[Ip-health] India and bilateral investment treaties - are they worth it?

leena menghaney leenamenghaney at gmail.com
Wed Jan 21 21:55:20 PST 2015

India and bilateral investment treaties - are they worth it?

Jan 21, 2015, By Kavaljit Singh of Madhyam, Back to beyondbrics (Financial


President Barack Obama's upcoming visit to India is likely to kick-start
stalled negotiations on a bilateral investment treaty (BIT) between the US
and India that has been under sporadic discussion since 2008, aimed at
facilitating greater cross-border investment flows.

Negotiations will resume based on model treaty texts prepared by each side.
In April 2012, the US released a new version of its model BIT. New Delhi
launched a review of its investment treaties in mid-2012 in the wake of
public outcry over arbitration notices served by 17 foreign companies
(including Vodafone and Sistema) challenging various policy measures and
demanding billions of dollars in compensation for the alleged violation of
India's BITs.

The review was meant to revise India's 1993 model treaty text and to
provide a roadmap for the re-negotiation of India's 86 existing BITs. It
was carried out by an inter-ministerial working group led by the ministry
of finance, reportedly in consultation with experts from four international
institutions. There is nothing wrong with consulting foreign experts per
se, but one fails to understand why no inputs were sought from experts,
think-tanks, NGOs and business associations based in India.

Nevertheless, India's new model BIT is undeniably a major improvement on
the previous one. For example, unlike the 1993 model, which uses an "asset"
based definition of investment which may include every kind of asset (eg,
money lying in a bank account), the new model adopts an "enterprise" based
definition of investment, thereby narrowing it to foreign direct investment
(FDI). The new model defines both persons and enterprises "conducting real
and substantial business operations in the home state" as investors. This
qualification is intended to deny investment protection to so-called
"mailbox companies" which have a minimal commercial presence in the home

The most favoured nation (MFN) treatment provision has been completely
dropped in the new model. By virtue of the MFN clause in a BIT, a foreign
investor can "import" more favourable protection provisions contained in
other BITs and use them to bring claims before arbitration tribunals. In
2011, India lost a case to an Australian company which successfully used
the MFN clause contained in India-Australia BIT to import an "effective
means of asserting claims and enforcing rights" clause from the
India-Kuwait BIT.

The new model provides national treatment (treating foreign and local
investors equally) but the qualifying term "in like circumstances" has been
inserted to narrow the scope.

The new model BIT also contains binding obligations on investors on matters
related to corruption, disclosures and taxation. Any breach of these
obligations may invite regulatory or legal action by the host country.

The new model retains the investor-state dispute settlement system (ISDS)
but it requires an investor to exhaust all local remedies (judicial and
administrative) before initiating international arbitration. In other
words, an investor will have to first submit its claim before the domestic
courts in the host country. Further, an arbitration tribunal is not given
powers to re-examine any judicial decisions.

It also contains expansive provisions to make the ISDS more transparent and
accountable. To ensure arbitrators are impartial and free of any conflict
of interest, detailed disclosure norms and codes of conduct for arbitrators
have been introduced.

The new model includes a long list of measures that will be completely
exempted under the Treaty. These include measures related to taxation (à la
Vodafone case), intellectual property rights (compulsory licensing), state
subsidies, government procurement, public health and safety, environmental
protection and financial stability.

Despite these significant improvements over the 1993 model, the question
remains whether India's new approach will actually find its way into the
final texts of India's future BITs. The US, for instance, is unlikely to
accept India's position to keep intellectual property rights and taxation
matters outside the scope of a proposed India-US BIT.

Needless to say, it would be a mammoth task to renegotiate India's existing
86 BITs within a reasonable time. It is also not clear whether the
government will renegotiate the investment chapters of India's free trade
agreements with Singapore, South Korea and Japan, which also contain
investment protection measures.

This leaves us with a fundamental question: are investment treaties
necessary to attract foreign investment? There is no conclusive evidence to
show that BITs result in greater FDI inflows. Since 1994, India has signed
BITs with countries such as Mangolia, Serbia, Macedonia and Iceland but the
two-way investment flows between India and these countries remain
negligible. On the other hand, India receives substantial foreign
investments from the US and Canada without any BIT.

For any foreign investor, there are other determinants - especially market
size, infrastructure, tax policy, labour laws and the business environment
- that influence the investment decision more than a BIT between the home
and host countries.

There is a plenty to learn from the other Brics countries. Brazil is not a
party to any BITs but still receives substantial amounts of foreign
investment. The country had signed 14 BITs in the 1990s but Brazil's
congress refused to ratify them because of potential risks associated with
the traditional ISDS system. Nevertheless, Brazil implemented some key
elements of BITs (such as equal treatment to foreign investors) as part of
its domestic reform agenda.

South Africa, on the other hand, terminated its treaties and replaced its
BITs regime with new domestic legislation (likely to become law in early
2015) which provides no recourse to any international arbitration. A
foreign investor having an investment dispute with the South African
government will have to use domestic dispute settlement mechanisms such as
domestic courts and arbitration processes.

Instead of relying only on a treaty-based approach, India should initiate
domestic policy reforms - such as fixing the domestic arbitration
ecosystem, speeding up judicial proceedings and easing issuance of business
visas - to attract and protect foreign investments. Such reforms would also
be politically acceptable in India.

Kavaljit Singh is director of Madhyam, a policy research institute based in
New Delhi.

Leena Menghaney
Mobile: 9811365412

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