Bilateral Investment Treaties
Treaties on Bilateral Investment:
- Treaties on Bilateral Investment: BITs are bilateral treaties between two countries that attempt to protect both countries’ investors’ investments.
- BITs have the following goal: BITs protect investments by setting constraints on the host state’s regulatory behavior, preventing undue interference with the foreign investor’s rights. Imposing duties on host states to provide fair and equitable treatment (FET) to foreign investment and not to discriminate against foreign investment are examples of these conditions.
- Allowing revenues to be repatriated under certain circumstances agreed upon by the two countries.
- Most crucially, permitting private investors to sue host states for monetary compensation if the latter’s sovereign regulatory measures are in violation of the BIT.
BITs and India:
- Since signing the first BIT with the United Kingdom in 1994, India has signed 86 bilateral treaties, the most recent of which was signed with Brazil in 2020.
- BITs have been one of the most important drivers of FDI into India.
- According to a 2016 study, BITs contributed to increased FDIs in the 2001-2012 era by giving substantive protection and commitment to foreign investors.
- However, India has been the recipient of many penalties imposed by an International Dispute Settlement (ISDS) tribunal.
- For example, regulatory actions such as the application of retrospective taxes, the termination and revocation of spectrum and telecom licenses are examples.
- As a result, the BITs were reviewed. In 2016, India introduced the Model BIT. Its goal is to serve as a starting point for negotiating new BITs with other countries, as well as renegotiating existing ones.
- In 2016, India shifted away from an overly investor-friendly strategy to a relatively restrictive approach to foreign investments, according to Model BIT.
- Between 2016 and 2019, India unilaterally cancelled 66 BITs, sending unfavorable signals to the international investment community.
- This is obvious by the fact that no country has expressed an interest in renegotiating based on the Model BIT.
- India has only signed three accords since 2016, none of which have yet come into force.
Model BIT-Related Issues
- Model BIT restricted the definition of investment that was required to qualify for BIT protection.
- The Transition from Asset-Based to Enterprise-Based Management: According to Model BIT, India proposes a restricted ‘enterprise-based’ investment definition, with only direct investments covered under the treaty.
- Negative List: In addition, the Model BIT’s definition of investment includes a negative list that excludes portfolio investments, debt-security interest, intangible rights, and other items from the definition.
- As a result, the new definition ignores the expanded scope of foreign investments in today’s era of globalization and liberalization.
- Exhaustion of Domestic Remedy Clause: The Model BIT includes a clause requiring the exhaustion of domestic remedies before resorting to international arbitration.
- According to the ‘Ease of Doing Business 2020’ report, India now ranks 163 out of 190 nations in terms of contract enforcement ease, with a dispute resolution time of 1,445 days and 31% of the claim value.
- This is hardly likely to boost international investor confidence.
- Broad Discretionary Authority in the Host State: It also includes a ‘Treatment of Investments’ clause that said that neither party would subject investments to measures that are clearly abusive and in violation of due process.
- However, there is no definition of what constitutes a violation of “due process.”
- Furthermore, Model BIT says that if the Host State decides at any point in time that the claimed breach under the BIT is a subject matter of taxes, the Host State’s decision is non-justiciable and exempt from review by an arbitral tribunal.
- The Model BIT makes the basic assumption that a foreign investor can put his or her trust in domestic court interpretations and systems.
- This might potentially provide the Host State broad power to unilaterally exclude any matter from a tribunal’s jurisdiction simply by claiming that the action in question is related to taxation.
- What Steps Should Be Taken?
- Using a Hybrid Approach to Definition: Given the apprehension of foreign investors, it is necessary to alter the definition of investment to include a combination of asset- and enterprise-based definitions.
- While maintaining a negative list (to exclude those specific categories or sectors that the Parties believe appropriate), such a definition would ensure that direct and indirect investments are protected under the BIT while yet allowing for regulatory exclusions.
- Following International Norms: India may consider revising the standard of treatment clause to line it with international norms and include the customary standard of fair and equitable treatment protection.
- In addition, the open-ended phrases in the Model BIT must be clarified. India may face fewer disputes and BIT claims as a result of this.
Conclusion:
- Initiatives like Make in India 2.0 and the liberalization of FDI caps across sectors are positive moves.
- Foreign investors may be hesitant to invest in India until the government takes a more balanced approach in the Model BIT 2016.
- As global corporations consider shifting their investments away from China, now is an excellent opportunity to review and update the Model BIT, moving away from the current inward-looking protectionist stance and toward a more pragmatic one.
