A year or more into office, the Narasimha Rao government, which had started the process of opening up the economy after the balance of payment crisis of 1991, decided to free up foreign investment in the financial markets. On September 14, 1992, the government introduced new rules to allow foreign investors, including pension funds and institutions, to buy into stocks of Indian companies listed on the stock exchanges and also unlisted firms.
A few days later, Manmohan Singh, finance minister in Rao’s government, was in the UK for an official meeting when he was asked about the protection on offer for investments by foreign investors in India. Official agreements or legal protection for investors was something they were used to in most jurisdictions. But for the Indian establishment, it came as a surprise. That may have been because not too many Indians were used to investing abroad. Quickly, a message was sent to investors in the UK that India was working on a framework which would provide comfort to them.
On his return to India, Singh told his officials to work on an agreement.
The department of economic affairs in the finance ministry got working on it considering that it had a division handling foreign investment. For long, the revenue department in the ministry had been used to negotiating agreements with countries on taxation. These were the double taxation avoidance agreements and in the earlier decade, the 80s, the Congress government had signed an agreement with Mauritius on taxation.
For the official who was then tasked with the responsibility of drafting this agreement, Sudhir Kumar, then a civil servant in the foreign investment division, a law degree proved to be useful. A study of double taxation avoidance agreements signed by India till then and meetings with overseas officials followed. A conscious attempt was made then to steer clear of issues which could impinge on double taxation agreements. And that’s how a year and two months later, India’s first Bilateral Investment Protection Agreement or BIPA, which was part of the early reforms programme, was readied.
The agreement spelt out the ground rules for national treatment of investments made by India and other countries in each other’s markets.
By March 1994, India signed the first BIPA with UK, which had first raised the demand for such an investment protection pact. Similar agreements were to follow soon the same year with Russia and later with Germany, Malaysia, Denmark and other countries. By 2010, India had signed up with 72 countries and enforced these agreements too and another 11 were signed but are yet to be enforced.
But it wasn’t long before these agreements came to be tested. It happened in the decade after the first investment protection agreement was signed. The decade of 2000 marked the start of an average growth of close to 8 per cent for over five years, especially after 2004 and big-ticket investments and the entry of many foreign investors.
The trigger for a relook at BIPA was the tax demand on Vodafone after the controversial retrospective amendments to India’s tax laws to raise money from the multinational firm. It wasn’t the fall-out of this demand and controversy which worried the UPA government headed by Manmohan Singh. Soon as licence agreements with foreign telecom firms were cancelled after the 2G scam during the second part of the UPA government, some of these firms such as Vodafone, Nokia and Sistema started to invoke these bilateral agreements against the government, leading to much unease in talks with sovereign leaders.
That’s when the government decided to put on hold all negotiations on BIPA and to come up with a new agreement which would seek to provide greater protection to investors and cut out some of the grey areas.
Since then, a new model BIPA has been unveiled with clearer rules on conflict of interest, arbitration, repatriation, domestic dispute resolution and other terms. The new BIPA when enforced may perhaps satisfy many investors but the test will be on the double taxation front — what the government does on the agreement with Mauritius which provides for exemption from capital gains.