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05 Aug 2016

Bilateral Investment Treaty: A tightrope walk that must balance national interests with our track record

The government’s efforts to make India more business and investment friendly involve structural changes, regulatory amendments as well as a thrust on economic diplomacy. The Draft Model for India’s Bilateral Investment Treaty (“BIT”) released by the government in 2015 is one more instrument that has significant potential to attract foreign investment into India while also encouraging Indian businesses to expand globally.

 Scope of Bilateral Investment Treaties

 As the name suggests, such treaties are aimed at promoting bilateral investments and business cooperation between the signatory countries by creating a more conducive climate that boosts investor confidence. Such treaties reaffirm the rights of Parties to regulate Investments in their territory in accordance with their Law including the right to change the conditions applicable to such investments. The end objective is to align and balance the objectives of the two Parties, viz. Home State & Host State in terms of level playing field, legitimate opportunities for profit, sustainable development and inclusive growth.

A BIT carves out the scope of investments, obligations of the Host and Home States and Investors making such investments and also obligations of the Host State with regard to dispute settlement mechanisms in case of a conflict between the parties. India has signed 83 bilateral treaties so far, each with its own unique clauses and applicable conditions.

 In terms of scope, India’s Model Bilateral Investment Treaty applies only to investments already in existence and has no applicability in relation to any Act or Law that existed prior to the date on which the treaty comes into effect. Further, the Treaty has no effect on government procurements and taxation matters which are explicitly excluded, as are licenses granted in relation to intellectual property rights in matters which are consistent with the Law of the Host State. The treaty also does not apply to commercial arrangements which specify dispute settlement procedures.

 Factors leading to assessment of the draft

 A Bilateral Investment Treaty exists not only to boost investor confidence in the Investee Country but also to ensure primacy of domestic laws of the Host country (the country attracting investments).

 Although there is no particular reason specified for amending the 2003 Model treaty in 2015 and then again in January 2016, it is fair to infer that the decision has something to do with the adverse arbitral awards against India in 2011 (White Industries Australia Limited V. Republic of India) and 2012 (the Vodafone case).

 The July 2016 arbitration outcome in the Antrix Corporation Limited vs. Devas Multimedia matter has strengthened the case for amendments to the Model Treaty draft- or at least, gives other parties the opportunity to negotiate harder.

 Key features of the revised model 

  • The revised model elaborates on the definition of critical terms such as “Enterprise”, “Real and substantial business operations”, and “Controlled”. The term “Enterprise” includes all legally constituted corporations and LLP and Joint Ventures with real and substantial business operations in the Host State with characteristics such as commitment of capital or other resources, expectation of gain or profit and an assumption of risk, etc. 
  • The revised model treaty mandates the investment source country and the investee country to treaty investors and other parties as favorably as its own investors, in similar circumstances, with respect to management, conduct, operation, sale, etc. to ensure that the host state facilitates the investor with a fair and equitable treatment and are provided full protection and security on terms no less favorable than those offered to the other domestic investors. This is the important principle of “National Treatment”. 
  • The new model restricts the host state from expropriating any investments except for reasons of public purpose i.e. sate can confiscate investments only for public use. One such example is acquisition of land under the land acquisition law and even in such cases such expropriation is only allowed on payment of adequate compensation which shall reflect fair market value of the expropriated investment. 
  • Under the model treaty transfer of funds is permissible to the extent that such funds constitute contributions to capital, profits, dividends, capital gains, sale proceeds and proceeds from partial or complete liquidation of the Investment, interest, royalty payments, management fees, and technical assistance, payments made under a contract including a loan agreement and payments arising out of a dispute or compensation towards expropriation. 
  • The model treaty strictly prohibits any practice amounting to corruption such as pecuniary or other inducements to any government official of the host state, award of contracts based on unreasonable recommendations and illegal contributions to any political party of the Host State. 
  • The model treaty obligates the investor to comply with the disclosure requirements prescribed under the domestic law of the host state with regard to their financial situations, performance, relationships and governance matters along with compliance with respect to tax liabilities, labour, environmental and other laws applicable to the Investment and the business operations in the host state. 
  • The model treaty also seeks to safeguard the interests of the Home State such that the Investments are made subject to civil actions for liability in the judicial process of respective Home State for the acts, decisions or omissions made in the Home State in relation to the Investment wherever the same prejudices the interest of the Host State in terms of significant damage, personal injuries or loss of life. 
  • Dispute resolution between the investor and the party is channelized through a tribunal constituted under the model treaty. It is to be noted that such tribunal has limited jurisdiction and does not have power to re-examine any legal issue already settled by a competent authority, or to review the merits of decisions made by such authority. Most important perhaps, is the condition specified that before an Investor initiates proceedings against the investee country in an arbitral tribunal under the model treaty, the Investor must first exhaust all local remedies. 

However, the same may not apply to Investors in cases where it is evident and can be established that the domestic legal remedies available are not capable of reasonably providing any relief in respect of matters for which a breach is claimed under the treaty by the aggrieved investor.

 Conclusion

 It is very important to accept that mere adoption of precautionary measures in a model treaty will per se not fulfill the purpose of achieving investor confidence. The finally agreed draft between India and other countries with which it intends to sign such treaties (e.g. the United States), will determine the efficacy of the new model.

It remains to be seen to what extent India will be successful in negotiating a Bilateral Investment Treaty with powerful countries like the USA on the basis of the new model, given that there have been recent instances where India has been asked to pay financial compensation for giving unfair and inequitable treatment to the interest of a foreign investors in India and as such, reflecting its inability to provide ‘National Treatment’.

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