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Renegotiating a BIT

India must aim to balance its right to regulate with investment protection

India must aim to balance its right to regulate with investment protection

The six-month deadline issued by Sistema,a Russian corporation,to the Indian government to amicably settle the investment dispute,under the India-Russia Bilateral Investment Treaty (BIT),will expire on August 28. The dispute had arisen because of the cancellation of the 2G licences by the Supreme Court. After the deadline expires,Sistema reserves the right to begin proceedings against India in an investment treaty tribunal. As the date nears,the Department of Telecommunications (DoT) is trying to put in place a team of legal experts to look into Sistema’s notice. An inter-ministerial group (IMG) has already been constituted to handle the legal notice. Similar notices have been issued by other foreign corporations like Telenor and Vodafone. However,India’s flawed understanding of the real character of BITs has given rise to all kinds of myths and half-truths.

The first myth is that BITs can be invoked only against the actions of the government,that is,the executive. On Sistema’s notice,for example,the dominant view is that it wouldn’t hold water because the licences were not cancelled by the government. This is erroneous. In addition to the executive,sovereign actions of the judiciary and the legislature can also violate international law contained in a BIT,for which India,as a country,will be liable. Lord Goldsmith,former attorney general of the United Kingdom,recently said that courts are considered part of the state under BITs. Thus,a decision of any organ of the state,including the judiciary,can be challenged under a BIT,provided the action is an exercise of sovereign function. A recent case in point is White Industry,an Australian company,successfully pursuing a claim against India on the violation of the India-Australia BIT,involving the Indian judiciary.

The second myth is that BITs do not apply to issues related to taxation. The IMG constituted in response to Vodafone’s notice to the Indian government under the India-Netherlands BIT reportedly feels that taxation matters are outside the ambit of BITs. The fact is they are a part of the host state’s sovereign regulatory functions and hence fall within the ambit of BITs,unless explicitly excluded. There are many instances where foreign corporations have raised matters related to taxation under BITs. For example,an American company,Occidental Exploration,successfully pursued a case against Ecuador involving a taxation related issue under the US-Ecuador BIT.

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The third myth is that only foreign direct investment (FDI) falls under the ambit of BITs. Yet they define investment in an extremely broad manner,covering all kinds of assets. The definition of investment in all Indian BITs covers investment,portfolio investment,intellectual property rights,rights to money or to any performance under contract having a financial value or business concessions conferred under law or contract.

An important aspect of BITs is that they bestow on foreign investors the right to prosecute their claims against the sovereign regulatory actions of the host state (investor-state dispute settlement),independent of their home country governments. This monumental provision plays an important role in enabling BITs to provide real protection to foreign investment. Apparently,some in the Indian government are of the view that the challenge posed by BITs should be dealt with by deleting the investor-state dispute settlement clause. However,not having this clause in a BIT will noticeably reduce the efficaciousness of these treaties in protecting foreign investment. It will add to the existing policy and regulatory upheaval,further dampening the spirit of foreign investors to invest in India. Moreover,deleting the investor-state dispute settlement provisions in BITs will negatively affect many Indian companies who have invested majorly in Africa,Latin America and other countries like Nepal,and put Indian investment abroad in peril.

The daunting challenge posed by BITs does not stem from the investor-state dispute settlement provision,but from the broad substantive protections covered in the treaty,which do not balance investment protection with India’s right to regulate. The way forward for India is to focus on renegotiating such provisions and narrowing their scope as per its developmental priorities.


Renegotiating BITs is not as difficult a job as it is often made out to be — most obligations under them are for 10 years,with the option of reviewing the BIT after this period. According to the United Nations Conference of Trade and Development,since 1998,more than 130 BITs worldwide have been renegotiated. Further,renegotiating a bilateral treaty is easier than renegotiating a multilateral treaty like the WTO,for example. India has a pretty successful track record in renegotiating Double Taxation Avoidance Agreements (DTAAs) in order to address concerns related to tax evasion and black money. If bilateral DTAAs can be re-negotiated,so can BITs. Our policy makers will do well to remember that we should not throw the baby out with the bathwater.

The writer is an associate professor at the National Law University,Jodhpur

First published on: 17-07-2012 at 01:25:18 am
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