treatment’ standard and Most-Favored Nation (MFN) etc. It sends a wrong signal to the investors creating fears that their investments might not be safe in India.

Fourth, The Model BIT insists that investor must exhaust domestic remedies (for at least 5 years) before commencing arbitration under the BIT. This will entangle the investors in prolonged disputes given pendency and slow dispensation of justice in India.

Fifth, Indian companies investing abroad will also have similar limitations on protections and be subjected to the local judicial bottlenecks.

Sixth, BITs signed prior to 2015 were asymmetric in the sense that they didn’t impose much obligations on foreign investors. Model BIT of 2016 partially addresses this asymmetry by requiring the investors to voluntarily adopt corporate social responsibility principles addressing issues like labour, environment, human rights, community relations and anti-corruption. However, the provision falls under the ‘best endeavour clause’, which means that they are not enforceable. Absence of mandatory obligations means that Government can’t press counter-claims on foreign investor on grounds that the investor has violated local law, human rights obligations, environmental obligations etc.

What corrective steps should be taken?

The Parliamentary Standing Committee on External Affairs had reviewed India’s Model BIT 2016 and BIT Agreements with other nations and submitted its report (‘India and Bilateral Investment Treaties’) in September 2021. It has made several noteworthy recommendations.

First, It recommended timely settlement of investment disputes through pre-arbitration consultation or negotiations.

Second, the Committee has observed that there is scope of improvement in the Model BIT (2016). New Model of BIT should: (a) Be suitably amended in light of new experience gained in disputes arising out of BITs; (b) Be reviewed continuously to ensure that it is balanced and comprehensive; (c) Incorporate best practices and provisions from BITs adopted by advanced countries after studying in detail the implementation and outcome of such treaties.

Third, New BITs should be drafted without any ambiguity, so as to avoid: (a) Overbroad interpretation by arbitrators and tribunals; (b) Investment disputes or claims against India; (c) The abuse of certain provisions by investors.

Fourth, The report calls for developing local expertise. It recommended developing panels of domestic lawyers (and law firms) with: (a) The requisite expertise in investment arbitration to represent India; (b) Experience in investment treaty law to ensure good drafting of BITs. It also recommended training government officials in the field of investment treaties, and promoting the New Delhi International Arbitration Centre as a world-class arbitration centre.

The UN Bodies have also made some recommendations in this regard.

First, The UNCITRAL Working Group III on ISDS (Investor-State Dispute Settlement) reforms has suggested that including binding investor obligations in the BITs would provide host Governments with a legal basis to raise counter-claims. This would remove the uncertainties and arbitral discretion.

Second, The UN Working Group on human rights, transnational corporations and other businesses, stresses the need to include binding and enforceable investor obligations concerning human rights and environment.

In addition, several other steps can be taken.

First, the Government should focus on reforming 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.

Second, The model BIT and the domestic legislation should be aligned to ensure a consistency in commitments as well as the dispute resolution processes.

Conclusion

The Government is in pursuit to make India a US$ 5 trillion economy by 2025 and a developed nation by 2047. Robust international trade and stable investments will be a vital factor in the success of this pursuit. The Government has pursued the negotiations of FTAs with a renewed vigour. This must be complemented by review and suitable corrections to the approach to Bilateral Investment Treaties (BITs). BITs remain a critical lever in attracting long term and consistent foreign investment. This will help in achieving multi-fold increase in trade and investments, paving way for rapid growth of the Indian economy.

Syllabus: GS II, Effect of policies and politics of developed and developing countries on India’s interests; Bilateral agreements involving India and/or affecting India’s interests; GS III, Indian Economy and issues related to growth;

Source: Indian Express, PRS, The Diplomat