1. Column: A BIT of an overreaction

Column: A BIT of an overreaction

The new model fails to understand the role of BITs in attracting foreign investment, the base of Make in India.

By: | Updated: April 4, 2015 12:54 AM

Finally, the central government has put the draft text of India’s new model Bilateral Investment Treaty (BIT) in the public domain for comments. BITs impose restrictions, under international law, on exercise of arbitrary state action to protect foreign investment. Globally, concerns have been expressed that current formulation of these treaties provides extensive protection to foreign investment at the cost of the host state’s right to regulate. This concern is buttressed by the fact that close to 500 BIT claims have been brought by foreign investors challenging a wide array of regulatory measures of different countries (developed and developing). All this necessitated a review of the existing BITs in order to re-balance them. India decided to revisit her BIT practice and develop a new model BIT after many foreign corporations like Vodafone, Nokia and Deutsche Telekom sued it under different BITs. One expected that new model BIT would mark the dawn of a new era where Indian BIT practice will re-balance protection of foreign investment with host state’s right to regulate, which is missing in India’s existing BIT practice. However, this expectation has been dashed. India’s new model BIT, far from striking this critical balance, is a knee-jerk reaction to foreign corporations suing India under BITs. India’s guiding philosophy behind the new model BIT appears to be completely immunising her from BIT claims. Let us look at some of the provisions to substantiate this point.

First, the new model BIT adopts an ‘enterprise’ based definition of investment. Thus, only enterprises constituted in India that have real and substantial business operations in India can bring BIT claims. This means that entire foreign portfolio investment is outside the ambit of the BIT no matter how significant this investment might be for the Indian economy. Further, for an enterprise to have real and substantial business operations in India it should engage a ‘substantial number of employees’ – a phrase that is not defined. Consequently, foreign corporations, even if constituted in India, who only have a few hundred employees, will be denied treaty protection notwithstanding the fact that this investment may have made substantial contribution such as bringing new technology. Since these investors will have no rights under international law, in case of regulatory disputes, will be forced to fight exceedingly frustrating long legal battles in local courts.

Second, the new model BIT does not contain the MFN provision, which is a core non-discrimination principle in international economic relations. Perhaps, the idea is to stop ‘treaty shopping’ by foreign investors. However, the objective to disallow treaty shopping can be achieved by restricting MFN’s applicability to actual cases of discrimination in application of domestic measures. Why throw the baby out with the bath water?

Third, the provision on expropriation recognises that host state can expropriate investment indirectly. However, proving this requires not just permanent and complete deprivation of the value of foreign investment but also transfer of this value to the expropriating country or its agency. In other words, even if state arbitrarily revokes, say a license given to a foreign investor, resulting in complete deprivation of the value of foreign investment, it will not be a case of regulatory expropriation unless this value of investment has been appropriated by the state. This will make it almost impossible to prove indirect expropriation because most such expropriations are not accompanied by the value of investment being transferred to the expropriating state.

Fourth, the model allows BIT arbitration only after local remedies have been exhausted. While this position is supported by customary international law, it is not an attractive proposition for foreign investors. Indian judicial system is overstretched with humongous backlog of cases and, thus, does not inspire much confidence in foreign investors as a forum for speedy-resolution of disputes.

Fifth, the model BIT provides an exhaustive general exceptions clause that allows host state to deviate from the obligation of protecting foreign investment in order to meet other compelling public policy objectives such as public health. While the inclusion of such general exception clause is a good step, the model BIT has made this provision ‘self-judging’, which is quite bizarre. Thus, arbitral tribunal will not be able to undertake full review of any such regulatory measure, which could result in misuse of this provision by host state.

There are other provisions, which further substantiate the ‘immuniation’ argument such as excluding taxation measures (even if unreasonable and arbitrary) and subsidies granted by state (even if for protectionist purposes) from the ambit of BIT. Also, regional or local government measures are outside the ambit of national treatment provision. Thus, foreign investor cannot complain about a state government’s regulatory measure favouring local investment, under the BIT, even if it is for protectionist purposes. In all likelihood, India’s treaty partners (existing and future partners like the US) will reject this model BIT. The new model represents a comprehensive failure to understand the role of BITs in the overall quest of attracting foreign investment, which is at heart of government’s high-octane ‘Make in India’ programme. One concedes that the role of BITs in attracting foreign investment should not be exaggerated. Nevertheless, BITs act as a ‘signalling device’ to foreign investors about congenial investment environment. This is more so for a country like India, which is ranked abysmally low at 142, out of 189 economies, in the World Bank’s index of ease of doing business. Also, it has been conveniently forgotten that the same unworkable BIT will be (unsuccessfully) relied by Indian companies to safeguard their investment when subjected to arbitrary state action overseas.

The author teaches international minvestment law at the South Asian University, New Delhi.

E-mail: pranjan1278@gmail.com

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