The Changing Landscape Of Investment Treaty Protection.

The Origin Of Indian BITs

India was a relative latecomer to the world of investment treaties. Although there had been an investment agreement with West Germany in 1964 protecting German investments in India, it was not until 1994 that India entered into its first bilateral investment treaty (BIT).

Thereafter, it struck such agreements enthusiastically: 72 have now come into force, with a further 11 signed but not yet ratified. The Government of India (the Government) also issued a model BIT in 2003, on similar lines to model BITs issued by other countries. Around the same time, the first BIT claims were made against India, arising out of the Dabhol power project. Even though substantial compensation was paid out in settling those claims, the experience did not deter India from entering into further BITs.

Growing Unpopularity

The picture has changed in the last few years, however, for a number of reasons.

First, and most significantly, in November 2011 a BIT arbitration went against India. In White Industries -v- The Republic of India, an Australian investor was awarded AUD 8m as a result of difficulties in enforcing a commercial arbitration award in India.

Secondly, there has been a raft of subsequent BIT claims (or threatened claims) against India, relating in particular to retrospective tax legislation, cancellation of telecom licences and annulment of coal mining licences. Most recently, in March 2015, Cairn India announced it had filed a claim under the India-UK BIT relating to a USD 3bn tax assessment. Around 20 BIT claims have now been filed against India, the highest number against any Asian country.

Thirdly, there has been a general reassessment of the merits of BITs – not only in India but also in other parts of the world – with South Africa turning its back on BITs, Indonesia threatening to do so, and controversy raging in the EU concerning the proposed Transatlantic Trade and Investment Partnership (TTIP).

The New Model BIT

In light of these developments, in 2012 the Government ordered a general review of the Indian position on BITs. The draft of a new model Indian BIT has now been released for public consultation.

While some have welcomed this draft as a salutary realignment of the rights of foreign investors, many have reacted with disquiet at the substantial retrenchment of protections in it, which goes further than the changes in model BITs issued by other countries in recent years. In particular, it contains:

• A narrow definition of “investment”: to claim protection under the new model BIT, an investor will have to have “real and substantial business operations” in India. It must have made a longterm commitment to India in terms of capital, employees and transfer of know-how, and cannot just be holding Indian assets.
• A narrow definition of “government”: only the actions of central government (plus, in some respects, the actions of state governments) are covered by the BIT, not those of local government.
• Excluded areas: unsurprisingly, the Government has reserved the right to take action protecting public health, safety or the environment, without contravening foreign investors’ rights. But the Government has gone further and suggested that the following (among other matters) are also not covered:
• intellectual property rights;
• contracts with the Government;
• court judgments and arbitral awards; and
• taxation.

The latter exclusion is the most striking, since the value of an investment can be substantially reduced through taxation (indirect expropriation).

• Removal of Most Favoured Nation clause: unlike earlier BITs, an investor will not be able to take advantage of rights in other treaties via a Most Favoured Nation (MFN) clause. The Australian investor in White Industries claimed a right under the India-Kuwait BIT by using the MFN clause in the India-Australia BIT.
• Reference to the Indian courts: an investor claiming a breach of the BIT must first pursue local remedies (via the Indian courts, in particular). It can only go to arbitration if that process has been exhausted, or if it can show that a local remedy would not provide any relief, or that there is no reasonable possibility of such relief being provided in a reasonable period of time.

Comment

This model BIT is only a draft. It remains to be seen whether the Government will issue it in the form it is does so, it remains to be seen whether any other country will accept it when negotiating a BIT. The litmus test for this may be the BIT negotiations which have reportedly been restarted between India and the US.

The US model BIT is substantially different from the draft India model BIT.

However, this draft does indicate a change in course on the part of the Government. It is likely to stimulate efforts to renegotiate existing Indian BITs, and will also set the tone for significant BIT negotiations, not only with the US but also with the EU and ASEAN.

What is perhaps most significant about this draft, though, is that it has been issued at all. The Modi Government, which has been energetically pursuing foreign investment since it came to power, clearly still sees value in continuing to enter into BITs. India has not followed South Africa in transitioning BIT protections from treaties into national law. The Government is also no doubt conscious of the increasing number of Indian companies that now invest in other parts of the world. They benefit in other countries from the protections offered by the BITs that India enters into.