Ministries for scrapping of bilateral investment pacts

Written by Arun S | New Delhi | Updated: Jul 14 2014, 06:31am hrs
The commerce and industry ministry, backed by the ministries of coal and telecom, has categorically stated that the government must invoke the sunset clause in all the 83 Bilateral Investment Promotion and Protection Agreements (BIPPA) with other countries and unilaterally exit from them. This is in the context of MNCs suing India for alleged violations of these treaties, in what is felt are instances of treaty shopping.

Of the 83 BIPPAs signed with partner countries, 72 have been enforced.

These wings of the Centre have suggested that all future BIPPAs, Bilateral Investment Treaties (BITs) and the investment clauses in Comprehensive Economic Cooperation / Partnership Agreements

(CECAs/CEPAs) should only be focused on

investment promotion, official sources told FE.

They cited the examples of South Africa and Indonesia seeking to terminate these treaties on finding them against their domestic interests.

Given the current thrust on investment promotion and protection in BIPPAs, foreign investors can sue the government for alleged violations of the pacts, push for settlement under international arbitration and conciliation norms (and not just under a domestic forum), and seek compensation for losses suffered by them.

Since these private investors are multinationals they resort to treaty shopping, where they cherry-pick the treaty that suits them most to ensure they win compensation for any loss incurred, the sources added. This, in turn, impinges upon the policy space available to the government to not only regulate but also challenge the nature of some of the investments made as well as impose certain performance obligations on foreign companies, sources said.

They added that the department of industrial policy and promotion has circulated a note on the perils of such BIPPAs, BITs and CEPAs/CECAs to all ministries.

This development comes even as the government has put on hold all further BIPPAs and is reviewing the BIPPA Model Text after it got several arbitration / dispute notices where private investors have issued notices to the government citing the BIPPAs.

However, in the case of all the BIPPAs in force, it is not so easy to walk away. The current Model Text says once entered into, the BIPPA will be in force for 10 years and thereafter it shall be deemed to have been automatically extended unless either country gives the partner country a written notice of its intention to terminate the agreement.

The agreement then will be terminated only one year from the date of receipt of such a written notice. Also, notwithstanding the termination, the agreement will continue to be effective for a further period of 15 years from the date of its termination in respect of investments made or acquired before the date of termination.

In such cases, the government will have to live with the disputes and find ways to settle them quickly, an official said.

Of the nine notices issued by foreign investors invoking different BIPPAs, seven (by Devas, Deutsche Telekom, Vodafone, Sistema, Khaitan Holdings, Axiata and Tenoch Holdings) pertain to the telecom sector and two (White Industries and Childrens Investment Fund) to the coal sector. The applicable BIPPAs include those with Australia, Mauritius, Germany, the Netherlands, Russia, Malaysia and Cyprus.

The Department of Economic Affairs, the sources said, is instead batting for review and renegotiation of the 83 BIPPAs, besides BITs and the investment clauses in CECAs/CEPAs. However, commerce and industry ministry sources said this process would take an inordinately long time to complete and was therefore not practical. The review of the BIPPA Model Text as well as preparing a roadmap to renegotiate existing BIPPAs, BITs, CECAs/CEPAs is being separately done by a standing committee of secretaries led by the Cabinet Secretary and a working group. A Cabinet note is also being prepared.

The three ministries have pointed out reports of countries such as South Africa and Indonesia pursuing their plans to terminate several of their BITs, and some other countries such as Bolivia and Ecuador considering similar moves.

The sources said foreign investment inflows have happened, including in India, irrespective of BIPPAs. For greater investment inflows, it is better to have stronger macro-economic indicators, availability of power, world-class infrastructure, easier land and labour laws and an impressive ranking in the ease of doing business index of the World Bank.

They also pointed out that no study has shown a linkage between increasing foreign investment and the signing of BIPPAs, adding that such agreements are mostly being pushed by capital exporting countries at the behest of big companies based there to the detriment of the developing and poor countries.