India scaring away foreign investors? What new Bilateral Investment Treaty is, and what it does

By: |
Updated: August 2, 2018 5:03:41 PM

The revised Bilateral Investment Treaty, which allowed renegotiation of investment protection agreements with other countries, is tilted towards the state and provides limited rights to foreign investors, a research paper has said.

India scaring away foreign investors? What new Bilateral Investment Treaty is, and what it must doIndia scaring away foreign investors? What new Bilateral Investment Treaty is, and what it must do

While PM Narendra Modi bets heavily on his grand ‘Make in India’ campaign to attract foreign investment, the revised Bilateral Investment Treaty is pro-state and limits the rights of foreign investors, a research report shows. The revised treaty allows renegotiation of investment protection agreements with other countries.

In December 2015, the Union Cabinet approved revised model text for the BIT to enhance protection of foreign investors in India as well as Indian investments abroad. Following this, India started renegotiating the terms of investment with 83 countries. However, a research report by Brookings has red-flagged some provisions that make new Model BIT “pro-state with limited rights to foreign investors”.

“The Model BIT contains a narrow definition of investment, an extremely narrow FET-type provision, excludes MFN clause and taxation measures from the purview of the BIT. Furthermore, it provides for a general exception provision without a chapeau and contains a complicated and sequential ISDS,” the research titled ‘India’s model bilateral investment treaty: Are we too risk averse?’ said.

Investor-state dispute settlement (ISDS) is a system through which individual companies can sue countries for their discriminatory or arbitrary practices, while the concept of Fair and Equitable Treatment (FET) is linked to the minimum standard of treatment guaranteed under customary international law, which has “broad and inconsistent treaty interpretations”.

For example: India has decided to keep taxation measures outside the purview of the BIT in response to Vodafone and Cairn challenging India’s retrospective application of taxation law under different BIT. It means that no company will be able to challenge such cases under revised BIT.

Vodafone has challenged Indian government’s demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the Netherlands-India BIT. The matter is being heard at an international arbitration tribunal.

Judicial delay in India has also been one of the major concerns for foreign investors. Even Economic Survey 2018 said that judicial delays lead to a number of complexities and must be done away with to deal boost economic activities in the country.

Some provisions of new BIT have continued to remain undefined and vague, and grant significant discretion to ISDS arbitral tribunals, the Brookings research said, adding that India has not been quite successful in developing a model that balances investment protection with the state’s right to regulate nor in reducing arbitral discretion.

Since the new BIT is for both foreign investors and Indian investors abroad, a framework that’s tilted towards the host state’s regulatory power will reduce protection for Indian companies abroad, the research report argued.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Next Stories
1Modi’s dream to double farmers’ income gets a leg up as agriculture exports pick up after 3 subdued years
2NPA crisis at Indian banks is mostly because of bad loan concentration in this one sector
3RBI rate hike: Central bank cautions of currency wars