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30 June, 2017
With the advent of a new world order, particularly post the end of the Cold War, the world witnessed a spurt in international trade and commerce. With the changing times, the attitude towards foreign investment also witnessed a marked change. Countries were no longer averse to foreign investment and shed their initial inhibition and reluctance to foreign investments within their economies.
Simultaneously, to regulate international trade and investments between the nations, this extraordinary growth in international trade also led to an emergence of legal framework, based on both customary international law and domestic laws.
As a result, Bilateral Investment Treaties (BIT), were entered into between two countries to provide a set of rules and regulations pertaining treatment and protection of foreign investments.
The United Nations Conference on Trade and Development (UNCTAD) defines a BIT as “an agreement between two countries regarding promotion and protection of investments made by investors from respective countries in each other’s territory.”
BIT & India
India signed its first BIT with United Kingdom on March 14, 1994. Till date, India has signed 83 BITs with different countries.
With the incidence of rising disputes for alleged violation of BITs by India, the Government of India replaced the existing Indian Model BIT with a revised BIT on December 28, 2015[1].
Revised Indian Model BIT – Striking Aspects
The revised BIT has narrowed the definition of investor, as it has adopted an “enterprise-based” approach, i.e., investor having majority ownership or direct control (direct investment) as against the “asset-based” approach in the erstwhile model, which is broader in scope.
The said definition in the revised BIT also includes a negative list, with foreign portfolio investors being the most prominent omission from the definition of investor.
Being conscious of ongoing tax disputes involving Vodafone and Cairn Energy, government has specifically, kept taxation matters outside the purview of the Model BIT. This is a significant feature and is likely to have a major impact on the investors considering investment in India.
The revised BIT has included state governments within the scope of National Treatment, thereby, providing favourable treatment to investors making investments within their territorial jurisdiction. This is a positive step and should enhance investor confidence.
Contrary to international law practice, which generally prohibits discriminatory lawful expropriation, the Revised BIT has allowed lawful expropriation despite being discriminatory, on the grounds of public purpose, in accordance with the due process of law and on payment of adequate compensation.
Most Favoured Nation (MFN) clause has been omitted under the revised BIT.
In a welcome step to promote corporate social responsibility, the revised BIT requires the investors to adopt policies and practices to support social causes in the state in which the investment is proposed to be made.
There is a new provision providing that an investor cannot initiate arbitration proceedings before five (5) years from the date on which the investor first acquired knowledge of the measure in question or breach of obligation.
This stipulation is unduly long and onerous in nature and somewhat runs contrary to the very purpose of BIT to promote investment in general.
Recent Developments
Amidst objections by the developed economies, as per the latest reports, Government of India seems to have softened its stance on the non-negotiability of the revised BITs.[2]
Further, British oil & gas major Cairn Energy PLC has moved to international arbitration tribunal at The Hague, the Netherlands, over failure of Vedanta Limited to provide the dividends to Cairn Energy due to an attachment order made by the Indian tax department pursuant to the tax demand imposed by retrospective application of the tax laws.[3]
The three (3) member tribunal at The Hague, the Netherlands, was constituted against the backdrop of retrospective tax demand by the Indian Government against Cairn.
Recently, India and Eurasian Economic Union (EAEU), with members comprising of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan, have announced the launch of negotiations on a Free Trade Agreement (FTA), to further promote and develop economic, trade and investment relations between the two parties. The first meeting of the negotiators would be held in India in September, 2017.
In Conclusion
Following expiration of BITs, effective April 1, 2017, India has approached several countries for negotiations to enter into the revised BIT model.
It has been reported that Tajikistan, Turkmenistan, Kyrgyz Republic, Switzerland, Oman, Qatar, Belarus, Thailand, Armenia, UAE and Zimbabwe, have agreed to India's proposal to renegotiate the treaties based on the revised BIT[4].
However, European Union (EU) and other developed economies have strongly objected to the exclusion of taxation matters and MFN clause.
The contemplated dispute resolution process proposed by the revised BIT may end up being another stumbling block for negotiation with the larger global economies.
A balance BIT framework has an impact on the outlook of 'ease of doing business'. The government would need to take a pragmatic approach which commensurate with the need of the hour. Somewhere down the line, the government has to strike that fine balance, considering the fact that India is no longer a mere capital importing nation and a one-sided approach would also have a corresponding impact on outbound investments equally.
[1] F. No. 26/5/2013-IC dated December 28, 2015, Department of Economic Affairs (Investment Division), Ministry of Finance, Government of India.
[2] http://www.thehindubusinessline.com/economy/policy/finmin-to-look-into-changes-sought-by-canada-in-draft-bilateral-treaty/article9665816.ece
[3] http://www.business-standard.com/article/companies/cairn-moves-international-arbitration-panel-against-dividend-freeze-117061100206_1.html
[4] http://www.thehindubusinessline.com/economy/indias-bilateral-investment-pacts-under-cloud/article9625580.ece
For further information, please contact:
Sawant Singh, Partner, Phoenix Legal
sawant.singh@phoenixlegal.in
