Investment treaties are a knotty affair

Source: Business Line

1 Apr 2015

Tilting with justice Right the balance Gorosi/shutterstock.com

Tilting with justice Right the balance Gorosi/shutterstock.com

India’s been at the receiving end of many MNCs. Is that why the government’s doing a rethink on arbitration abroad?

It’s been widely reported in the media that the Indian government is considering scrapping or renegotiating its bilateral investment treaties (BITs) on concerns of increasing instances of foreign companies dragging matters to arbitration proceedings abroad. Further, India’s comprehensive trade pacts that also cover investment rules, will focus mainly on investment promotion instead of investment protection.

As of now, India has signed 83 investment treaties; 72 are in operation. BITs or bilateral investment protection agreements (BIPAs) are signed by governments to protect investments made by investors from one signatory country in the territories of others and vice-versa, from arbitrary regulatory changes. Notably, India has no investment protection treaty with the US though the negotiations have been on since 2008.

What prompted this sudden change in thinking? Does it have anything to do with increasing instances of what is called ‘treaty shopping’by MNCs especially after the arbitration award in the White Industries case that went against India? This was followed by other arbitration notices prompted by the cancellation of 2G telecom licences (February 2, 2012) and the introduction of tax law amendments in the Union Budget 2012-13, supposedly to deal with the adverse court decision in the Vodafone case.

The latest to join the bandwagon is British oil major Cairn which announced its intention to invoke the India-UK bilateral investment protection treaty to challenge India’s IT department tax demand amounting to $1.6 billion plus applicable interest and penalties.

After his meeting with President Obama in New Delhi in January, Prime Minister Narendra Modi said that talks on the India-US Investment Treaty would soon resume. It will be interesting to see how India comes to terms with its reservations on investment treaties at a time when the US is trying to rewrite the rules of investment through its mega trade pacts such as the Transpacific Trade Partnership and the Transatlantic Trade and Investment Partnership.

The US is pushing hard to broaden the scope of investment protection by including many non-core items such as pre-establishment national treatment, labour, and environment or IPR that are likely to make India uncomfortable.

Between treaties and inflows

Critics argue that the US is using investment treaties as a tool to get what it could not get through the consensus-based WTO route. For example, the inclusion of IPR under the ambit of investment protection can be seen as trying to get around India’s perceived lax IPR regime.

India’s dilemma is that given its huge capital requirements, it cannot ignore the fact that 50 per cent of the outward FDI is associated with TPP/TTIP members that include the EU, Japan and the US, among others.

Supporters of investment treaties can rightly be criticised for exaggerating their role in attracting foreign investment. However, it would be naïve to argue that BIPAs don’t play any role in influencing the flow of foreign investment. Leaving aside resource rich countries such as Brazil or Venezuela (which will attract foreign investment irrespective of whether they have investment treaties or not), investors (of domestic or foreign origin) do look for predictability of the regulatory environment that is ensured by investment protection treaties. Besides, investment treaties provide an extra layer of protection to foreign investors over and above what is possible under the domestic legislative framework. BIPAs also have sentimental effects on foreign investors, and dwell on the overall investment climate that India can ignore at its own peril given its dismal ranking (142 out of 189) on the ease of doing business according to the World Bank. India’s image has already taken a hit because of a series of tax disputes involving MNCs, such as Vodafone and Nokia.

The absence of investment protection treaties would also imply that aggrieved Indian businesses, many of which have substantial overseas presence, will not be able to successfully challenge unfavourable regulatory changes or seek international arbitration for damage. Between FY2009-10 and FY2013-14, India invested over $60 billion abroad, including investments in foreign equities, loans and guarantees that would need protection from expropriation and other unfavourable policy changes in host countries. This, however, does not mean there is nothing wrong with India’s bilateral investment treaties or that India should not do anything to check their misuse by MNCs. India would need to review and rejig its BIPAs to minimise their adverse consequences while at the same time retaining their useful features.

What’s wrong with BITs?

It is now clear that provisions related to investor state dispute settlement (ISDS) impinge upon the policy space available to government agencies, and make it difficult to impose any kind of performance obligations on foreign investors. Then, there’s no clarity about what would constitute investment under investment treaties. This fact was exploited by the Australian company, White Industries, in its dispute with India over a more or less commercial contract. Among the most abused terms is the meaning of expropriation, a word open to multiple interpretations. Should it include indirect expropriation or not? Again there is confusion about what constitutes public interest that justifies expropriation. Under the existing provisions, the rulings of tribunals can’t be appealed, hence they de facto become binding on parties.

The way forward

India will need to tighten its definition of expropriation preferably on the lines of the Canada-EU trade agreement that excludes measures to protect health, safety and the environment from the ambit of direct or indirect expropriation that can be challenged by investors.

Only the government should be allowed to initiate ISDS cases following the current model of the WTO dispute settlement mechanism. Thus, an aggrieved firm desirous of seeking compensation must first convince its own government that investment rules have been violated. This will put a check on the misuse of BITs.

However, going overboard may backfire. Though there is limited information (in the public domain) about India’s proposed model BIT, many of its suggestion do not seem practical — take, for instance, the suggestion to put restrictions on royalty payments to limit the ability of Indian companies to secure foreign technologies.

Given India’s slow-moving judicial system, any suggestion that aggrieved foreign investors must first exhaust remedies under the domestic legislation of the host country before going for international arbitration is not based on a realistic assessment of India’s peculiar situation. So too the idea to keep taxation disputes out of the purview of BITs. Too much tightening of the definition of foreign investment may be counter-productive when India needs all kinds of foreign investments including direct and portfolio investment, loans and loan guarantees.

The writer is a former government official and currently a corporate economic advisor based in Mumbai. The views are personal

(This article was published on March 31, 2015)
This entry was posted in BITS, Investor state dispute. Bookmark the permalink.

One Response to Investment treaties are a knotty affair

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