A new model: Revamping BIT calls for a fresh approach to boost FDI

With India facing consequences such as having its foreign assets seized as a result, government has essentially been defensive, including terminating BITs with some 75 countries between 2016 and 2021

Union Finance Minister Nirmala Sitharaman’s announcement that the government would revamp the model bilateral investment treaty (BIT) has the potential to reverse India’s discouraging foreign direct investment (FDI) climate. The move is seen as a prelude to easing the path towards signing long-pending free-trade agreements with the United Kingdom (UK) and the European Union (EU). But a thorough re-examination of the model BIT agreement that India announced in 2016 would require a fundamental reorientation in approach. The post-Budget commentary from senior officials of the finance ministry suggests that the government is open to adjustment. It is in India’s interests to adopt a flexible approach and global best practices in this regard.

 

The background to the model BIT was rooted in several adverse rulings the Indian government faced, among them the controversies over retrospective taxation involving mobile-service provider Vodafone and oil and gas major Cairn Energy. With India facing consequences such as having its foreign assets seized as a result, the government has essentially been defensive, including terminating BITs with some 75 countries between 2016 and 2021. In 2016, the government came up with a model framework that ostensibly sought to offer “appropriate protection to foreign investors” but in reality ended up ring-fencing the government from the risks of international arbitration.

 

Apart from several definitional vagaries, the model framework omits the “most favoured nation” and “fair and equitable treatment” doctrines, which are germane to BITs. The definition of investment has also been narrowed from an asset-based one to an “enterprise” definition so that only direct investment is protected under the treaty. Tax issues have also been excluded from the purview of the model BIT, with the state according itself wide discretionary powers to decide whether a dispute constitutes a tax issue or not. Overshadowing these omissions, anomalies, and opacities, however, is the requirement for an investor seeking redress to exhaust all domestic legal remedies for five years before initiating arbitration under a BIT. This clause appears to have discouraged significant investors well aware of the slow pace and variable outcomes associated with the Indian justice system. The clause also affects Indian companies investing abroad since they could face similar local judicial hurdles, especially in West Asia or Africa.

 

Since 2016, India has entered into several BITs under the new template with the United Arab Emirates (UAE), Belarus, Taiwan, Brazil, and Kyrgyzstan. Except Taiwan, the other countries have sufficient Indian investment. India has also signed international agreements with the UAE, Australia, and the Indo-Pacific Economic Framework for Prosperity Agreement. But those vary from the model BIT. The agreement with Brazil does not include the clause involving local remedies and the one with the UAE explicitly includes portfolio investment, which is not included under the model BIT, and some agreements have shortened the time frame to exhaust legal remedies. Revamping the model BIT framework, therefore, would need a transition from a jurisdiction that seeks to control foreign investment to one that facilitates such investment to keep the FDI spigot turned on. Given ongoing geopolitical and economic changes, India needs to substantially increase the ease of investment to attract foreign capital on a durable basis.