Bilateral Investment Treaties

SYLLABUS

GS 2 >> International Relations >> Bilateral agreements involving India and/or affecting India’s interests

REFERENCE NEWS

• While presenting the interim Union budget, Finance Minister Nirmala Sitharaman stated that India will be negotiating Bilateral Investment Treaties (BITs) with its trade partners to boost the inflow of foreign direct investment. This announcement comes at a time when India’s bilateral treaties have dried up, more so, since the adoption of the Model BIT in 2016.

ABOUT BILATERAL INVESTMENT TREATIES(BITs)

• Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other’s territories.
• The Agreements establish minimum guarantees between the two countries regarding the treatment of foreign investments and protect them from arbitrary decisions of national Governments.
• BITs typically have provisions like National treatment (treating foreign investors at par with domestic companies), Fair and equitable treatment (in accordance with international law), and Protection from expropriation (limiting each country’s ability to take over foreign investments in its territory) etc. among others.

HISTORY OF BILATERAL INVESTMENT TREATIES

• The Government had released the first Model BIT text in 1993. Under this model, India signed its first Bilateral Investment Treaty (BIT) with the United Kingdom in 1994.
• The Government had released Model Bilateral Investment Promotion Agreement (BIPA) in 2003. As of 2015, India had signed BITs with 83 countries (of which 74 were in force).
• The BITs were invoked by several MNCs in context of their disputes regarding sovereign actions of the Government of India. 
• In 2011, an International Chamber of Commerce (ICC) Tribunal ordered the Government of India to pay US$ 4.10 million to White Industries under the 1999 Indo-Australia BIT. The Government also received notices under various BITs concerning retrospective tax amendments and the cancellation of 2G licenses. Post these developments, the Government initiated a review of its existing bilateral investment treaties (BITs).
• In 2015, India started drafting a new model BIT to replace the existing model BIT (1993) and BIPA (2003). In 2016, the model BIT was completed and released to the public domain.

BENEFITS OF BILATERAL INVESTMENT TREATIES

• BITs provide security against arbitrary actions of sovereign Governments. This enhances confidence of investors. Thus BITs have a potential to attract Foreign Direct Investment (FDI).
• BITs generally provide a mechanism for settling disputes between investors and the country of investments. The most preferred mode of settling such disputes is arbitration, where parties agree to have their dispute decided by a neutral person (the arbitrator) instead of going to Court.
• BITs encourage the adoption of market-oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory manner.
• BITs support the development of international law standards consistent with the objectives of trade and investment promotion.

CHALLENGES WITH INDIA’S APPROACH TO BILATERAL INVESTMENT TREATIES

• Reactionary Framework Post White Industries Case: The formulation of the Model BIT of 2016 can be seen as a reactive measure to the White Industries arbitration case rather than a proactive strategy to enhance foreign investment. This knee-jerk reaction may have led to overly cautious or restrictive provisions that potentially deter investors.
• Narrow Definition of Investment: The Model BIT's narrow definition of 'investment' and the inclusion of vague terms such as 'certain duration' and 'investment...operated in good faith' create ambiguity. This lack of clarity about what qualifies as an investment and the conditions under which it is protected can lead to uncertainty and hesitation among potential investors. Furthermore, the exclusion of portfolio investments and other non-direct investments from the definition ignores the reality of contemporary global financial flows and investment practices.
• Omission of Standard Protections: The exclusion of well-recognized investment protection standards such as the 'fair and equitable treatment' standard and Most-Favored Nation (MFN) clause sends a negative signal to international investors. By omitting these standards, the Model BIT potentially lowers the level of protection offered to foreign investments, fostering concerns over the security and favorable treatment of such investments in India.
• Mandatory Exhaustion of Domestic Remedies: The requirement for investors to exhaust domestic legal remedies for at least five years before pursuing arbitration introduces significant delays and complexities. This provision not only prolongs dispute resolution but also exposes investors to the inefficiencies and potential biases of local judicial systems, which may further discourage investment.
• Limitations on Indian Investors Abroad: The same constraints and requirements imposed on foreign investors in India apply to Indian companies investing overseas. This reciprocality means Indian investments are also subject to local judicial inefficiencies and legal bottlenecks in other jurisdictions, potentially hampering the global expansion of Indian businesses.
• Asymmetry and Corporate Social Responsibility (CSR): While addressing the asymmetry in obligations between host states and investors found in earlier BITs, the Model BIT's approach to CSR under a 'best endeavour clause' is non-enforceable. This soft approach fails to impose mandatory obligations on investors regarding labor rights, environmental standards, human rights, and anti-corruption measures. The absence of enforceable provisions limits the host state's ability to hold investors accountable for local law and standard violations.
• Wide Discretionary Powers to Host State: The Model BIT allows broad discretionary powers to the host state, especially regarding disputes related to taxation. By exempting decisions related to taxation from arbitration and not clearly defining what constitutes a violation of 'due process,' the Model BIT potentially grants the host state unilateral power to exclude certain disputes from arbitral review. This could undermine investor confidence in the fairness and impartiality of dispute resolution mechanisms.
• Impact on Foreign Direct Investment (FDI): The restrictive and ambiguous provisions of the Model BIT, combined with challenges in renegotiating terms with other countries, have contributed to a decline in FDI equity inflows to India. This decline indicates that the Model BIT may be acting more as a deterrent to investment rather than as a mechanism to attract and secure it.

WAY FORWARD

The recommendations from the Parliamentary Standing Committee on External Affairs and UNCITRAL offer a comprehensive roadmap for refining India's approach to Bilateral Investment Treaties (BITs). 

• Timely Settlement of Disputes: Following the Parliamentary Standing Committee's advice, India should prioritize the timely settlement of investment disputes through pre-arbitration consultation or negotiations. This approach emphasizes diplomacy and dialogue over litigation, potentially saving resources and preserving international relationships.
• Continuous Improvement and Learning: The Committee's suggestion to continuously review and amend the Model BIT based on new dispute experiences, ensuring it remains balanced and comprehensive, is crucial. India should incorporate best practices and successful provisions from BITs of advanced countries, analyzing their outcomes and implementation strategies to refine its own agreements.
• Clarity and Precision in Drafting: To mitigate overbroad interpretations and prevent abuse by investors, new BITs should be drafted with clear, unambiguous language. This precision will help avoid unnecessary disputes and claims against India, aligning with the Committee's observations.
• Development of Local Expertise: The Committee's call for developing panels of domestic lawyers with expertise in investment arbitration and treaty law is fundamental. Training government officials and promoting the New Delhi International Arbitration Centre as a premier arbitration venue will enhance India's self-reliance in managing investment disputes and treaty negotiations.
• Binding Investor Obligations: Endorsing the UNCITRAL Working Group III's recommendation, India should include binding obligations for investors in BITs to enable host governments to raise counter-claims. This approach addresses the asymmetry in current treaties and reduces the discretion of arbitral tribunals.
• Incorporating Human Rights and Environmental Standards: Following the UN Working Group's emphasis, India should ensure its BITs contain enforceable obligations on investors regarding human rights and environmental protections. This aligns investment practices with global standards and safeguards against exploitative behaviors.
• Reforming the Domestic Judicial and Legal Framework: To support a robust BIT framework, India must continue reforming its domestic judicial system and aligning the model BIT with domestic legislation. Improvements in administrative and substantive legal processes, as well as consistency in dispute resolution mechanisms, are essential for attracting stable foreign investment and achieving economic growth targets.

Hence, these steps are pivotal for India's goal of becoming a $5 trillion economy by 2025 and achieving developed nation status by 2047, by ensuring a stable and conducive environment for international trade and investment.

PRACTICE QUESTION

Q: "Discuss the impact and challenges of Bilateral Investment Treaties on India's economic growth and international relations, proposing strategies for a proactive approach to enhance their role in securing sustainable investment."(15M, 250W)