Daily Editorial – Terminating Bilateral Investment Treaties: Right or Wrong

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• Terminating Bilateral Investment Treaties: Right or wrong

1. Issue

2. Bilateral Investment Treaty (BIT)

3. Why India is terminating BITs?

4. Effects of BIT termination

5. Criticisms of the decision

6. Model BIT

7. Conclusion

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Click here to Download Daily Editorial PDF (14th Dec. 2016)

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Issue

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• India’s Bilateral Investment Treaty (BIT)with Netherland has expired on November 30 due to termination of treaty unilaterally by India.
• India has also issued notices to around 50 countries to terminate BITs.
• Countries include about 20 European Union (EU) member countries.
• Subsequent to termination, India plans to launch new BIT negotiations with these 50-odd countries based on its 2015 model BIT.
  

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Bilateral Investment Treaty (BIT)

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A BIT is a treaty between two countries that sets out to provide certain basic protections to the investors of one state investing in another state.

It holds host states accountable for the exercise of their regulatory power through an independent international arbitration mechanism.

Most such treaties provide investors a guarantee of “fair and equitable treatment.

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Why India is terminating BITs?

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White Industries Case 

• In 2011, India faced it’sfirst adverse arbitral award arising out of a BIT against White Industries case.
• White Industries obtained an arbitral award in its favour in a contractual dispute with Coal India.
• For 10 years, this case remained pending first in High Court then in Supreme Court.
• In 2010, White Industries took the matter to arbitration on the grounds that the inordinate delay in Indian courts to enforce the arbitration award violates the India-Australia BIT.
• White Industries argued that the delay violated the provisions on fair and equitable treatment (FET), expropriation, MFN treatment, and free transfer of funds.
• The arbitral tribunal accepted the plea and India was forced to pay a huge price for the delays caused by its judicial system.
• Since then 17 investors have issued notices of arbitration against India, including Vodafone and Telenor.

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Effects of BIT termination

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Effects on existing foreign investments in India

• Most BITs signed by India contain survival clauses ensuring availability of treaty protection for existing investment even after the expiration of the treaty for the next 10 to 15 years.
• Hence Termination of BITs by India will not impact existing foreign investment in India.
• Termination of BITs will also not impact any of the 15-odd ongoing BIT disputes against India including Vodafone’s challenge of retrospective taxation under the India-Netherlands BIT.

Effectson incoming investments

• Termination of BIT means that the new investment coming from the countries shall not enjoy the trety protection.

Effects on India’s investment abroad

• India’s overseas FDI has increased from less than $1 billion in 2000-01 to more than $21 billion in 2015-16.
• BIT replacement will also reduce the protection available to Indian companies abroad.
• Many Indian investors have been benefitted due to BIT. There are many examples available for that.
• Examples
• An Indian investor, FlemingoDutyfree Shop Private Limited (FDF) won damages of €17.9 million in a case against Poland under the India-Poland BIT.
• An Indian mining company, Indian Metals & Ferro Alloys Ltd. (IMFA), has sued Indonesia under the India-Indonesia BIT.
• An Indian investor has sued Macedonia under the India-Macedonia BIT for the alleged expropriation of mining concessions awarded to the Indian investor.

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Criticisms of the decision

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• This decision shows that India is reluctant to be held accountable under any international laws.
• It will force investors to rely on the domestic laws and regulation for their grievances, which would create uncertainty in their minds regarding protection of their future investments.
• On the other hand foreign investors do not look at Indian judicial system as a forum for speedy resolution of disputes.
• India’s rank in World Bank’s ease of doing business is abysmal at 130 out of 190 nations, also does not inspire any confidence.

No Balanced approach

• Government has not adopted a balanced approach in dealing with the issues arising due to the BIT clauses.
• From 1994 to 2011, India signed 70-odd BITs tilted heavily in favour of investment protection against the host state’s regulatory power.
• While recent Indian model BIT tilts the balance towards the host state’s regulatory power
• It severely limits the substantive and procedural protection to foreign investment.

Challenges in negotiating new BITS

• India is planning to replace old BITs with the new model BIT.
• For example, With EU India hopes to replace the cluster of European BITs with the India-EU Bilateral Trade and Investment Agreement (BTIA).
• Considering 16 failed rounds of negotiations since 2007 and Brexit, future of this treaty doesn’t looks bright.

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Model BIT

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The revised model BIT will be used for re-negotiation of existing BITs and negotiation of future BITs.

Following are the important features:-

• “Enterprise” based definition of investment instead of more expansive ‘assets-based’ definition.
• The purpose of having an enterprise-based approach is to narrow the scope of protected investments and reduce the potential liability of the state under ISDS claims.
• protections against expropriation
• The model excludes matters such as government procurement, taxation, subsidies, compulsory licenses and national security to preserve the regulatory authority for the government
• Model BIT has excluded the provisions such as fair and equitable treatment clauses and Most-Favoured Nation clauses.
• A refined Investor State Dispute Settlement (ISDS) provision requiring investors to exhaust local remedies before commencing international arbitration
• Model limits the power of the tribunal to awarding monetary compensation alone.

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Conclusion

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• Considering India has substantial capital invested in other countries and the requirement of India for the foreign capital, a balanced approach is needed.
• A tilted approach would definitely have repercussions.
• India should amend the protectionist 2015 model BIT to strike a balance between interests of investors and that of the host state.
• India should negotiate all future BITs based on this balanced approach.