Stung by several instances of foreign companies dragging the Indian government to legal processes and arbitration overseas, New Delhi plans to remodel its bilateral investment agreements with provisions to ring-fence itself from such hazards in the future.
According to official sources, the finance ministry has circulated a draft Cabinet note to all ministries suggesting a model Bilateral Investment Treaty (BIT) text that, in many ways, is different from the 72-odd bilateral investment promotion and protection agreements that are in force.
The new model, likely to be cleared by the Cabinet soon, will be first implemented for the proposed India-US BIT, the sources added.
One of the changes is broadening of the term ‘expropriation’ that allows the state to take over private properties, invoking ‘public interest’.
Under the current BIPA model too, expropriation/nationalisation is allowed for ‘public purposes’, but there is no clear definition of what constitutes ‘public interest’, giving room for foreign companies to sue India’s Union and state governments overseas.
In the BIT, “public interest,” sources said, would include instances that would allow the government to bring out certain defined public policy measures including the patent-disabling ‘compulsory licensing’,which is used to make available to the general public, costly and patented essential drugs at affordable prices.
The definition of ‘investment’ will also be changed to restrict its scope to mainly financial investments directly made by an India-incorporated entity. Investments made by foreign firms in India indirectly through holding companies overseas won’t be covered under the new BIT model.
Also being considered is to explicitly exclude short-term foreign institutional investments from the purview of the definition of investments. The new BIT model will also strongly prevent the practice of ‘treaty shopping,’ which allows foreign investors with operations in multiple countries to choose a bilateral pact between India and a particular country that is most favourable to them in case of a dispute.
“It may be all right to treat intellectual property rights as part of investments/assets. However, curbing abuse of patent monopoly should be treated as ground for expropriation and this aspect is being considered by many countries,” said Biswajit Dhar, professor, Centre for Economic Studies and Planning, JNU.
Foreign investors that have sued India abroad include Devas, Deutsche Telekom, Vodafone, Sistema, Khaitan Holdings, Axiata, Tenoch Holdings, White Industries and Children’s Investment Fund. These lawsuits were initiated under India’s BIPAs with Australia, Mauritius, Germany, the Netherlands, Russia, Malaysia and Cyprus to send legal notices to the government and in many cases claiming compensation for damages.
Sources said taxation-related disputes won’t be under the purview of the new BIT model, as in the extant BIPAs. The double taxation avoidance pacts will deal with taxation.
Sources added that the new model BIT text would limit the disputes that the state can be involved to those where executive decisions are involved. Also, time limits would be clearly specified within which such decisions can be challenged in overseas jurisdictions.
There will also be new curbs on payments related to investments (including royalty payments) so that India can safeguard its balance of payments (BoP) interests.
The finance ministry’s BIT text also includes specific provisions to ensure that foreign investors can’t claim the protection of BIT after re-routing black money into India.
Earlier, the commerce and industry ministry, with the support of the ministries of coal and telecom, had wanted the government to invoke the ‘sunset’ clause in all BIPPAs and unilaterally exit from them.
Citing the examples of South Africa, Indonesia, Bolivia and Ecuador seeking to terminate these treaties on finding them against their domestic interests, these ministries wanted all future BIPAs, BITs and the investment clauses in Comprehensive Economic Cooperation/Partnership
Agreements to focus solely on ‘investment promotion’ rather than ‘protection and promotion’.
It is the investment ‘protection’ clauses that were helping MNCs do treaty shopping, these ministries opined. These clauses, they argued, were eroding the policy space available to government to regulate/challenge the nature of some of the investments made as well as impose certain performance obligations on foreign companies.