By Prabhas Ranjan, The Wire| February 2, 2016
Pricked after being sued by foreign investors under different bilateral investment treaties (BIT), India has adopted a new model. But it could impact the ongoing India-US BIT negotiations.
Provoked by foreign investors suing India under different bilateral investment treaties (BITs), the government recently adopted a new model BIT. Countries develop a model BIT to use as a template to negotiate investment treaties, but on its own, a model BIT has very limited legal value. The 2015 model BIT replaces the 2003 model, which was fairly investor-friendly. Most of India’s existing BITs, signed with more than 70 countries, are based on the 2003 model. The adoption of the new model BIT heralds a new era in India’s engagement with foreign investment and investment treaty practice.
What the model BIT entails
The draft model BIT, unveiled by the government in early 2015, failed to balance the protection of foreign investment with India’s right to regulate and was diametrically opposed to the government’s pet projects to woo foreign investors, such as ‘Make in India’ and ‘Digital India’. The 20th Law Commission of India in its 260th report recommended to the government amendments to many provisions in the draft model BIT.
Although we are uncertain if all recommendations made by the Law Commission were taken into account when revising the draft model BIT, some suggestions have been incorporated. For instance, in the draft model, the provision on expropriation recognised that the host state can expropriate investment indirectly. However, proving this required not just the permanent and complete deprivation of foreign investment but also the transfer of the value of foreign investment to the expropriating country or its agency. Indirect expropriation of foreign investment is rarely accompanied by appropriation of the value of investment by the state. Consequently, this would have made it almost impossible for foreign investors to prove indirect expropriation even when there was total deprivation of their investment. The final model has done the right thing by removing the requirement of appropriation of value of investment and limiting the test of indirect expropriation to substantial or permanent deprivation of foreign investment.
The final model has retained the ‘enterprise’-based definition of investment as was in the draft model. Thus, only foreign enterprises legally constituted in India can bring a BIT claim. However, assets held by the foreign enterprise have been included in the definition of investment. Another welcome change is that the final model has done away with the requirement that only those foreign enterprises that have real and substantial business operations in India, which included proving the undefined requirement of engaging a ‘substantial number of employees’, could benefit from the treaty protection. This would have knocked out a large part of foreign investment from the ambit of treaty protection and thus diluted its significance.
The draft model BIT provided that the issuance of compulsory licenses (CLs) would be outside the ambit of the treaty, if such issuances were consistent with domestic law, such as for a patented drug. However, in the final model BIT the issuance of CLs will be outside the treaty’s ambit only if such an issuance is consistent with the WTO treaty. To better understand the difference, let us look at a possible situation where a foreign pharmaceutical company challenges the issuance of CLs by India, which has been upheld by the Indian courts, before a BIT tribunal. Under the draft model BIT, the tribunal would give deference to the decision of the Indian courts as they are better placed to judge issues of compliance with domestic law. However, under the final model BIT, the tribunal will have the jurisdiction to examine whether the CL has been issued in accordance with the WTO’s agreement on trade related aspects of intellectual property rights. The tribunal will be less deferential to Indian courts since the issue would need to be resolved in compliance with international law and not Indian law. Apart from concerns over whether investment tribunals have the capacity to judge such questions, this will unnecessarily expose India’s patent laws to international judicial scrutiny. Surely India does not want this as it runs the risk of opening a Pandora’s box on extremely sensitive and contentious issue of intellectual property protection.
The final model BIT retains certain things from the draft model such as excluding taxation from the purview of the treaty. The exclusion of taxation is a direct outcome of companies like Vodafone challenging retrospective taxation laws before BIT tribunals. Perhaps such a strong reaction was unnecessary because, as the Law Commission’s report observed, BIT tribunals give adequate deference to countries on matters related to taxation unless the tax measures are confiscatory, discriminatory or arbitrary.
The model BIT, like the draft version, does not have the most favoured nation (MFN) provision — a cornerstone of non-discrimination in international economic relations. The absence of the MFN provision is a direct consequence of India losing the dispute to White Industries, an Australian company, in 2011. White Industries used the MFN provision to import a beneficial provision from the India-Kuwait BIT into the India-Australia BIT. The use of the MFN provision by foreign investors for such purposes has been questioned. However, not having the MFN provision in the BIT is a disproportionate reaction. As the Law Commission had suggested, the objective to disallow treaty shopping can be achieved by restricting the MFN’s applicability to actual cases of discrimination in application of domestic measures. But excluding it entirely could send negative signals to foreign investors.
Another noticeable feature of the model BIT is that foreign investors have to exhaust local remedies before proceeding for international arbitration. This might not be a very attractive proposition for foreign investors because, as the 245th report of the Law Commission pointed out, the Indian judicial system is overstretched with a humongous backlog of cases.
The way ahead
It would be interesting to see what impact the adoption of the new model would have on the ongoing India-US BIT negotiations, as India’s model differs from the US. The US’s 2012 model includes MFN, recognises that taxation measures could result in the expropriation of foreign investment, does not have an enterprise-based definition of foreign investment and does not require the exhaustion of local remedies before initiating international arbitration. The US has already indicated that it has reservations regarding India’s new model BIT, likely making it difficult for Indian negotiators to convince their American counterparts to accept the Indian viewpoint on these issues.
There are three pertinent points to consider when deciding the future course of action. First, does India wish to renegotiate its BITs based on the new model with countries where it is largely an exporter of capital? This would include renegotiating with many African and Asian countries, with whom India stands to benefit from the current investor-friendly BITs.
Second, what would India do if a country refuses to renegotiate? Would it terminate the existing BIT? If yes, the survival clause ensures the existence of the BIT for the next 15 years.
Third, newly negotiated BITs based on the new model would mean less treaty protection for Indian investment abroad. This is especially important considering that outward foreign investment from India has increased significantly over the past few years.