Bilateral investment Treaties(BITs) are agreements between two countries for the reciprocal promotion and protection of investments in each other’s country by individuals and companies situated in either of the country. These bilateral agreements provide treaty-based protection to foreign investment to protect the investment by each country’s investors in the other country. The agreements are signed by governments; however, the beneficiaries are business entities. India has signed more than 80 BITs with other countries to increase investment including creation of employment, investor friendly environment etc. in the country.
In recent years, India has been involved in several disputes with foreign investors in which the investors have invoked the provisions of the Investor State Dispute Settlement (ISDS) mechanism included in the BITs to bring India before the private arbitration panels. India was one of the most sued countries in 2015 due to certain deficiencies in the agreements. Main reason for bringing the Model BIT was the increase of litigations by foreign firms. India during 2015-16 was one of the most sued country in the world. In this regard, the government has modified the existing BIT framework and brought out the 2016 Model BIT. The new Model BIT became effective from April 2017 onwards, replacing the earlier framework. As a result of adoption of the new model framework, the new treaties will be signed under the revised guidelines and negotiations and old treaties need to be re-negotiated with the partner countries.
In the 90s, the BITs were initiated by the Government of India. The reason was to offer favorable conditions and treaty-based protection to the foreign investors and investments. For example, the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) provides for exemption on import duties for investment in infrastructure sector, which would eventually attract the investors from abroad to invest in the growing economy of India with enhanced securities against adverse changes, thus promoting investment inflow. Though it is difficult to quantify the benefits of BITs, it invariably results in increased investments inflows, encourages transfer of technology and modern management skills. A look at various BITs to which India is a party will make it clear that each BIT is quite different from the other in its own way although there are many common characters present. These common characters are in form of specific rights. The basic premise is that the government will not put the investors and their investments to risks which are either unreasonable or inappropriate. One of the most noticeable features of the Indian BITs is that it does not give ‘a right to make investments’ in India. All rights, under the BITs to which India is a party, can be exercised only after making investments in India. However, this issue can be debated considering of Model BIT of India, which promises to provide favorable conditions to make investment in India. It is important to note that the Indian government retains the freedom to determine which sectors are open to foreign investments and under what terms and conditions can those investments be made. It is of utmost importance to note that the investments made in India must be established or acquired in accordance with the national laws of India.
Problems with the old BITs
The main problems of the old BITs that led to the initiation of ISDS by different companies. Recently, in two cases, the White Industries and Devas Multimedia have won arbitration
against India, flooding of other arbitrations including that of the Sistema, Vodafone, Children Investment Fund etc. have highlighted the serious problems with the old BIT framework. The important problems in the old BIT framework are given below:
Definition of Investment- Broad definition of investment had been included in the BITs which usually cover “every kind of asset” and other non-exhaustive list of covered assets. This led to the expansionist interpretation of the investment by the Arbitration tribunals.
National Treatment and Most Favoured Nation
National treatment (NT) and MFN guarantee the investment and the investor from a Contracting Party a treatment that is not less favourable than what is given to the host country’s own investment and to investors from any third country. It is very important to clearly define the scope of these terms because often MFN is used to import more favourable provisions. the MFN clause was meant to make sure that, for example, US investors in India are not discriminated as against, say, Chinese investors in India. But it has often been put to use to achieve other ends.
Expropriation
Expropriation of investment which is often equated with nationalisation is a major issue in the investment context. The clarity in this regard is also required. to exclude from its purview results consequent to any legislation passed by a state or national legislature as well as of the orders resulting from a judicial process.
Investor State Dispute Settlement
The investor state dispute settlement mechanism in the investment treaties provides investors the facility to drag sovereign States to international arbitration process. Even worse are the scenarios where sovereign States are held liable for disputes on commercial agreements between firms. The verdict of the UNCITRAL Tribunal on the dispute brought by White Industries has been an embarrassment for the Government of India. Not only was the Government of India brought into the dispute over commercial engagement between White Industries based in Australia and Coal India Ltd. but India was also held liable to White Industries. This case also brings out yet another aspect of investment treaty that foreign investors are well equipped to bypass even the highest courts of the country. In the Devas dispute, the government cancelled an awarded contract, when irregularities were found. The investor sued the government and won.
Loss of taxpayers’ money
ISDS has shown that host States have very limited role for promotion of public good and any penalty may lead to the loss of taxpayer’s money.
Vague language, law creation through adjudication by tribunals, partiality with developing countries etc. will be address through the new model framework.
New Model BIT
The new model BIT 2016, addressed the above problems of the old BIT framework as well as included other provisions so that country can benefit from such treaties and agreements. The
government may be able to insist on the provisions of the model treaty with some states but perhaps not with all states due to various reasons. In any event, the model treaty is not an absolute document. It may ultimately depend on the bargaining power of the other state, and whether it is capital importing or capital exporting. The important features are mentioned below.
• Enterprise based definition of investment instead of asset-based definition- The Model has adopted an ‘enterprise-based’ definition of investment that under which investment is treated as the one made by an enterprise incorporated in the host state. Under the earlier ‘asset-based definition’ of investment included intellectual property and other assets that whereas these assets are not considered as assets under the new definition. The objective of adopting enterprise-based approach is to narrow the scope of protected investments and reduce the potential liability of the state under Investor-state dispute settlement (ISDS) claims. Asset based definition considers every kind of asset – both movable and immovable as investment and gives protection under treaties, though their contribution to national economic development is meagre.
• Exclusion of MFN treatment- The most important feature of the amended model is that it dropped the Most Favoured Nation (MFN) status previously included. Purpose of the MFN clause for the investors angel is to ensure that a say, a US investor is not discriminated compared to say, a Japanese investor. In recent years, complaining foreign investors sued India arguing that they have to get the same beneficial treatment given to companies from other countries. This was happened in the case of White Industries. The Australian firm has highlighted the MFN status provided under the India-Kuwait BIT to claim compensation from the government and won an international arbitration. The White Industries case is pointed as the main factor that produced the deletion of the MFN clause.
• Full Protection and Security: In the context of the Model, FPS means obligations only relating to physical security of investors and to investments.
• State government as stake holders: Actions of the state Governments are included under the Model BIT.
• Fair and equitable treatment – The Model BIT links Fair and Equitable Treatment to international laws. This is aimed to counter a broad interpretation and risk misuse. Here, customary international law, which is built in state practice, gives a minimum standard of protection to investors. Any potential violation listed in the provisions of denial of justice, breach of due process etc, requires a violation of customary international law for a claim to be justified. When the Model BIT linked FET to international law, it gives more scope for government and regulators.
• Expropriation- Expropriation means nationalization of assets of foreign companies. As in other BITs, the Model BIT provides that the State cannot nationalise or expropriate an Investment or take measures equivalent to expropriation, except “for reasons of public purpose” in accordance with the procedure established by law and on payment of adequate compensation. But it gives certain exemptions. Here, the Model BIT says
that, any measure by a judicial body aiming to protect public interest will be outside the purview of expropriation. Similarly, non-discriminatory regulatory measures were also excluded.
• Non-Discriminatory treatment-The new Model BIT includes a new clause on non- discriminatory treatment for compensation of losses. Investors can avail non- discriminatory just compensation in circumstances like armed conflict, natural disasters and in the state of national emergency.
• Provision for transparency- The Model BIT incorporates a clause for transparency, requiring the Parties (government and regulators) to ensure that all the laws, regulations, procedures and administrative rulings regarding matters covered in the BIT are published or are available for interested persons to get acquainted with them. The clause thus ensures clarity of laws and policies for the investors.
• Corporate Social Responsibility- The Model BIT mandates foreign investors to voluntarily adopt internationally recognized standards of corporate social responsibility in the country.
• Conditions for initiating arbitrations – The Model BIT stipulate that the aggrieved investor should use all local remedies as well as negotiations and consultations initiating arbitrations against the host State. Investor can use outside remedies only five years after resorting to all domestic arrangements.
Impact of the new Model BIT
Citizens must demand for transparency on why and how much the government pays to aggrieved investors. The likely impacts are give below:
• Better negotiation- Since countries use model BITs as templates for negotiations, a successful negotiation will generally be one that deviates as little as possible from a proposed model, the textual consistency of a countries’ BIT is a good indicator of how successful a country is in its BIT negotiations, he added.
• Investment- good bargaining position and investors do want to invest in the country.
• Jurisdiction of Courts/Government: rewriting the rules of the global trading architecture.
• Sustainable Development- In the preamble, the Model BIT 2015 seeks to align the objectives of investment with sustainable development and inclusive growth of the parties. Further the Model BIT ensures that investments are in compliance with local laws and enhance their contribution to inclusive growth and sustainable development.
• Judicial Independence- India is taking a more protectionist stand under the new Model BIT by providing for excluded areas.80 Further, an arbitration tribunal is not given powers to re-examine any judicial decisions. It also contains expansive
provisions to make the ISDS more transparent and accountable as good governance initiatives. To ensure arbitrators are impartial and free of any conflict of interest, detailed disclosure norms and codes of conduct for arbitrators have been introduced. Retaining the ISDS system demonstrates a continued commitment to settle disputes in accordance with international law. Attempts have been made to strike a balance between the costs and benefits of ISDS. From an Indian perspective, investments treaties are not just instruments of investor protection, but also a valid tool promoting sustainable development goals, ensuring transparency in corporate dealings and preventing unethical business practices
• Investor and Home State Obligations
The Model BIT indicates a change in course on the part of the Government. After delineating India’s duty to protect investors and their investments, India’s model text also places responsibilities on both investors and their home states to ensure responsible corporate conduct and inclusive and sustainable growth in its territory. The Model BIT requires foreign investors to contribute to the development of the host country and to operate by recognizing the rights, traditions and customs of local communities in order to obtain treaty benefits. Investors are also required to make long-term commitments, hire local employees, avoid corruption, be transparent about financial transactions and governance mechanisms, and comply with host country taxation policies. Signatory home states are required to act against investors found to be violating Indian laws. Host countries could initiate counterclaims in international arbitration for any violations of obligations on foreign investors. This is a mechanism to promote sustainable development using IIAs. It is accepted that host States could bring sustainability through direct regulations and investor obligations.
Conclusion
The model framework will balance protection to the investors vis a vis regulatory space for the governments. Further, provisions in the new model are more precise and this will reduce arbitral discretion. The new model has provided the framework for new negotiations with trading partners. The new model will also protect Indian companies which invest in developed as well as developing countries. Further, the new model will provide rule based, predictable and non-discriminatory environment to the investor in India as well as Indian Investors in other countries. The impact of the new BIT model will be seen in the future; however, Indian Government is also engaging the investors through multilateral bodies so that the objective of investment in the country may be fulfilled by the stakeholders.