For various reasons, the Posco project has constantly been in the news ever since the Orissa government and the South Korean steel major signed an MoU in 2005. Of late, this Rs 51,000 crore project?representing the biggest FDI investment in India?has been in the news because of an alleged tussle between the Orissa government and the central government over providing environmental clearances to the project.

While the debate over whether Posco?s steel investment is environmentally sustainable or whether this is a classic example of industrialisation at the cost of tribal rights goes on, this article wishes to highlight an important aspect that has so far gone unnoticed. This is related to the fact that Posco is a South Korean company and thus any action that India (whether at the central or the state level) takes with regard to this company has to be compatible with India?s obligations under the India-Korea Comprehensive Economic Cooperation Agreement (CECA). The India-Korea CECA is an international treaty aimed at regulating international economic matters such as trade and investment flows between the two countries. This treaty contains a chapter on foreign investment, which grants certain rights to foreign investors over their investments.

Although this treaty came into force on January 1, 2010, it also applies to investments already announced at that time. Thus, Posco?s investment in Orissa is covered by the India-Korea CECA. The chapter on foreign investment, apart from granting rights to foreign investors, also states that any violation of these rights is challengeable under the investor-state investment treaty arbitration system. The foreign investor, for example, has the right to ?fair and equitable treatment?: Posco has to be treated ?fairly and equitably? by India. While the exact legal meaning of ?fair and equitable treatment? remains obscure, an important concept that has evolved relates to the ?legitimate expectations? of the foreign investor. In other words, if the ?legitimate expectations? of a foreign investor are frustrated by the host state, then this would imply that the state has not treated the foreign investor ?fairly and equitably?. The ?legitimate expectations? of the foreign investor include consistency and coordination between different tiers of the government structure so as to make sure that the ?legitimate expectations? created by one tier are not repudiated by another tier.

Take an example from Chile, where one arm of the government had given the go-ahead to a Malaysian foreign investment project, which was later red-flagged by another government arm on the grounds that the project was not environmentally sustainable. This action was held, by an international arbitration tribunal, as frustrating the ?legitimate expectations? of the Malaysian investor and thus violating the right of the foreign investor to be treated ?fairly and equitably??a right which the Bilateral Investment Treaty (BIT) between Chile and Malaysia recognised.

The above case has close resemblance to the Posco situation in India. We have the Orissa government clearly pushing for the Posco project, arguing that Posco?s investment is legal and will bring enormous benefits to Orissa. On the other hand, the Union environment ministry is investigating the environmental dimensions of this investment and has not given the required clearance. Although, the Orissa chief minister Naveen Patnaik might be feeling confident about the Posco project after meeting the PM on August 23, 2010, the final clearance is still awaited. Let us assume, hypothetically, that after its investigation, the Union environment ministry concludes that this investment is not environmentally sustainable and refuses to clear it. Such a situation, subject to other facts, could result in frustrating the ?legitimate expectations? of the foreign investor and thus could amount to a potential violation of the ?fair and equitable treatment? standard recognised in the investment chapter of the India-Korea CECA. In other words, such a situation could give rise to an actionable claim, which Posco can enforce at the international level. If the claim is successful, India may be required to pay millions of dollars as damages to the Korean giant.

These arguments should not be misunderstood as holding a brief for the South Korean company or to suggest that India should overlook any environmental violations that Posco might have committed or even to suggest that an international dispute with Posco is inevitable. The purpose of these arguments simply is to illustrate that India, as a state, has to be very careful in dealing with foreign investments by being cognisant of its international obligations under more than 60-plus BITs and many other CECAs. Else, India?s actions could amount to international treaty (BITs and CECA) violations. This is applicable not just to the different ministries of the central government regulating foreign investment but also for the state governments that are keen to attract more and more foreign investments to their states. State governments should be very careful about creating such expectations for foreign investors as may later allow even legitimate regulations by the central government to be construed as violations of the ?legitimate expectations? of the foreign investor.

The India-Korea CECA allows countries to adopt certain measures for environmental purposes that, depending on the facts and circumstances, would allow India a defense in case an international dispute with Posco arises in the future. However, the majority of Indian BITs do not have much scope for adoption of environmental regulatory measures affecting foreign investment. For such foreign investments, a Posco-type situation could be more problematic and might give rise to actionable claims by the foreign investors at the international level.

India needs to be careful about accepting restrictions on its sovereign ability?both at the Centre and at the state level?to regulate foreign investment each time it enters into a BIT or a CECA containing an investment chapter. For instance, according to some media reports, the Orissa government wants Posco to reserve jobs for the local population at different levels like the semi-skilled and the managerial levels. This is a major issue in renewing the MoU with Posco (the first MoU lapsed in June 2010). When the India-Korea CECA outlaws the imposition of any requirement on a foreign investor to reserve jobs at the senior managerial level, how will the Orissa government insist on such reservations? Even if the Orissa government is able to persuade Posco to reserve managerial jobs for the locals, other state governments may not be similarly successful when the adoption of such measures is outlawed?either by a BIT or by a CECA. So, India needs to carefully weigh the benefits of foreign investment against the compromise of regulatory oversight each time it enters into a BIT or a CECA.

Let us hope that the Posco project provides an opportunity, not only for the larger debate on industrialisation and tribal rights, but also for revisiting India?s investment treaty programme that is central to regulating foreign investments. It will be unfortunate if this issue is reduced to a petty political tussle between the Congress and the Biju Janta Dal or is used as an example to show how the Congress-ruled Centre is discriminating against the states ruled by the political parties in Opposition.

The author is an assistant professor at NUJS, Kolkata and a PhD Candidate at King?s College, London

?pranjan1278@gmail.com