The recent signing of the India-Japan Comprehensive Economic Partnership Agreement (CEPA) was followed by the usual euphoria that characterises the conclusion of such treaties by India. Economists and industry chambers have presented impressive numbers on gains to India from the treaty, such as greater FDI flows from Japan and a boost in bilateral trade to $25 bn. But such agreements are not just about the quantum of trade and investment flows. They put certain restrictions on India?s regulatory power. The seriousness of the impact of such treaties on regulatory power can only be determined through rigorous legal scrutiny. Yet, the lack of enough international economic lawyers in India and the overdependence on economists in dealing with international economic treaties has meant that rigorous legal analysis of such treaties is usually not undertaken.

This article makes a legal analysis of the investment chapter in the India-Japan CEPA. The investment chapter contains a most-favoured nation (MFN) provision, according to which investors and their investments shall be accorded treatment no less favourable than accorded, in like circumstances, to investors and their investments of any other country. Also, the investment chapter provides other guarantees to foreign investors, like the right to national treatment, protection from direct and regulatory expropriation; right to be treated fairly, right to transfer funds related to investment and, most importantly, right to bring disputes against India?s sovereign regulatory actions. Indian investments shall enjoy these rights in Japan.

The investment chapter recognises exceptions to these rights to allow enough regulatory space to pursue policies in public interest. These exceptions are more comprehensive than the exceptions found in India?s Bilateral Investment Promotion Agreements (BIPAs). Thus, the treaty recognises that India can deviate from the MFN provision in adopting certain measures for certain sectors listed in the treaty. Further, the treaty keeps government procurement outside the ambit of the MFN provision.

Despite these useful exceptions, in the event of a dispute between a Japanese investor and India on an important public regulatory measure, the MFN provision could be interpreted in a manner that will result in sidetracking provisions defending regulatory power. This is because, first, there is nothing in the treaty that states that the MFN provision cannot be used to import beneficial provisions from other treaties. Second, the MFN provision in other investment treaties, globally, has been interpreted in an expansive manner.

To illustrate, Article 87 of CEPA provides that foreign investors shall be provided fair and equitable treatment (FET). But, over the years, investor-state arbitration tribunals have interpreted FET provisions expansively, resulting in a variety of measures of host countries ending up as violations of the investment treaty. Argentina?s emergency laws adopted in early 2000 in order to protect it from a serious economic crisis were held as a violation of the FET provision of the US-Argentina investment treaty. To limit the otherwise broad ambit of the FET provision, Article 87 of the CEPA states that the FET standard does not require treatment beyond what is required by customary international law (CIL). This is different from the FET formulation in a majority of Indian BIPAs where FET exists as an autonomous standard not explicitly linked to CIL. Linking FET with CIL will ensure that FET is interpreted in accordance with CIL and does not have an expansive interpretation.

But the MFN provision in the India-Japan CEPA might not let this happen. In the event of a dispute, the Japanese investor can rely on the MFN provision to borrow a broad FET provision from other Indian BIPAs where it is not linked to CIL. The legal argument that a Japanese investor can make is that by defending its regulatory measure against a narrower FET provision (in India-Japan CEPA), India is treating the Japanese investor less favourably than a third country investor who has a broader FET provision in its BIPA with India.

This sort of multilateralisation can be stopped in two ways. First, not having the MFN provision in the bilateral treaty. It is noteworthy that the investment chapter in the India-Singapore CECA does not contain an MFN provision. Second, narrowing the scope of the MFN provision by explicitly mentioning that an investor cannot rely on it to import substantive provisions from other treaties. The MFN provision should be limited to ensuring non-discrimination in application of domestic laws on foreign investors in like circumstances. Such an exception would ensure that a Japanese investor cannot borrow beneficial provisions, relying on MFN from any of the Indian BIPAs or any other CEPA containing investment chapter?signed before or after the India-Japan CEPA.

It is important that in light of the global evidence, India conducts a thorough legal examination of BIPAs and CEPAs. It would be unfortunate if India, like many other countries, unexpectedly learns from an ad hoc international arbitral tribunal that its investment treaty obligations unduly affects its sovereign ability to adopt regulatory measures.

The author is an assistant professor at National University of Juridical Sciences, Kolkata, and PhD candidate at King?s College, London