Saturday 29 August 2015

Model Bilateral Investment Treaty (BIT) | Need, Law Commission, Analysis

Why in news?
The Law Commission has suggested a host of changes in the MODEL Bilateral Investment Treaty (BIT) draft to make it more investment friendly and include a confidentiality clause. 

What is BIT?

  • BIT, an agreement establishing the terms and conditions for private investment by 
    • nations and 
    • foreign companies in India, 
      • is expected to replace all the existing bilateral investment protection and promotion agreements. 
  • India’s bilateral investment treaty (BIT) programme is part of a larger trade and investment agenda of the Indian government to boost investor confidence and increase investment flows into and out of the country. 
    • Since 1994, India signed 83 Bilateral Investment Promotion and Protection Agreements (BIPPA)
      • of which 74 are in force
    • India has also entered into 11 Free Trade Agreements which have a dedicated chapter on investment, that are substantially similar to the standalone BITs. 
    Why do we need to change the BIT?

    • 2003: 2003 BIT Model of India for BIT negotiations hasn't seen much success
      • Not much attractive for investors
      • India also had limited involvement with Investment Treaty Arbitration (ITA), which refers to the dispute resolution mechanism available under BITs. 
    • 2010: The period after 2010, however, saw a surge in India’s involvement with ITA. 
      • Towards the end of 2011, India received its first adverse award in relation to a BIT in the White Industries Australia Limited V. Republic of India case. 
        • Tax become a major issue
        • Vodafone Case - Vodafone invoked the India-Netherlands BIPPA, seeking international arbitration in its Rs 20,000 crore tax dispute; 
        • then there was Nokia’s Rs 21,000 crore and 
        • Cairn Energy’s R10,927 crore tax disputes. 
        • And there are three arbitrations filed by Reliance Industries as well, though these do not pertain to taxation issues. 
        • While arbitration has yet to formally start in any of the foreign cases, the country had earlier lost an arbitration proceeding to Australian mining company White Industries.
      • India has also received numerous ITA notices from various investors and under various BITs. 
      • As on date, there are 14 known pending proceedings of claims brought against India. 
    • 2015: March 2015, govt made public a new Draft Model Indian Bilateral Investment Treaty (the ‘2015 Model’). 
      • The objective of the 2015 Model was:
        • “to provide appropriate protection to 
          • foreign investors in India and   
          • Indian investors in the foreign country, 
            • in the light of the relevant international precedents and practices, while maintaining a balance between the 
              • investor’s rights and 
              • the Government obligations.” 
        • The Government added that the 2015 Model would form the basis for negotiations with other countries. 
      • So, the Law Commission undertook a study of the 2015 Model and made certain suggestions on specific clauses of the 2015 Model. 
    Proposed changes to Model BIT by Law Commission:
    • Widen the definition of investment, to classify who does/ doesn’t get protection
    • Switching from enterprise based to asset based definition. 
      • Enterprise based definition does not covers overseas investments
      • Government draft: it took “enterprise based” definition of investment where an foreign investor if don’t have any enterprise in India to carry business then no protection will be granted to him.
        LCI recommendation: took “asset based” definition where investor enjoys protection if he invest into assets tangible (infrastructure), non tangible(stocks, shares) in India
    • Suggested changes to MFN clause and inclusion of dispute settlement mechanisms
      • Exclusion of the controversial most favoured nation clause, which has been a bone of contention in an Indo-Australian Bilateral Treaty in 2011.
        • so that Indian govt can provide differential benefits to countries based on their domestic investment - it restricts discretion on India's part
      •  the investor should not be barred from initiating arbitral proceedings after pursuing available local remedy in the host country. 
        • There cannot be a limitation of time as well to approach the arbitral tribunal
    • Remove restrictions with regard to procurement.
      • Government procurement should be included in the treaty protection because foreign investors enter a country through the government procurement process, for example, through infrastructure projects.  
        • If not:
          • It could lead to the exclusion of many activities that would otherwise meet treaty objectives of contributing substantially to the host State's development. 
          • Absence of treaty protection could lead to an exodus of foreign investors which may not be desirable in the long term
    • It is not necessary to exclude taxation from the purview of the treaty as "power to tax is an integral part of the State's police powers in international law. The power to tax exists independent of a treaty, unless the tax itself is arbitrarily imposed to destroy the State's regulatory freedom
    • In terms of transparency, the commission has suggested that all documents in relation to the investment treaty should be made public.
    • Incorporation of 'denial of benefit clause' where investors could be denied protection benefits in case of corruption and involvement in illegal activities
    • Government has authority to self-judge whether a measure(public health, public order, morality etc) is treated as exception or not so that it will not come under BIT provisions. 
      • BUT - Redraft exception list to avoid unnecessary discretion on the part of government.

    • Protection of Indian investors investing abroad
    • Safeguarding the regulatory powers of the State 
      • balance between making India attractive to investors and minimizing risk for the government.
    • make it all the more difficult for international companies to drag the government for arbitration
    • encourage ease of doing business in India.
    What next?
    • The government will soon come out with a comprehensive model BIT, which will form the basis for renegotiation of the existing pacts and negotiating new ones with different countries. 
    • Three areas where the BIT is likely to be tough are: 
      • International tribunals would not have jurisdiction to re-examine a legal issue settled by the Indian judicial authority; 
      • the treaty shall not apply to any taxation measure; 
      • they cannot question whether a measure was taken by the government for public purpose or in compliance with law—the question is whether a retrospective tax law, and that is just one example, is to be considered as public purpose. 
    Critical analysis:
    • We take care of our interest in BIT, the ‘bilateral’ in it means it has to be acceptable to the other country as well. 
    • Why will that country accept a BIT that excludes the issues which are critical to them?
    • Why would anyone come and invest in India on being denied neutral dispute settlement mechanisms?
    • Interestingly, while the existing Indo-UK treaty includes tax disputes, the current stand of the Indian government is that these cannot be arbitrated under the treaty! 
    • Also, in a globalised world where Indian firms are also big investors overseas, what is sauce for the goose has to be sauce for the gander—so, if the proposed Indian BIT was to be adopted by other countries, for instance, the takeover of the GMR airport in the Maldives would not have been arbitrated since it was done in public interest. 
    • The bottomline is that if the new BIT makes investors wary of investing in India, it hurts the country’s interests.


    Post a Comment