Bilateral Investment treaty

The bilateral investment treaty that India has with several countries will lapse on March 31 which can impact the arrival of FDI to India

What is a Bilateral Investment treaty?

• A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one country in another country (For Foreign Direct investments).
• BITs are established through trade pacts.
• Most BITs grant investments made by an investor of one Country in a foreign country a number of guarantees, such as fair treatment, protection etc.

Significance of Bilateral investment Treaties

• Studies show that BITs have significant impact on FDI inflows. FDi inflows has increased multiple times owing to BIT’s signed.
• Though BITs alone does not determine FDI inflows, they do play a critical role in mitigating regulatory risks and thus encouraging investors to invest.

What is Investor – State dispute resolution(ISDS) in Bilateral Investment treaties?

• Many BITs allow for an alternative dispute resolution mechanism – ISDS
• Under ISDS investors can have recourse to international arbitration if their rights are violated under BITs, rather than suing the host country in its own courts.

The history of Bilateral investment treaties signed by India

• India didn’t sign BITs till 1990s because foreign investment was not considered significant.
• In 1991, following reforms as a part of  wooing foreign investors India started signing BITs
• In 2010 India had signed BITs with 83 countries.

The problem starts

• The Bilateral investment treaty claims brought by foreign investors from 2011 onwards caused heavy losses to India
• The treaty claims dragged India into international arbitration to seek huge compensation for losses suffered by the companies due to reasons including government policy changes.
• As a result India unilaterally issued BIT termination notices to 58-member countries in 2016 and some other BITs signed will expire soon.

The terminated BITs will continue to be relevant for existing foreign investment in India and Indian investment in these countries for the next 10-15 years due to survival clauses.

The new bilateral investment treaty by India

• This new model BIT put forward by the government contains an Investor State Dispute Settlement (ISDS) mechanism which allows companies to seek international arbitration only when all domestic legal options have been exhausted.
• The government wants to sign new BITs with all the 58 countries based on the new Model BIT adopted in 2016.
• With respect to EU countries, India hopes to replace the cluster of European BITs with the India-EU Bilateral Trade and Investment Agreement (BTIA)

The Issues with the new Bilateral Investment Treaty

• The Model BIT instead of striking a balance between investment protection and state’s right to regulate, tilts towards the latter.
• The India-EU BTIA, despite 16 rounds of negotiations since 2007, has not been signed due to major differences.

• Several countries have raised concerns over thus ISDS clause in India’s new BIT

Why the changes is not in the interest of foreign investors?

• The new BITs will force the foreign investors to rely entirely on domestic laws and domestic courts to safeguard their interest.
• If domestic laws are changed suddenly to the detriment of foreign investors (like in the case of Vodafone where Parliament retrospectively amended the Income Tax Act to overrule the Supreme Court’s decision in favour of Vodafone) it would leave the foreign investor without any remedy.
• Indian judicial system does not inspire much confidence in foreign investors.

How the changes will affect Indian investors investing abroad?

• Given the reciprocal nature of BITs, their termination followed by replacement with a protectionist treaty will also reduce the protection available to Indian companies abroad.

Major differences between Indian Bilateral Investment Treaty and recently signed EU-Canada Comprehensive Economic and Trade Agreement (CETA)

1. The EU-Canada CETA contains a ‘most favoured nation’ (MFN) provision which is missing in the Indian Model BIT.
2. The Indian Model BIT, mandatorily requires foreign investors to litigate in domestic courts for five years before pursuing a claim under international law.
3. The EU-Canada CETA provides protection to foreign investors in situations where the state goes back on promises made to the investor. The Indian Model BIT is silent on this
4. The EU-Canada CETA talks of pursuing the establishment of a multilateral investment court to settle investment disputes.

Due to these differences, an India-Canada BIT or an investment treaty with EU looks difficult.

Analysis – BIT’s in India – oscillating between extremes

• From 1994 to 2011, India signed 70-odd BITs tilted heavily in favour of investment protection against the host state’s regulatory power.
• Instead of rectifying the position favoring investment protection the recently adopted Indian model BIT tilts the balance towards the India’s regulatory power
• The present BIT severely limit  the protection offered to foreign investment.

The way forward

Indian BITs should reconcile investment protection with the host state’s regulatory power.

For this India needs to do three things:

1. Amend the protectionist 2015 model BIT so as to strike a balance between interests of investors and that of the host state,
2. Negotiate with existing BIT partners based on this balanced model,
3. Withdraw the termination notices till the newly negotiated text is finalised for replacing the existing BIT.