1 October, 2015
The engines of economic growth in India are moving towards full throttle. Foreign investors are keenly observing if India is ready to walk the talk. The cornerstone of investor confidence has always been transparency, predictability and clarity of a country’s policies and regulations. The need for capital preservation is as much of a consideration as investment return and capital growth Woefully, the draft Model Bilateral Investment Treaty (“BIT”) does not seem to be making that case.
India had recently invited comments on the draft Model BIT. The finalized draft shall be used to negotiate any new BIT entered into, including the much anticipated US-India BIT. In addition, it would be used to renegotiate the India’s 72 currently active BITs.
To start with, the very concept of investment that lies at the heart of any investment treaty is disappointingly ill- considered. The Model BIT has chosen the enterprise-based definition of investment over the widely used asset-based definition. The negative list, which includes intellectual property rights amongst others, further shrivels the permissible forms of investment under the Model BIT.
From the perspective of a capital importing country, the definition of investment identifies entrepreneurs, industries and groups that the country wants to attract in order to increase foreign investment.
Investment of capital takes a multitude of forms in the world today. With India looking to bring about a generational change in technology, expertise and enterprise, the present definition of investment needs to be replaced with a more progressive and dynamic definition that is broad, reflecting a desire to encourage foreign investment in all its forms, present and future. The concerns of arbitral activism that may arise from expanding the definition of investment can be better addressed with the exclusion of specific types of assets, a closed-list definition with a wide asset-based list, or by tempering the definition with established Salini characteristics.
Further, the crippling of many substantive protections is bound to dampen investor enthusiasm and confidence. The protection of “National Treatment” excludes from its purview laws and actions of regional (of a state of India) and local governments, leaving the substantive protection limited to the measures of the Union Government. The Constitution of India vests significant powers in the states which they exercise independent of the Union Government. Local governments are similarly empowered, though on a much smaller scale. This effectively means that foreign investors shall have no recourse from any contaminated actions and policies of the regional and local governments.
Next, the standard protection of ‘fair and equitable treatment’ has been replaced with much leaner and somewhat imprecise protections, and completely excluding the protection of ‘full protection and security’. As proposed, the investments shall be protected only if the violations of due process are “un-remedied and egregious” and the manifestly abusive treatment is “continuous, unjustified, and outrageous” coercion or harassment. The bar for remedy, determinable from by usage of “egregious” and “outrageous”, is steep and seems to suggest that lesser evils shall not be frowned upon. As the NAFTA tribunal in Mondev International Ltd v USA very aptly observed “what is unfair or inequitable need not equate with the outrageous or egregious”, and that “a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith”.
India has been trying to overcome its governance and ease-of-doing-business credibility crisis. The Model BIT, in a clear reaction to the White Industries case and the Louis Dreyfus Armateurs claim, excludes “services supplied in the exercise of governmental authority”. This reflects badly on India’s resolve to give an efficient investment milieu to foreign investors. The incongruity here is that every investor legitimately expects the host government to warrant robust services, particularly those services which are supplied in the exercise of government authority and cannot be replicated by private service providers, like effective means of asserting claims and enforcing rights (courts) and safe and secure business environment (law and order).
The reverberation of the Vodafone, Cairn Energy and Vedanta claims is evident in the Model BIT’s exclusion of taxation measures. Sovereign governments, undoubtedly, should have discretion to formulate their taxation policies, without suspecting a lurking investment claim. However, such a carve-out for taxation should specifically exclude retrospective taxation and unambiguous tax sops to attract investors, especially when the Indian tax authorities have such an uninspiring reputation with regards to the treatment vetted out to foreign investors.
The trepidations from the battery of recent investment claims filed against India are evident in the Model BIT. The drafters, shortsighted in limiting protections afforded to inbound investors in order to reduce exposure to future claims, have ignored that the BIT lays down reciprocal investment guarantees and by the same token protections to outbound Indian investors will also be shaved off. This is significant as India is now not only importing capital, but also exporting it, even though not on a comparable basis. Moreover, with India’s increasing South – South economic engagement, a BIT negotiated on this model would leave Indian investors to fend for themselves in case of an embittered investment in another developing country.
Further, with the exclusion of the Most Favored Nation provision, market access commitments, umbrella claims and a requirement to first exhaust local remedies (although not endlessly), India needs to provide credible, robust and unambiguous assurances to foreign investors. This seems to be a steep ask for GOI, especially in the face of conundrum of issues in front of it.
The Model BIT needs to adopt a perspective which is more progressive and aligns with the long-term interests of India. The drafters must find the fine balance between investor rights, investor responsibilities and State’s regulatory powers. The Model BIT in its present form resembles a half-baked cookie, which has all the flavors to be a delicacy but leaves a lot to be desired.
This article was first published in the August 2015 issue of Lex WITNESS.
