Note4Students

1. Foreign investments are inevitable to expand our infra-structure projects. BIT should offer certain degree of protection to investor as well it should actualise our developmental goals. In this context, model BIT deserves greater analysis to understand various features . This topic is important while considering a host of issues like ease of doing business.

Introduction

1. The revised Indian model text for Bilateral Investment Treaty (BIT) will replace the existing Indian Model BIT.  The revised model BIT will be used for re-negotiation of existing BITs and negotiation of future BITs and investment chapters in Comprehensive Economic Cooperation Agreements (CECAs)/ Comprehensive Economic Partnership Agreements (CEPAs) / Free Trade Agreements (FTAs).

Analysis

Why the new Model BIT?

1. Main reason for bringing the Model BIT was the constant suing of the country by foreign firms.
2. India was one of the most sued countries during 2015 and 2016.
3. According to UNCTAD- the international institution that tracks global investment trends; around 17 investor-state arbitrations are filed against the country launched by foreign investors by the end of 2015.
4. The flooding of arbitrations including that of the Sistema, Vodafone, Children Investment Fund etc. tempted the policy makers to reframe the BITs.
5. The government thus has modified the existing 1993 BIT framework and brought out the 2015 Model BIT. The move is important as it will help the country to make its treaty more specific in international arbitrations. The textual consistency of a countries’ BIT determines its success in BIT negotiations and disputes.

Important features of Model Bilateral Investment Treaty

 

Enterprise based definition of investment instead of asset based definition

1. The Model has adopted an ‘enterprise-based’ definition of investment that under which investment is treated as the one made by an enterprise incorporated in the host state.
2. Under the earlier ‘asset based definition’ of investment included intellectual property and other assets that whereas these assets are not considered as assets under the new definition.
3. The objective of adopting enterprise-based approach
4. is to narrow the scope of protected investments and reduce the potential liability of the state under Investor-state dispute settlement (ISDS) claims.
5. Asset based definition considers every kind of asset – both movable and immovable as investment and gives protection under treaties, though their contribution to national economic development is meagre.

 

Exclusion of MFN treatment

1. The most important feature of the amended model is that it dropped the Most Favoured Nation (MFN) status previously included.
   1. Purpose of the MFN clause for the investor’s angel is to ensure that a say, a US investor is not discriminated compared to say, a Japanese investor.
2. In recent years, complaining foreign investors sued India arguing that they have to get the same beneficial treatment given to companies from other countries. This was happened in the case of White Industries. The White Industries case is pointed as the main factor that produced the deletion of the MFN clause.

 

Full Protection and Security (FPS):

1. In the context of the Model, FPS means obligations only relating to physical security of investors and to investments.

 

State government as stake holders:

1. Actions of the state Governments are included under the Model BIT.

 

Fair and equitable treatment (FET)

1. The Model BIT links Fair and Equitable Treatment to international laws.
2. This is aimed to counter a broad interpretation and risk misuse. Here, customary international law, which is built in state practice, gives a minimum standard of protection to investors.
3. Any potential violation listed in the provisions of denial of justice, breach of due process etc, requires a violation of customary international law for a claim to be justified.
4. When the Model BIT linked FET to international law, it gives more scope for government and regulators.

 

Expropriation

1. Expropriation means nationalization of assets of foreign companies.
2. As in other BITs, the Model BIT provides that the State cannot nationalise or expropriate an Investment or take measures equivalent to expropriation,
3. except “for reasons of public purpose” in accordance with the procedure established by law and on payment of adequate compensation.
4. But it gives certain exemptions. Here, the Model BIT says that, any measure by a judicial body aiming to protect public interest will be outside the purview of expropriation. Similarly, non-discriminatory regulatory measures were also excluded.

 

Non-Discriminatory treatment

1. The Model BIT includes a new clause on non-discriminatory treatment for compensation of losses. As peer the clause, investors can avail non-discriminatory just compensation in circumstances like armed conflict, natural disasters and in the state of national emergency.

 

Provision for transparency

1. The Model BIT incorporates a clause for transparency, requiring the Parties (government and regulators) to ensure that all the laws, regulations, procedures and administrative rulings regarding matters covered in the BIT are published or are available for interested persons to get acquainted with them. The clause thus ensures clarity of laws and policies for the investors.

 

Corporate Social Responsibility 

1. The Model BIT mandates foreign investors to voluntarily adopt internationally recognized standards of corporate social responsibility.

 

Conditions for initiating arbitrations at international arbitrations

1. The Model BIT stipulates that the aggrieved investor should use all local remedies as well as negotiations and consultations initiating arbitrations against the host State. Investor can use outside remedies only five years after resorting to all domestic arrangements.

 

The model BIT approved by the cabinet excludes matters relating to taxation.

The model Bill thus tries to balance protection to the investor with state regulations. More importantly it was configured in the context of excess legal arbitration against the state. What is more important is to renegotiate with the partner countries and attract foreign investment in the context of the change.

Criticism

Reduced Scope of Protection

• 1. The Draft Model BIT has limited the scope of protection under the BIT by introducing an ‘enterprise’ based definition of ‘Investment’: only enterprises constituted in India that have ‘real and substantial business operations’ in India and are owned or controlled by the Investor qualify as Investment for the purposes of the treaty.
  2. The enterprise will be considered owned by the Investor only if more than 50% of the capital is held by the investor. This definition excludes all minority investments unless they are controlled by the investor through voting agreements or any other agreements of similar nature.
  3. The definition of “investment” in the Draft Model BIT is restrictive. Besides excluding Indian holding companies and foreign portfolio investments from the definition of “investment”, it also sweeps out intangible rights like goodwill, brand value, investments in government debt and public sector undertakings, in addition to orders or judgments of any judicial, regulatory, administrative or arbitral authority.

Narrow Fair and Equitable Protection

1. The Draft Model BIT restricts the protection under fair and equitable treatment to only excessively qualified measures such as “un-remedied and egregious violations of due process”, “denial of justice” or “manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment”.
2. Such narrow formulation of this standard takes away a wide range of procedural and substantive protection to the investors and their investment, like legitimate expectations which have otherwise been covered under this standard of protection under almost all BITs, notwithstanding certain variations among texts of different BITs.

De-Levelling the Playing Field

1. The ‘Most Favored Nations’ clause, which has been traditionally considered to be extremely significant in economic treaties, guarantees the investors of a non-discriminatory treatment vis-à-vis investors of other countries.
2. However, in its endeavor to restrict the rights of the investors, the Draft Model BIT completely wipes out this clause. By omission of such cardinal protection, it appears that India is not serious in granting protection to the Investors but only wants to protect itself from a potential fate such as in the White Industries’ case, in which India had to pay the Australian investor over US$ 8 million on account of inordinate delay in Indian courts to enforce the award passed in a commercial arbitration.
3. The protection of national treatment, which ensures that the investors are not discriminated vis-à-vis domestic investors, has been diluted to exclude regional or local government measures.
4. Thus, a foreign investor cannot complain about a state government’s regulatory measure favoring local investment, under the BIT, even if it is for protectionist purposes.

Arbitration

1. The Draft Model BIT departs from the practice followed in international arbitration disputes by taking away the authority of the Arbitral Tribunal to review the Host State’s determination of whether an expropriatory measure was taken for a public purpose or in compliance with its law or not.
2. While the requirement of exhaustion of local remedies is in consonance with the position under customary international law, considering the state of Indian judicial system it is an unattractive and unfair proposition for foreign investors to be subjected to lengthy and unending court proceedings in India.

Conclusion

The new Indian Model BIT text will provide appropriate protection to foreign investors in India and Indian investors in the foreign country, in the light of relevant international precedents and practices, while maintaining a balance between the investor’s rights and the Government obligations.

Questions:

India was one of the most sued countries in 2015. Will the country’s new model bilateral investment treaty attract and safeguard foreign investment more effectively?