India, US model texts for treaty poles apart
Even as the United States is pushing for revival of talks on a proposed bilateral investment treaty (BIT) with India during President Barack Obama’s visit, a breakthrough is unlikely any soon as their respective model BIT texts — the starting point for negotiations — are almost poles apart.
The talks on an India-US BIT had begun as early as August 2009, but have seen little progress so far. New Delhi has now incorporated stringent norms in its model BIT text (which is in the ‘final draft’ stage and awaiting Cabinet clearance) following foreign investors and MNCs, including Vodafone and Siestema, issuing legal notices to the Indian government, invoking different BITs that India had inked with other countries.
The extreme position taken by India in its new model text could be rejected in toto by Washington, said sources.
These include provisions totally excluding tax issues, as well as portfolio investments and derivatives from the BIT’s purview. The US model BIT text has not fully divested investors of their right to challenge the government’s tax-related decisions. Besides, it has also not excluded short-term investments and derivatives from protection under BIT.
The other main bone of contention would be India’s move to leave out the ‘most favoured nation’ clause (which mandates the signatory countries to accord equal treatment — in like circumstances — to investors from all countries).
The absence of an MFN clause in India’s BIT text implies that foreign investors with operations in multiple countries will not be able to invoke a BIT between India and any other country that is most favourable to them (to win huge compensation) in case of a dispute. The US model BIT text has an MFN clause.
What can also irk Washington is India’s model text asking aggrieved investors to first exhaust local judicial and administrative remedies before proceeding ahead with arbitration overseas. There is no such restriction in the US model text.
In addition, Indian BIT text has a clause preventing investors from challenging decisions of Indian courts, something that will not get US approval.
Besides, the US might also challenge the curbs imposed by New Delhi’s model BIT text on repatriation of investments to help India safeguard its interests when or if it faces balance of payments (BoP) problems.
Washington, sources said, is against any such restrictions on capital flows. Also, India’s model text does not have a detailed procedure on how such restrictions on repatriation of investments can be imposed, something which makes it difficult for investors to challenge the curbs in courts or during arbitration.
The US model text has a detailed procedure, which makes it very difficult to impose any restrictions on capital outflow.
Another provision in India’s model text that the US will find it unpalatable are the performance requirements that it imposes on investors including transferring technology to India. The US will also oppose India’s BIT text giving the policy space to the Indian government to have a law requiring that Indian citizens need to be appointed in senior management positions in companies in certain sensitive industries. Also, the US will not be pleased with India’s model text excluding protection to those investors without long-term interest in the country.
India’s BIT text specifies that only ‘enterprises’ having ‘real and substantial business operations’ in the host state, including through transfer of technological know-how, can claim protection. This move is meant to discourage investments by shell companies/ front companies / mailbox companies through low-tax countries, but since many US firms route investments through such low-tax nations like Mauritius and Singapore, Washington could oppose this clause.
India’s proposals vs US
* Excludes tax issues, portfolio investments and derivatives
* Doesn’t have MFN clause to prevent investors from invoking any BIT that India has that is most favourable to them in case of a dispute
* Investors asked to first exhaust local remedies before opting for arbitration overseas
* Prevents investors from challenging decisions of Indian courts
* Imposes curbs sans detailed procedure on repatriation of investments in event of India having BoP problems
* Imposes performance requirements on investors including transfer of technology; allows India to have law to help appoint Indian citizens on top positions in firms in sensitive sectors
* Discourages investments from shell/mail-box firms in low-tax havens