Protecting foreign investment

Updated: Aug 27 2013, 08:41am hrs
Abhinav Goel

Finance minister P Chidambaram recently approved the creation of a permanent group of secretaries to renegotiate Indias 82 bilateral investment protection agreements (BIPAs). This opportunity should be used not only to update and tighten Indias BIPAs but also to rethink Indias stance on the ICSID convention. Signing onto ICSID, as has been done by Pakistan and China, will go a long way in protecting the investments of Indian multinationals in other countries and steer foreign investment to Indias lagging infrastructure and utility sectors.

The Convention on the Settlement of Investment Disputes between States and Nationals of other States, commonly known as the ICSID Convention, is a multilateral treaty entered into force in October 1966. The treaty aims at encouraging investment in emerging economies and mitigating political and country-specific risks to foreign investments by providing a dispute resolution institution called ICSIDthe International Centre for Settlement of Investment Disputes. Located in Washington DC, the centre facilitates arbitration and conciliation proceedings, and allows countries and foreign investors to resolve their disputes under the auspices of independent arbitrators and mediators. These arbitrators and mediators are expert professors, judges and lawyers in the field of international investment law, and thus can be relied upon for quick, neutral and just resolution of investor-state disputes.

The carrot for investors is that under Article 54 of the convention, all ICSID contracting member states, whether or not they are parties to a given dispute, are required to recognise and enforce ICSID arbitral awards as if they were a final judgment of a court in that state. And since the Convention was adopted under the aegis of the World Bank, the relationship between ICSID and World Bank weighs heavily in voluntary enforcement of these awards by member statesparticularly for countries that continue to need support from the World Bank group. ICSID convention also provides for mechanisms to annul an award rendered by its tribunala procedure absent in forums where Indias current investor-state disputes are resolved. Under Article 52 of the convention, these proceedings go before an ad hoc committee which considers various grounds of annulment such as improper constitution of tribunal, manifest excess of tribunals powers, corruption on the part of a tribunal member, serious departure from a fundamental rule of procedure, and failure to state the reasons on which the award is based. Thus, on one hand foreign investors are assured of an independent non-state expert to arbitrate over their disputes, and on the other a state is assured of increases in foreign investment and recourse to annulment if it wishes to challenge the award.

The idea has worked. While only 20 countries first signed the treaty, today the number stands at a staggering 158. Most of Indias neighbours are in this group of 158 countries and have ratified the convention more than a decade agoPakistan (1966), Sri Lanka (1967), Nepal (1969), Bangladesh (1980) and China (1993). These countries have seen tremendous investments into their infrastructure and utility projectsfrom toll roads and power generation plants to water purification plantsafter signing on to ICSID. Indeed, one of the conditions of ICSID tribunals jurisdiction is the contribution to the economic development of the host state of the investment. The pioneer of this approach, the tribunal in Salini v Morocco, even found that the two criteria for an investment to contribute to economic development of a country include: first, the investment should be beneficial to public interest, and second there should be transfer of know-how from the investor to the host state.

With such positive effects, Indias recalcitrance in ratifying the ICSID is unfounded. ICSID convention will not only usher tremendous foreign investment into the country but will also bastion the strength of Indian multinationals investing in other countries. To put this in perspective, overseas direct investment by Indian companies increased by 179% to $3.30 billion in January 2013, as against $1.18 billion last year. Whether it is Tata Groups acquisition of UKs Corus in 2006, Bharti Airtels acquisition of Zain Africa in 2010, Hindalcos acquisition of Novelis in 2007, or ONGCs acquisition of Kazakhstans Kashagan oilfield in 2012, Indian companies are continuously expanding outside India. India needs to protect these domestic investors by promoting quick resolution of their disputes with foreign governments. Crucially, all these countries where Indian companies have invested are already members of ICSID. But these investors cannot be fully protected under the convention unless their parent country, India, is also a signatory to the convention.

As India renegotiates its 82 BIPAs, it should not miss this golden opportunity to increase foreign investment and spur its growth. A few Latin American nations are backing out of ICSID after the recent economic crisis because they have not been able to pay up ICSID awards after expropriating foreign investments. But this gives India all the more reason to set foot on this train and steer foreign investment from Latin America to itself. This will be classic win-win situation for bothIndias investors and its decrepit infrastructure and utility sector.

The author is a Juris Doctorate honours graduate of the George Washington University Law School. He may be reached at [email protected]