India’s draft BIT policy could end up scaring foreign investors: Here’s why

Instead of jumping from one extreme to the other, the Law Commission suggests that India should adopt a balanced model BIT, which reconciles investment protection and India’s right to regulate.

5 min readSep 21, 2015 03:18 PM IST First published on: Sep 21, 2015 at 03:11 PM IST

In terms of signalling to foreign investors, the draft model is diametrically opposed to the government’s pet projects to woo foreign investors like ‘Make in India’. (Express Photo)

The recent 260th report of the Law Commission, on India’s new model Bilateral Investment Treaty (BIT), has put the spotlight on India’s BIT policy. BITs are reciprocal treaties to protect foreign investment by imposing restraints on host State’s sovereign right to regulate.

Earlier this year, as a reaction to foreign investors suing India under different BITs, the government unveiled the draft of its new model BIT for comments. A model BIT acts as a template for future BIT negotiations and is usually the first step in a country’s investment treaty practice. India wishes to use the new model as the basis to renegotiate its existing 80 odd BITs and sign new BITs. Although the declared objective of the new model is to balance investment protection with host State’s right to regulate, this objective has not been achieved, as the Law Commission’s report establishes.

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The new model is very host-State friendly: imposing very limited restraints on host State’s right to regulate and thus, providing numerous opportunities to deny treaty protection to foreign investment. In fact, the draft of the new model BIT ends up scaring foreign investors. In terms of signalling to foreign investors, the draft model is diametrically opposed to the government’s pet projects to woo foreign investors like ‘Make in India’. The new model makes a 180-degree turn from the 2003 model. The 2003 model and India’s existing investment treaties are very investor-friendly: sacrificing host State’s sovereign right to regulate at the altar of investment protection.

Instead of jumping from one extreme to the other, the Law Commission suggests that India should adopt a balanced model BIT, which reconciles investment protection and India’s right to regulate. A balanced model BIT is important for India to draw other countries, especially those who are large investors in India, to the negotiating table. Else, why will these capital-exporting countries, benefitting from current investor-friendly BITs, agree to renegotiate?

The possibility of these countries agreeing to negotiate or renegotiate their BITs with India, if a balanced model BIT is adopted, is high for two reasons. First, developed countries are more acceptable to the idea of a balanced BIT today, than two decades back. This is because many developed countries have faced the brunt of investor-friendly BITs. Multinational corporations have used these BITs to challenge the sovereign regulations of these countries pertaining to wide-range of issues like environment, health and intellectual property among others. For example, under NAFTA, foreign investors have sued the US and Canada many times. This made these countries realise that investor-friendly BITs, signed to protect their companies abroad, can come back to haunt them one day. It is precisely for this reason that the existing US and Canadian model BITs reflect a much better balance between investment protection and host State’s right to regulate than their previous model BITs. Another example is of Australia making changes in its BIT policy after being sued by Phillip Morris for the regulation on plain packaging of cigarette packs. Similarly, in Germany, which traditionally promoted investor-friendly BITs, and UK concerns have been expressed over inclusion of investor-state dispute settlement (ISDS) – a core feature of all BITs that benefit investors – in the context of Transatlantic Trade and Investment Partnership (TTIP) agreement being negotiated between the EU and the US.

Second, outward FDI from India has increased considerably. According to RBI, India’s outward FDI for 2007-08 stood at about $21 billion. It peaked to about $44 billion in 2010-11. From January to July 2015, this figure stood at about $14 billion. A large amount of this money has been invested in developed countries like Netherlands, UK, Switzerland, US, Australia and Japan. So, today, Indian companies like Wipro, Mahindra and Tata are doing business in developed countries. These Indian companies can use one-sided investor-friendly BITs with relative ease to challenge the sovereign action of these developed countries just like Vodafone and Cairn have done against India. Thus, it is in the interest of these countries, as much as it is in India’s interest, to move towards a balanced Model BIT.

Two other points regarding India’s BIT policy need to be flagged. First, does India also wish to renegotiate its BITs with countries where India is largely an exporter of capital? This includes many African and Asian countries. This is because India stands to benefit from the current investor-friendly BITs with these countries. Second, what would India do if a country refuses to renegotiate? Would it terminate the existing BIT? If yes, the survival clause ensures the existence of the BIT for next 15 years. Also, it would mean no treaty protection for Indian investment in that country. It is important that India carefully thinks through all these issues and accordingly develops its BIT policy instead of adopting a policy as a knee-jerk reaction to investors suing her.

– The author teaches at South Asian University and was a member of the sub-committee of the Law Commission that drafted the 260th report on Indian Model BIT. Views are personal.