India should join World Bank's international investment dispute centre

The World Bank's International Centre for Settlement of Investment Disputes can assist India in achieving its globalisation goals

The International Centre for Settlement of Investment Disputes (ICSID) is a World Bank Group institution set up in 1996, with a specific mandate to resolve disputes that arise between foreign investors and the countries in which they invest. Although India actively participates with the World Bank and its affiliated institutions — the International Finance Corporation and the Multilateral Investment Guarantee Agency — it is not a signatory to ICSID. India’s hitherto non-participative position in ICSID requires a fresh assessment, as in the world of global investment flows, ICSID does stand out as a credible institution for cross-border investment-related disputes resolution.

Over time, ICSID has indeed become a pre-eminent forum for settling disputes between foreign investors and host states. As of December 31, 2023, it had 158 Contracting States and seven  Signatory States under its fold, with 967 arbitration and conciliation cases registered under its Convention and Additional Facility Rules. Arguably, India’s non-participation stands out, as many of the 158 states that are members of the ICSID Convention include India’s major trade and investment partners. Being a member of ICSID not only gives states and their investors access to dispute resolution under the Convention, but also a voice in ICSID’s governance. Membership is voluntary, with its services being utilised only if both parties consent.

The ICSID has demonstrated over the years that it plays a crucial role in maintaining stability in international investments through arbitration, conciliation, and mediation. Its inclusion in numerous treaties and national laws underscores its significance in shaping the cross-border investment landscape, which has grown exponentially since the institution’s founding. With the powerful involvement of the World Bank, solutions delivered are given due recognition by both parties in a dispute.

India’s membership issue arises at a time when the country is working earnestly towards attracting $100 billion in annual foreign direct investment (FDI) over the next few years, up from $71 billion in 2022-23. To achieve that, the government has correctly focused on the drivers of private investment, including rapid improvements to infrastructure and logistics, and streamlined processes for establishing businesses. Being a signatory to ICSID would provide the much-needed booster dose of confidence to a new cohort of foreign investors.

At the same time, India’s outward foreign direct investment (OFDI) has been steadily increasing since the financial year 2020-21, when it was approximately $17.8 billion. The sectors that attracted significant OFDI from India include information technology, pharmaceuticals, minerals, energy, manufacturing and infrastructure. Indian companies have been actively pursuing mergers, acquisitions and greenfield investments in various countries across Asia, Africa, Europe, and the Americas. These investments are driven by factors such as market access, technology acquisition, resource diversification, and strategic expansion. Overall, India’s outward investment flows are expected to continue growing as Indian companies seek to strengthen their global presence and competitiveness. This trend underscores India’s increasing economic influence on the global stage.

As India’s FDI flows increase inward and outward, so does the potential for investment disputes arising from various sources: Political and regulatory changes, geopolitical tensions, economic crises, expropriation risks, contract breaches, capital convertibility issues, restrictions on currency repatriations, changes in royalties and taxes, cultural misunderstandings, environmental concerns, and transparency issues. India’s expanding overseas investment footprint increases exposure to these scenarios, highlighting the need for an effective and impartial dispute resolution mechanism to navigate the intricate landscape of international investments, and mitigate risks. In the past, India has faced several controversies with foreign investors, including tax disputes with Vodafone and Cairn Energy, as well as issues related to Enron’s Dabhol Power project and the POSCO steel plant. Similarly, Indian investments abroad have seen shocks. The imposition of an unexpected cess by Indonesia on coal exports had raised serious existential questions about the viability of two of India’s very large imported-coal-based power plants. There are also several well-known cases where Indian investments have been jeopardised due to commercial disputes with host countries.

The ICSID offers a credible risk-mitigating opportunity. By becoming its member, India can provide foreign investors with a trusted legal framework for dispute resolution, significantly enhancing its appeal as an investment destination. Indian businessmen investing abroad would also benefit from similar protections. The underlying concept behind ICSID is that foreign investors everywhere depend on the rule of law and fair mechanisms for resolving legal disputes. This is as true for investors coming into India as it is for Indian investors going abroad.

In the race to sustain its impressive FDI growth, India must do more than tweak policies — it needs to modernise its approach to investment. A game-changing move would be joining the ICSID. This step would signal to the world that India is serious about creating a transparent and reliable environment for investors, driving confidence and unlocking even more foreign capital flows. While concerns about sovereignty remain, the potential to elevate India’s global investment standing and secure long-term economic growth far outweigh the risks.

It’s important to note that ICSID membership aligns with India’s model bilateral investment treaty. It would complement India’s broader efforts around legal reforms, such as the need to make judicial procedures more efficient and responsive to current needs. Ultimately, investors benefit from a range of options to settle disputes, both domestic and international.

The competition for global capital is fierce and India must leverage every tool at its disposal. In this fiercely competitive global market, joining the ICSID is a move India cannot afford to miss.

The author is an infrastructure expert. He is also the founder and managing trustee of The Infravision Foundation. Vrinda Singh contributed to this piece