Making the model BIT work

Source: The Financial Express

Recently published for stakeholders’ consultation, the Model Indian Bilateral Investment Treaty (new model convention) is a significant policy move of the NDA government towards promoting bilateral cooperation with respect to foreign investments. The new model convention is proposed to replace the 1993 version which largely forms the basis for India’s existing portfolio of over 80 bilateral investment treaties (BITs). It reaffirms the government’s commitment to provide appropriate protection to inbound investors as well as secure similar protection for Indian investors in a foreign country, without diluting its sovereign rights to regulate investments.

The review of the 1993 model was anticipated, given India’s rapid resurgence as a far more integrated and one of the fastest growing economies, with increasing number of new trade and investment agreements. Besides, the extant model treaty has been historically believed to favour foreign investors at the cost of sovereign rights of the Indian judiciary and executive. In 2012, an investment arbitration ruling against the Indian government in the White Industries case—the only such case of completed investment arbitration till date—had brought the existing model treaty in sharper focus for imminent review; recent spate of arbitration notices including a challenge to verdict of the apex court as being violative of India’s commitments under existing BITs proved to be the cliched last nail.

Unsurprisingly, the new model convention makes significant departures from the principles enshrined in the 1993 model, such as to tilt the balance back in favour of securing India’s sovereign rights. The 2015 model convention has many features which are clearly intended to thwart frequency of investment protection claims, by taking away the most-favoured nation (MFN) framework from the model treaty which proved a nemesis for the government in the White Industries case, and excluding tax dispute matters from its coverage. The model convention though leaves domestic outbound investors wanting in exclusive measures for ensuring protection of outbound investments.

Besides the policy-level departures, wholesome changes are proposed to the manner BITs are applied in determining eligibility of investors seeking protection thereunder. The foremost of such changes comes in the form of the overhaul of the definition of ‘investment’. By requiring a foreign enterprise to be constituted in India and to carry out ‘real and substantial operations’ along with employing a ‘real and substantial number’ of employees in India with a long-term commitment of capital, the new BIT makes a tectonic shift to an ‘enterprise-based’ definition of investment.

The revised eligibility criteria, though a well-intentioned move to keep so-called ‘mailbox companies’ at bay, could cause unintentional damages too. Subjectivity in interpretation of terms ‘real’, ‘substantial’ and ‘long-term’ has created immense disquiet amongst strategic investors who have built reasonably ‘real and substantial’ investment portfolio. Whilst exclusion of foreign portfolio investments may appeal to logic, the onerous and subjective tests of ‘real and substantial’ presence in India creates doubt as to the eligibility of private equity investors too. This is certainly an unfortunate and probably unnecessary outcome.

The new BIT guarantees a ‘standard of treatment’ which prohibits the host country from unjust and outrageous harassment of foreign investors, by guaranteeing the foreign investors, amongst other things, ‘national treatment’ and protection from ‘expropriation’. The ‘national treatment’ protection, however, is not extended against measures introduced by a regional or local government of the host country. This half-hearted approach to granting ‘national treatment’ is likely to inspire little confidence in foreign investors. Expropriations, on the other hand, are prohibited except when made for ‘public purpose’; unfortunate though to leave ‘public purpose’ undefined.

The most prominent shift in approach to the model convention comes by way of doing away with the MFN framework. Whilst the move shall thwart attempts of treaty shopping, this could significantly hurt bona fide cases where Indian government is expected to provide equal treatment to investors coming from different treaty partner countries. Besides, the MFN principle is an avowed principle of the General Agreement on Tariffs and Trade; however, a relevant question is, can India, as a founding member of the WTO, unilaterally wish away an important principle of international trade without inviting claims by other state parties before the WTO and other multilateral forums?

The new BIT lays down onerous obligations for foreign investors; the most important of which is against ‘corruption’. The wide definition given to corruption not only includes giving or promising of gifts or any monetary advantage or gratification, it shall also put rigours around the lobbying efforts of investors. Extending it further to address private corruption, which also finds mention in the UN Convention against Corruption, will go a long way in addressing this challenge that has significantly tarnished India’s image as a business-friendly nation.

For the settlement of ‘investment disputes’ with a foreign investor, the new BIT provides for the establishment of an arbitral tribunal to be governed by the UNCITRAL model. The new convention, however, successfully protects the Indian judiciary’s turf by providing for the constitution of arbitral tribunal only after exhaustion of all domestic remedies, and with a prohibition that such a tribunal shall not sit in review over decided judicial matters. However, there was a missed chance here towards rescuing foreign investors as also the government from the agony of judicial delay in India. The model convention could provide for insertion of a good faith clause providing that where sincere attempt of adjudication by the petitioner before the domestic courts yields no result even after completion of, say, three years of proceedings, either party would be at liberty to approach the arbitral tribunal. Such a ‘good faith’ clause could potentially inspire expeditious settlement of dispute under domestic laws, lest the matter lands before the arbitral tribunal.

Clearly, the new model convention is a mixed bag of outcomes—while on one hand it reinforces the protections offered to foreign investments in the form of national treatment, protection from expropriation and free transfer of funds, on the other hand it limits the scope of protection by adopting an ‘enterprise-based’ approach, narrow jurisdiction of arbitral tribunal, excluding portfolio investments and taxation matters. There are definitional imperfections too which may require some fine-tuning.

From an implementation success standpoint, the key shall be the flexibility with which the government will negotiate with other countries on the new BIT. Given the wider protections favouring the foreign investors under the earlier BITs and the subjectivity in some crucial terms in the new BIT, it is doubtful if the home countries of the foreign investors would be keen to negotiate ‘down’ as per new BIT. Also, in order to reaffirm the faith of investors in India, the government must carry out important domestic policy and administrative reforms to complement new BITs, such as fixing of the domestic arbitration ecosystem, reforms to unclog the judicial system, taking forward labour laws reforms, and objectively handling national resource auction policy.