FinMin proposes new model to replace BIPA

The Ministry of Finance has finalised a proposal for a model of Bilateral Investment Treaty (BIT)  to replace Bilateral Investment Promotion and Protection Agreement (BIPA) which will provide protection only  to companies and natural persons  who have substantial business activity in their home country. The move will help in preventing treaty shopping. 
 

The proposed model also requires the enterprise to have substantial operations in India and excludes the claims of indirect or minority shareholders as it requires the investor to have at least 50 per cent stake or right to appoint majority of the directors or senior management officials. 
 

The model draft proposal has also made it clear that tax measures will be excluded from the BIT completely. In simple terms this means that no tax measure introduced by the host country, will not be subject to any dispute settlement under the BIT. 
 

The new model also clearly defines government again for the first time to include only the central and the state government and not activites of the local government. 
 

The proposed model agreement also plans to remove some of the broad obligations found in the current BIPA agreement which gives arbitral tribunals wide latitude to interpret the provisions. So the most favoured nation obligation is being removed. 
 

The new model also for the first time introduces an early review mechanism to dismiss frivolous claims leading to significant costs, it also establishes a mechanism under which a host country can now pursue counter claims  against foreign investors for their illegal conduct. 
 

Under BIPA the exception provisions to preserve the right to the state to develop their policies in accordance with national interest is very limited. It contains only one exception-essential security interest. The new model broadens the scope to include the protection of environment, conservation of natural resources, stability and integrity of the financial system, public health and safety and improving working conditions amongst others. 
 

Under the proposed model, in case os an investor state dispute settlement, the aggrieved party should exhaust all adminstrative and judicial procedures within a specified time frame within the country before the claim can be submitted for arbitration. After exhaustion of these remedies the investor will have to engage in consultation with the host state to find a solution for one year. Failure to go through this process will lead to the investor being barred from pursuing investor-state arbitration.  
 

The proposed model also balances investor rights with their obligations under the domestic law. So it does not provide any protection to investors who violate core obligations under the law.   

A new model agreement was needed by the government has there has been a substantial increase in the amount of disputes under BIPA. The number of disputes went up to 550 in 2012. And in that year as many as 58 new cases were initiated, the highest number of such disputes filed in a year ever.