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India and Bilateral Investment Treaties

Given the catalytic role of foreign direct investment (hereinafter FDI) in promoting economic development, countries adopt various unilateral as well as bilateral arrangements to create a conducive environment for FDI. One such significant form of arrangement is bilateral investment treaties (hereinafter BITs). As sizeable cost and resources are involved in treaty formation, it becomes important to examine the potential benefits of BITs for investment and whether such measures translate into higher FDI flows.


India signed her first BIT with the United Kingdom in 1994, with the clear objective of attracting and incentivizing foreign investment[i]. India’s initial attitude towards International Investment Arbitrations (hereinafter IIAs) remained unchanged until a few years back. India’s first BIT was based on a Model created by a developed country - where emphasis lied on the protection of foreign investment, rather than internationally recognized regulatory powers of the State. This excessively investor-friendly regime remained unchanged for nearly two decades. The India-UK BIT served as the base template for India to negotiate further BITs. The Indian Model BIT of 2003 contained close semblance with the India-UK BIT. The regime garnered scanty attention and until 2011, only one arbitration was initiated against India internationally. This was ultimately settled and did not result in an international investment arbitration award.


However, India’s approach to investment treaties started undergoing a sea-change after the case of White Industries in 2011. Several cases were filed against India between 2011 and 2016. As a result of the growing surge of BIT claims, India unilaterally terminated several BITs in 2016. India has also introduced a Model BIT in 2016 to serve as the foundation to re-negotiate treaties while formulating interpretative statements on the existing ones.

Investment treaties are considered as a commitment to protect investors and to provide them with a more certain, predictable, and supportive environment. Investors contemplating FDIs require better institutional quality, supportive policies, and reduced restrictions on entry and operation. A comparison of FDI trends along with trends in BITs shows that along with an upward trend in BITs, India has also experienced a surge in the total FDI inflows in the last two decades.


NEED FOR FDI

Given the catalytic role of FDI in promoting economic development, countries adopt various unilateral as well as bilateral measures to create a conducive environment for FDI. The bilateral measures include, inter alia, double taxation avoidance agreements, and BITs. The focus of this article is on BITs which are agreements that establish the terms and conditions for FDI in a country. According to UNCTAD, Bilateral investment treaties are agreements between two countries for reciprocal encouragement, promotion, and protection of investment in each other’s territories by companies based in either country[ii].


Attracting FDI is an important policy objective of developing countries like India; the results imply that one of the instruments of achieving this objective is for the government to negotiate BITs with countries that are prospective investors. By laying down clear guidelines concerning investment and widening the scope of investment activities covered under a bilateral agreement, an environment of certainty is created which would facilitate FDI flows.


As of 31st January 2015, around 3,000 BITs had been negotiated across the world, of which 2,225 are in force[iii]. The scope and depth of BITs are expanding in terms of intra-regional and inter-regional coverage, which, in turn, is expected to strengthen the flow of investment among economies. Most of the BITs contain provisions for investment covering establishment clauses, legal provisions, tax norms, dispute resolution procedures, administrative specifications, and other related protocols. They also promote equal treatment towards domestic as well as foreign investors. Such arrangements create an environment of certainty for foreign investors and, hence, are perceived as investment-friendly.


WHITE INDUSTRIES

White Industries [iv], an Australian mining company, entered into a long-term mining contract with Coal India Limited (Coal India), a State-owned Indian company in 1989. Disputes relating to quality, bonus and penalty payments arose between Coal India and White Industries, prompting the latter to commence arbitration under the ICC Arbitration Rules. In May 2002, the ICC tribunal awarded USD 4.08 million to White Industries. In September 2002, Coal India applied to the Calcutta High Court to set aside the ICC Award under the Indian Arbitration and Conciliation Act. Simultaneously, White Industries applied to the High Court of New Delhi to enforce the ICC Award in India. Both proceedings experienced significant delays.


The enforcement proceedings eventually stayed pending a decision in the set-aside proceedings. White Industries appealed to the Supreme Court while the High Court of New Delhi stayed the enforcement proceedings. The matter was pending before the Supreme Court for nine years until 2010. White Industries finally invoked arbitration under the India Australia BIT. The Tribunal ultimately awarded White USD 4.08 million as compensation as it found that India had violated its obligation to provide to the investor ‘effective means’ of asserting claims and enforcing rights i.e. a provision borrowed from the India-Korea BIT[v] by way of a most-favored-nation clause in the India Australia BIT.


After this award, several foreign corporations slapped ISDS notices against India challenging a wide array of regulatory measures such as the imposition of retrospective taxes, cancellation of spectrum licenses, and revocation of telecom licenses. Recently, Japanese automaker Nissan sued India under the India-Japan Comprehensive Economic Partnership Agreement (CEPA[vi]). According to UNCTAD, a total of 22 ISDS claims have been brought against India so far, out of which a large number of cases are pending. It is also worth mentioning that some Indian investors have also initiated ISDS claims against other countries though such instances are few in comparison to the cases brought against India.


It is interesting to note that the Indian Model BIT retains the ISDS mechanism to settle disputes with foreign investors though it adds several conditions that an investor needs to meet before accessing ISDS. The adoption of the Model BIT with the ISDS mechanism shows that India has rejected the extreme option exercised by countries like South Africa to walk out of the system. India wants to be a part of the system although with different terms of engagement. Consequently, India has changed the scope and content of certain key provisions in the Model BIT to limit challenges to its actions.


CONCLUSION

White Industries was followed by a spate of investor-state proceedings against India, more particularly as a result of regulatory and legislative measures adopted by the Indian government in the subsequent years. The award in White Industries served to be an eye-opener to India and proved to be a turning point in her otherwise indifferent stance towards investor-friendly BITs. After the White Industries case in 2011, India’s approach to investment treaties began to undergo a sea-change. The Central Government Working Group began a review process in 2012 and aimed at creating an investor-state dispute resolution regime that would balance investor rights with State regulatory obligations – rather than containing broad and vague provisions capable of significant encroachment upon State regulatory powers.


From the period between 2011 and 2015, India signed only one BIT with the UAE and an IIA with ASEAN. This shift further culminated in the introduction of the new Indian Model BIT in 2016[vii]. In 2016, only one BIT has been signed by India with Cambodia. India has reportedly terminated 58 of its BITs and is in the process of re-negotiating new BITs. It is also engaging in formulating interpretative statements on the existing BITs and IIAs.


The White Industries award draws attention to the fact that BIT provisions like the MFN clause are often vague and broad. This enabled White Industries to indulge in treaty shopping and arrive at a result that India did not anticipate. The ruling also clearly demonstrates how sovereign functions of the Indian judiciary could amount to a violation of India’s BITs. Hence, one expects that this ruling should trigger a critical review of India’s BIT program. Such a review is imperative in light of India’s deepening integration with the global economy and an increasing number of new trade and investment agreements, such as the India-EU free trade agreement.


ENDNOTES

[i] https://investmentpolicy.unctad.org/international-investment-agreements/treaties/bit/1968/india---united-kingdom-bit-1994

[ii] Heribert Golsong, International Legal Materials, Vol. 34, No. 4 (JULY 1995), pp. 935-945.

[iii] Available at http://finmin.nic.in/bipa/bipa_index.asp?pageid=1

[iv] White Industries v. India, IIC 529 (2011).

[v] Available at https://dea.gov.in/bipa

[vi] Available at https://commerce.gov.in/writereaddata/pdf_download/IJCEPA_Basic_Agreement.pdf

[vii] Available at https://dea.gov.in/sites/default/files/ModelTextIndia_BIT_0.pdf


ABOUT THE AUTHOR

This blog has been authored by K.S. Manaswi who is a Final Year B.A., LL.B. (Hons.) student at Damodaram Sanjivayya National Law University, Visakhapatnam.


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