An own-goal on FDI

Govt must revisit its approach to bilateral investment treaties

The government has announced that it intends to renegotiate the set of bilateral investment treaties, or BITs, India has signed with a large group of countries. While it is a good practice to continually update BITs to reflect the changing requirements of world trade and cross-border investment, the draft BIT the government has released, which it intends to use as the basis for future treaties, has led to considerable disquiet. Not only does it appear to be something of an outlier as far as such BITs are concerned, which would lead to problematic negotiations, but it is feared that some clauses for investor protection have been significantly reduced. Such a reduction in protections would jeopardise India’s status as a desirable destination for foreign direct investment (FDI) even though high inward FDI is the lynchpin of the Union government’s plan to revive the economy, particularly manufacturing.

One of the ways in which the revised BITs have caused concern is that they drastically reduce the scope of international arbitration to resolve disputes involving foreign investment. This follows a series of arbitration awards that have displeased the Indian government – the most recent being over a dispute between Tata Sons and NTT DoCoMo of Japan, which government agencies have reportedly blocked Tata Sons from following, as well as the Antrix-Devas arbitration, which the government is contesting. The new BITs will prevent investors from turning to international arbitration until domestic legal options have been exhausted. Given the slow speed at which cases can move through the Indian judicial system, this would considerably reduce foreign investors’ ability to retrieve their investments if things go bad. The impact on their expectations and, thus, on the total amount of future investment would naturally be negative.

There is also concern that the Indian model essentially excludes disputes over taxation from the BIT. Economic Affairs Secretary Shaktikanta Das has stated it is his belief that foreign companies are not discriminated against by India’s tax structure. However, there are concerns about the arbitrary application of India’s existing tax laws. BITs usually contain a clause through which companies can claim that some tax measures amount to illegal expropriation. India has run up against such claims before. It is worth remembering that its tax claim against Vodafone did much to damage the reputation of the previous government with foreign investors. While the current administration has promised to not repeat such errors, investors will have noticed the power to tax retrospectively remains with the government. And now the possibility of the BITs’ protection against extortionary tax might also go. Again, investor confidence will be dented. The argument that tax is a sovereign right and cannot be sacrificed in some treaty does not hold water. After all, the point of any treaty is to constrain the exercise of sovereign power to some degree.

There are other important ways in which India’s approach to BITs shows scant regard for the concerns of foreign investors. For instance, India’s model BIT has no most favoured nation (or MFN) provision. In sum, if the intention is to increase inward FDI, the lines on which the government is renegotiating BITs might constitute an own-goal.