APRIL 07, 2015

By TIOL Edit Team

THE Finance Ministry's decision to seek public comments on long-awaited draft new model bilateral investment treaty (BIT) is both welcome and deplorable.

Welcome because the Draft improves standardization and brings clarity to issues that are currently subject to varied interpretation. The vaguely written aspects are thus prone to litigation under the 72 operating, bilateral investment promotion and protection agreements (BIPA) signed with different countries.

The Draft would pave the way for start of negotiations with countries such as Russia that are pressing for amendments to BIPA. It would also clear the way for India to negotiate alignment of BIPA with BIT to ward off fresh cases of Treaty-based of investor-state dispute settlement (ISDS). Instances include Vodafone and Cairn Energy tax disputes and 2G licence cancellations-triggered deemed expropriation of foreign investments.

The Ministry's initiative is deplorable because Model BIT brings partial clarity to India's hazy framework for investment protection, which is an enabler for investment promotion.

The Draft lacks certain elements such as recourse to World Bank (WB)-conceived Convention on the Settlement of Investment Disputes (CSID) and International Energy Charter. These are effective forums for settlement of investment disputes in addition to arbitration offered under the United Nation's Agreement on International Trade Law) that is provided under BIT.

The Ministry should enlighten stakeholders about the last mode of dispute settlement which itself is undergoing change.

As put by United Nations Conference on Trade And Development in a document captioned 'IIA Issues Note - Recent Trends in IIAs and ISDS' issued in February 2015, "The year saw important multilateral developments geared towards increased transparency in ISDS. These include the coming into effect of the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency and the adoption of the Convention on Transparency in Treaty-based Investor-State Arbitration, which will be opened for signature later in 2015."

It worthwhile to note that draft Model BIT does not envisage enactment of investment protection law that has been mooted earlier by a few expert committees.

Before analyzing BIT further, we should first consider the basics. The Ministry has changed the title of the model agreement from Bilateral Investment Promotion and Protection Agreement (BIPA) to BIT. It has thus completely dropped the word 'promotion' from the new model text perhaps to leave out scope for demand from signatory countries seeking specific changes in India's foreign direct investment (FDI) and foreign portfolio investment (FPI) policies.

In any case, the linkage between attraction of investments and BITs is tenuous. This is because there are a lot more factors that influence investment inflows across the globalized economy.

The Ministry has also dropped the term 'Most-Favoured-Nation Treatment' from BIT without explaining the underlying rationale. Other notable features of BIT are exclusion of issue compulsory licence by foreign companies to Indian entities for exploitation of closely held technologies especially for drugs in the public interest.

The provisions of BIT would also not apply to procurements by the Government, non-commercial government services, subsidies, taxation, pre-investment expenditures, etc.

The draft says: "Where a Host State asserts as a defence that conduct alleged to be a breach of its obligations under this Treaty is a subject matter of taxation which is excluded by this Article from the scope under this Treaty, any decision of the Host State, whether before or after the commencement of arbitral proceedings, shall be non-justiciable and it shall not be open to any arbitration tribunal to review any such decision."

It has also included in the list of investors' obligations the requirement to comply with Indian tax laws. The Draft says: "Investors and their Investments must comply with the provisions of Host State's Law on taxation including timely payment of their tax liabilities in accordance with the Law of the Host State."

BIT is thus focused on protection of foreign investment in India and Indian overseas investments in countries that sign the agreement.

The Ministry could have made the exercise of inviting public comments more meaningful and productive. It could have tagged to the Draft an explanatory statement or a presentation or a consultative paper to explain the differences between model BIPA and model BIT.

In keeping with the much flaunted commitment to good governance, the Ministry should have also compared the Draft with model BIT of the United States and other such countries that revised their model pacts in recent years based on their experiences with earlier versions of the agreements.

The comparison would have shown that writers of Indian Draft borrowed leaf from revised model BITs of the OECD Countries. Nothing wrong in benefiting from the insight developed by others through their implementation experiences. Such comparison would have saved stakeholders' time and helped them concentrate on the scope for improvement in the Draft. It is quite possible that such an exercise was done by the working group that last year reviewed BIPA.

The Ministry should also clarify whether it would port the core elements of BIT in the Comprehensive Economic Cooperation Agreement (CECA)/Comprehensive Economic Partnership Agreement (CEPA) that it has been negotiating with certain countries and trade blocks. In the past, Investment protection and promotion have figured in such comprehensive deals.

The most important need is to disclose whether existing BIPAs provide for any timeframe for negotiations for revision of existing pacts. If so how the Government intends to take BIT to the countries that are signatories to respective BIPAs.