Rethinking India's BIT framework: A balancing act for investment growth

India's Bilateral Investment Treaties 2.0

Editor: James Nedumpara

Publisher: Springer Nature

Pages:  257

Price: Rs 15,999

  In her Budget speech, Finance Minister Nirmala Sitharaman spoke of making India an attractive place for foreign direct investment (FDI) with the objective of  achieving Viksit Bharat 2047. A task force will be set up to examine the provisions of India’s model BIT 2015 to make appropriate recommendations. This arduous task requires expertise. This timely volume, India’s Bilateral Investment Treaties 2.0,  edited by James J Nedumpara, head of the Centre for Trade and Investment Law (CTIL), attempts to offer some well-researched suggestions.

 

The book broadly outlines investors’ perceptions to International Investment Agreements (IIAs) to attract FDI. IIAs may not be make-or-break deals but, counter intuitively, they appear on investors’ checklists and their absence, more than their presence, tend to have a profound effect on investing decisions. An UNCTAD report says globally about 2,200 Bilateral Investment Treaties (BITs) and additional 386 investment chapters as part of trade agreements are active. This proliferation underlines the lure beyond the FDI numbers since such agreements usually involve the transfer of modern technologies, new skills, valuable managerial practices, forge collaborations and so on, all of which spur manufacturing and contribute to a country’s economic growth.

 

Dr James has diligently put together individual and team-based empirical research contributions of his CTIL colleagues — Smrithi Bhaskar, Suvrajyoti Gupta, Sparsha Janardhan, Shreyas Jayasimha, Prettkiran Kaur, Aditya Laddha, Kuladeep Medasani, Rishabha Menna, Rubanya Nanda, Shiny Pradeep, Ronjini Ray and Ayushi Singh.

 

The authors attribute the backlash against IIAs to asymmetrical obligations imposed by the Investor State Dispute Settlement (ISDS) provision that can drag a state to international arbitration for dispute settlement. Recipient countries of the Global South have been at the receiving end of this draconian provision as they struggle to reconcile their development priorities and investors’ interests. Capacity constraints are another limiting factor. India, too, has been a victim with 49 ISDS claims brought against it under its older or pre-2015 Model BIT framework, which formed the basis for the conclusion of 83 BITs.

 

Of the several cases the book focuses on, the White Industry case under the India-Australia BIT in 2011 was a watershed moment, for it triggered India to unilaterally terminate all its BITs except one (with Bangladesh) and renegotiate on the basis of a 2015 model BIT. The tribunal found India guilty of violating its obligation to provide “effective means” of claims and rights, a provision it borrowed from the India-Kuwait BIT.

 

This extraneous interpretation of the provision was an eye-opener for India. On the withholding of capital gains tax pertaining to Vodafone, the Supreme Court of India ruled in favour of the telecom major, prompting the government to amend the tax legislation with retrospective effect. However, adverse rulings by ISDS tribunals against the retrospective tax on Vodafone and Cairn Energy galvanised the government to reverse the law in 2021. In the Devas-Antrix case, a claim brought under the India-Mauritius BIT, the tribunal concluded that India’s conduct violated the “Fair and Equitable Treatment” (FET) provision. The differing perspectives of high courts on whether investment treaty arbitration is commercial or not under the Indian Arbitration and Conciliation Act, 1996, brought to light the need for the Indian judiciary to develop expertise on investment arbitration issues.

 

The infirmities in India’s model BIT 2015 were highlighted by the authors; the decision to drop the most-favoured nation (MFN) clause and restrict the use of the FET provisions are defensive in nature. On the ISDS clause, they suggest a more flexible approach instead of the stipulation that investors exhaust local remedies for five years before recourse to international arbitration. One cannot agree more with the importance of anti-corruption clauses as well as provisions of protection, predictability, facilitation as strong incentives for manufacturing-led investments. Their suggestion for an integrated investment chapter in FTAs could be tricky because of the sunset clause that makes it hard to terminate at a later stage.

 

The book draws out the relative merits of the existing legal framework on international arbitration — the United Nations Commission on International Trade Law (UNCITRAL), New York Convention, and International Centre for Settlement of Investment Disputes (ICSID),  to which India not a signatory — and suggests borrowing from them relevant provisions to complement India’s public policy approach while addressing lacuna in our legal framework at the same time. In defence of legitimate public interests, it supports the state’s right to regulate in line with its international commitments to security, human rights, environment and sustainable development goals (SDGs).

 

The perception that ISDS is a double-edged sword can hardly be disputed. Even developed countries, with increasing two-way FDI flows, are feeling its heat. Many have sought exemptions through side letters and others explored alternatives in the form of State-to-State Dispute Settlement (SSDS) that makes room for diplomatic mediation and tradeoffs between two states. If ISDS is inevitable, then a mechanism constituting an ombudsman, a joint committee and mediation would help minimise resorting to international arbitration.

 

The timely iteration of these well researched topics by the CTIL team are worth considering for updating India’s BIT 2.0. An essential part of this exercise is to set up an inter-agency coordination that works seamlessly across government departments and develops domain expertise with the aim of making India an attractive investment destination.

 

The reviewer is a serving Indian Foreign Service officer