Source: East Asia Forum
12 Feb 2015
It’s official: India and the US will resume negotiations on a high-standard bilateral investment treaty (BIT). In a recent joint statement Prime Minister Narendra Modi and President Barack Obama affirmed their ‘shared commitment to facilitating increased bilateral investment flows and fostering an open and predictable climate for investment’. Since 2008, the two countries have been engaged in sporadic discussions to conclude the treaty. Negotiations on its wording, based on each country’s revised model treaty texts, will begin soon.
But, given the vast divergence between their respective models, the chances of a quick breakthrough appear bleak. This is especially so because India has recently overhauled its 1993 model text, adding stringent conditions and narrow provisions. India’s new model text is miles apart from the 2012 US model BIT on fundamental issues. To start with, the definition of investment itself will be a major bone of contention.
In any investment treaty, the definition of investment is of paramount importance because it determines what kinds of investment will be protected. The US model adopts a broad, asset-based definition that includes business enterprises, shares, bonds, debentures, derivatives, intellectual property rights, business concessions, contractual rights, and moveable and immovable property.
In contrast, India’s new model BIT adopts an ‘enterprise’ based definition, confining the term investment to foreign direct investment in the host state. An enterprise is defined narrowly as one having ‘real and substantial business operations’ in the host state with ‘substantial and long-term commitment of capital’ and a ‘substantial number of employees in the territory of the host state’. So an enterprise that carries out minimal business operations in the host country would not qualify for protection under the treaty.
India’s model BIT excludes several things from its definition of investment: portfolio investments, government debt securities, commercial contracts, goodwill and other intangible assets of an enterprise. And, unlike the US model, India’s model only recognises those investors who directly own and control an enterprise, precluding the possibility of claims by indirect or minority shareholders. A holding company would also not qualify as an investment entity.
Even if the US adopts a more flexible approach, it will certainly insist on including intellectual property rights and portfolio investments (both equity and debt flows) in any definition of investment.
The US model also includes a most favoured nation provision, which India has completely dropped from its new model. Washington is unlikely to accept the exclusion of such a provision as it would prevent US investors from invoking more favourable substantive protection standards contained in India’s other BITs.
Market access will be another bone of contention. The US government seeks strong market access commitments through pre-establishment of national treatment, which means US enterprises could establish investments with terms that are just as favourable as for Indian investors. This would prevent India from imposing performance requirements on US enterprises as a condition of investment. But India’s new model, and its existing treaties to date, only provide post-establishment national treatment, meaning once established foreign investors are treated no worse than domestic investors, and then there are exceptions. India maintains the right to screen foreign investors prior to them establishing an investment presence in the country.
What is more, the US model allows investor-state dispute settlement (ISDS), under which investors can bring a claim before an international arbitration tribunal against the host state for alleged breaches of treaty obligations. India’s new model requires an investor to exhaust all local remedies (judicial and administrative) before initiating international arbitration. For India, ISDS is intended as a last resort should all domestic courts, arbitration processes and negotiations fail. India’s model also prohibits international arbitration tribunals from re-examining any legal issues settled by a judicial authority in the host country.
The US model contains detailed provisions on environment and labour standards. India has always opposed such standards in bilateral agreements and at the WTO. It remains to be seen whether India will accept these provisions under the proposed India–US BIT. The Indian model deals only with disclosure and anti-corruption provisions.
It is also uncertain whether the US will agree to India’s proposal to keep intellectual property rights (including compulsory licenses), taxation matters, and measures taken to ensure financial and macroeconomic stability outside the framework of the proposed treaty.
Does all this mean that a BIT between the US and India is impossible?
The two countries may find common ground on transparency issues, state-to-state dispute settlement mechanisms, investor and host country obligations, and conduct of arbitration tribunals. Identifying common ground is usually the first step in the negotiation process.
Any BIT is based on the principle of reciprocity. If India agrees to US demands, one must ask what India will get in return. The same is true of the US. Both parties will have to cede considerable ground to conclude a mutually acceptable BIT within a reasonable time. Despite the strong personal rapport between Obama and Modi, the negotiations will not be a smooth affair.
Kavaljit Singh is the Director of Madhyam, a policy research institute based in New Delhi.
This is an edited version of a piece that first appeared here on the beyondbrics blog of the Financial Times on 26 January 2015.