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Editorial Today – Bilateral Investment Treaty

What is Bilateral Investment Treaty (BIT) A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state.

What is International investment agreement (IIA) An International Investment Agreement (IIA) is a type of treaty between countries that addresses issues relevant to cross-border investments.

Difference between BIT and Preferential trade agreement Bilateral investment treaties deal primarily with the admission, treatment and protection of foreign investment.

Importance of BIT BIT increases the comfort level and boosts the confidence of investors.

Counter argument against BIT Investors are driven by important factors like market size, availability of skilled labour, infrastructure and quality of domestic governance institutions, and not so much by the existence of a BIT.

India’s BIT

Background The first BIT was signed by India on March 14, 1994.

Why existing Model BIT was revised Considerable socio-economic changes have taken place since 1993 when the Model text of BIT was first approved.

Features of India’s Revised Model BIT India’s revised model BIT has been formed taking into consideration arguments against BITs.

Criticism of India’s Revised Model BIT The 20th Law Commission of India in its 260th report recommended to the government amendments to many provisions in the draft model BIT.

India –US Bilateral Investment Treaty India and the U.S. started negotiating a BIT in 2009.

Some of the differences between in the BITs model of India and US Most Favoured Nation, Taxation and Compulsory Licensing.

Other Bottlenecks The issue of BIT negotiations cannot be quarantined from the larger economic issues between the two countries.

 

What is Bilateral Investment Treaty (BIT)

  • A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment (FDI).
  • Most BITs grant investments made by an investor of one Contracting State in the territory of the other a number of guarantees, which typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security.
  • The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration, often under the auspices of the ICSID (International Center for the Settlement of Investment Disputes), rather than suing the host State in its own courts. This process is called investor-state dispute settlement.
  • Influential capital exporting states usually negotiate BITs on the basis of their own “model” texts (such as the US model BIT).
  • It is a type of International investment agreement (IIA)

 

What is International investment agreement (IIA)

  • An International Investment Agreement (IIA) is a type of treaty between countries that addresses issues relevant to cross-border investments, usually for the purpose of protection, promotion and liberalization of such investments.
  • Most IIAs cover foreign direct investment (FDI) and portfolio investment, but some exclude the latter.
  • Countries concluding IIAs commit themselves to adhere to specific standards on the treatment of foreign investments within their territory.
  •  IIAs further define procedures for the resolution of disputes should these commitments not be met.
  • The most common types of IIAs are Bilateral Investment Treaties (BITs) and Preferential Trade and Investment Agreements (PTIAs).
  •  International Taxation Agreements and Double Taxation Treaties (DTTs) are also considered as IIAs, as taxation commonly has an important impact on foreign investment.

 

Difference between BIT and Preferential trade agreement

  • Bilateral investment treaties deal primarily with the admission, treatment and protection of foreign investment. They usually cover investments by enterprises or individuals of one country in the territory of its treaty partner.
  • Preferential Trade and Investment Agreements are treaties among countries on cooperation in economic and trade areas. Usually they cover a broader set of issues and are concluded at bilateral or regional levels.
  •  In order to classify as IIAs, PTIAs must include, among other content, specific provisions on foreign investment.

 

Importance of BIT

  • A BIT increases the comfort level and boosts the confidence of investors by assuring a level playing field and non-discrimination in all matters while providing for an independent forum for dispute settlement by arbitration.

 

Counter argument against BIT

  • Until recently, it was simply assumed that the investor protection regime enshrined in BITs would lead to increased foreign investment and that foreign investment, in turn, would produce economic development benefits in both the host and home countries. Yet, within the past decade, several empirical studies have raised doubts about the accuracy of that assumption; investors are driven by important factors like market size, availability of skilled labour, infrastructure and quality of domestic governance institutions, and not so much by the existence of a BIT. Moreover, it is now clear that not all investment leads to development. So the underlying promise of BITs has not been realised.
  • Second, the costs of BITs are becoming harder to ignore. An increasing number of disputes have been brought against states to challenge good-faith measures taken in the public interest, such as anti-tobacco legislation, phase-out of nuclear power, environmental regulations, restrictions on development of hazardous waste facilities, domestic decisions regarding the scope of intellectual property rights, and efforts to regulate tariffs for electricity and water in concessions operated by private investors. These disputes are costly to litigate and even more costly to lose, and threaten states’ ability to regulate in the public interest.
  • In recent years, countries such as Bolivia, South Africa and Indonesia have either stopped signing new treaties or have announced their intention to withdraw from existing treaties.
  •   Australia, view the regime with scepticism and are reluctant to sign treaties with investor-state dispute settlement (ISDS) mechanisms.
  • In a major shift in policy, Germany, which had been one the earliest proponents of the investment treaty system (World’s first BIT was signed on November 25, 1959 between Pakistan and Germany), now opposes the inclusion of ISDS in the investment chapter of the Transatlantic Trade and Investment Partnership (TTIP) with the United States.
  • Leading economists have similarly raised concerns about the potential impact of traditional BITs on governments’ ability to regulate in the public interest.

 

India’s BIT

 

Background

  • The first BIT was signed by India on March 14, 1994. Since then, till date, the Government of India has signed BITs with 83 countries. These BITs were largely negotiated on the basis of the Indian Model BIT of 1993.
  • The Union Cabinet had given its approval for the revised Model Text for the Indian Bilateral Investment Treaty in December 2015. The revised Indian model text for Bilateral Investment Treaty (BIT) will replace the existing Indian Model BIT.  The revised model BIT will be used for re-negotiation of existing BITs and negotiation of future BITs and investment chapters in Comprehensive Economic Cooperation Agreements (CECAs)/ Comprehensive Economic Partnership Agreements (CEPAs) / Free Trade Agreements (FTAs).

 

Why existing Model BIT was revised

  • Considerable socio-economic changes have taken place since 1993 when the Model text of BIT was first approved.
  •  The nature of government regulation concerning foreign investment has evolved.
  • A wide variety of laws now regulate investments both at the central and the state levels.
  • During the last few years, significant changes have occurred globally regarding BITs, in general, and investor-state dispute resolution mechanism in particular.
  • Moreover India adopted a new model BIT in 2015 as a reaction to foreign corporations suing the country under different BITs, and perhaps with the objective to immunise itself from claims of foreign corporations under international law.

 

Features of India’s Revised Model BIT

  • India’s revised model BIT has been formed taking into consideration arguments against BITs.
  • The new model clarifies that it only covers investments that have a physical presence and substantial business activities in the territory of the host state. This means that the investments represent long-term commitments of capital and resources to the local economy and can facilitate crucial transfers of technology. These types of beneficial investment are still afforded guarantees of fair treatment, protections against discrimination, expropriation and a right to freely transfer returns on investments.
  •  Moreover, they get the significant benefit of ISDS — but not before pursuing prior remedies before domestic courts, endorsing the customary rule applicable in other international regimes that a violation of international law can only be found after there has been an exhaustion of domestic remedies.
  • India’s new model BIT makes clear that its goal is to accomplish more than mere investor protection. Recent trends suggest that governments are wisely transforming BITs into tools of good governance with carefully calibrated rights and obligations.

 

Criticism of India’s Revised Model BIT

  • It has failed to balance the protection of foreign investment with India’s right to regulate and was diametrically opposed to the government’s pet projects to woo foreign investors, such as ‘Make in India’ and ‘Digital India’. The 20th Law Commission of India in its 260th report recommended to the government amendments to many provisions in the draft model BIT.
  • The draft model BIT provided that the issuance of compulsory licenses (CLs) would be outside the ambit of the treaty, if such issuances were consistent with domestic law, such as for a patented drug. However, in the final model BIT the issuance of CLs will be outside the treaty’s ambit only if such an issuance is consistent with the WTO treaty. To better understand the difference, let us look at a possible situation where a foreign pharmaceutical company challenges the issuance of CLs by India, which has been upheld by the Indian courts, before a BIT tribunal. Under the draft model BIT, the tribunal would give deference to the decision of the Indian courts as they are better placed to judge issues of compliance with domestic law. However, under the final model BIT, the tribunal will have the jurisdiction to examine whether the CL has been issued in accordance with the WTO’s agreement on trade related aspects of intellectual property rights. The tribunal will be less deferential to Indian courts since the issue would need to be resolved in compliance with international law and not Indian law. Apart from concerns over whether investment tribunals have the capacity to judge such questions, this will unnecessarily expose India’s patent laws to international judicial scrutiny.
  • The final model BIT retains certain things from the draft model such as excluding taxation from the purview of the treaty. The exclusion of taxation is a direct outcome of companies like Vodafone challenging retrospective taxation laws before BIT tribunals. Perhaps such a strong reaction was unnecessary because, as the Law Commission’s report observed, BIT tribunals give adequate deference to countries on matters related to taxation unless the tax measures are confiscatory, discriminatory or arbitrary.
  • The model BIT, like the draft version, does not have the most favoured nation (MFN) provision — a cornerstone of non-discrimination in international economic relations. The absence of the MFN provision is a direct consequence of India losing the dispute to White Industries, an Australian company, in 2011. White Industries used the MFN provision to import a beneficial provision from the India-Kuwait BIT into the India-Australia BIT. The use of the MFN provision by foreign investors for such purposes has been questioned. However, not having the MFN provision in the BIT is a disproportionate reaction. As the Law Commission had suggested, the objective to disallow treaty shopping can be achieved by restricting the MFN’s applicability to actual cases of discrimination in application of domestic measures. But excluding it entirely could send negative signals to foreign investors.
  • Foreign investors have to exhaust local remedies before proceeding for international arbitration. This might not be a very attractive proposition for foreign investors because, as the 245th report of the Law Commission pointed out, the Indian judicial system is overstretched with a humongous backlog of cases.

 

India –US Bilateral Investment Treaty

  • When Prime Minister will visit the U.S. in June 2016, one of his high-agenda items will be the bilateral investment treaty (BIT) between the two countries.
  • India and the U.S. started negotiating a BIT in 2009. However, these negotiations lost steam because both countries were busy updating their model BITs.
  • A balanced BIT that protects foreign investment without unduly compromising the host state’s right to regulate will benefit both India and the U.S. However, there is a yawning gap between the two sides on core foreign investment protection standards, as reflected in their respective model BITs, which makes BIT negotiations really difficult.

 

Some of the differences between in the BITs model of India and US

  • First, the U.S. model BIT contains a Most Favoured Nation (MFN) provision — a cornerstone of non-discrimination in international economic relations — which is missing in the Indian model. It will be very difficult for India to convince the U.S. to have a BIT without a MFN provision. From the U.S.’s perspective, this would mean that American businesses would have no remedy under international law, if the latter were discriminated against in India. The same argument would apply for Indian investment in the U.S.
  • Second, the Indian model completely excludes taxation from the purview of the BIT — a direct response to Vodafone and Cairn Energy bringing BIT claims against India for imposing taxes retrospectively. However, in the U.S. model, foreign investors can assert claims that taxation measures, such as confiscatory taxation, involve an expropriation of foreign investment. Given India’s recent record in administering its taxation laws that has made foreign investors jittery, it will be quite difficult for it to convince the U.S. to agree to completely exclude taxation from the BIT.
  • Third, the Indian model completely excludes issuance of compulsory licenses (CLs) and revocation of intellectual property rights (IPR) from its purview. On the other hand, the U.S. model BIT excludes issuance of CLs and revocation of IPR only from the purview of the expropriation provision.

(Expropriation is the act of taking of privately owned property by a government to be used for the benefit of the public.)

 In other words, while the foreign companies, including pharmaceutical companies, cannot challenge issuance of CLs and revocation of IPR as expropriation, they can surely challenge it as violation of other BIT provisions such as fair and equitable treatment (FET) — a pretty stretchable investment protection provision that has often been abused by foreign corporations. Complete exclusion of issuance of CLs and revocation of IPR from the purview of the BIT might not be acceptable to the U.S. for two reasons: first, it would not allow U.S. companies to sue India directly for issuance of CLs or revocation of IPR; second, the U.S. continues to place India, along with China and Russia, on a ‘priority watch list’ for IPR violations, and thus would not like to foreclose opportunities for challenging India’s IP laws internationally.

 (To Understand ‘Priority watch list’ read Editorial Today #18 – Trade Facilitation Act and Its Impact)

  • Fourth, the major difference between the two models is on the issue of investor state dispute settlement (ISDS) provisions. The Indian model BIT, unlike the U.S. model, mandatorily requires foreign investors to litigate in domestic courts for five years before pursuing a claim under international law. This is not at all an attractive proposition for U.S. companies in India because of the overstretched Indian judicial system where more than three crore cases are pending.

 

Other Bottlenecks

  • The issue of BIT negotiations cannot be quarantined from the larger economic issues between the two countries, especially the trade battle at the World Trade Organisation.
  • The U.S. continues to accuse India for stalling the trade talks at WTO, which India vehemently counters.
  • Also, India and the U.S. have been involved in a spate of trade disputes at the WTO. In 2015, India lost the case on ban of poultry imports to the U.S. at the WTO. Currently, India and the U.S. are holding consultations at the WTO to resolve India’s complaint over increased visa fees by the U.S. This comes immediately after India lost the solar panel case to the U.S. in the WTO.
  • This, in turn, perhaps prompted the government to inform Parliament that India plans to file as many as 16 disputes against the U.S. in the WTO challenging the U.S.’s renewable energy programmes.
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  • Ajit Kumar Singh

    Really very superb effort … enlightened the knowledge perspective …

  • MOHNISH DIGRA

    Great article