India and Bilateral Investment Treaties (BITs) : Daily Current Affairs

Relevance: GS-2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Key phrases: BITs, external affair, investment, FDIs, ISDS, Devas case, Arbitration, standing committee.

Why in News?

The report of the Standing Committee on External Affairs on ‘India and bilateral investment treaties (BITs)’ was presented to Parliament last month. This report is momentous as it comes a decade after India lost the first investment treaty claim in 2011 (White Industries v. India).

What is Bilateral investment Treaties?

Bilateral investment Treaties (BITs) are agreements between two Countries (States) for the reciprocal promotion and protection of investments in each other's territories by individuals and companies situated in either State.

Background to the India BITs:

India’s tryst with BITs started in 1994 when it signed its first with the United Kingdom. It subsequently went on to sign BITs with more than 80 countries.
India’s love for BITs ended in heartbreak in 2011, when an international tribunal ordered India to pay 4.10 million Australian dollars (plus interest and costs) to White Industries under the 1999 Indo-Australia BIT.
Shocked by the award, the Indian government commenced the process of revisiting its existing BITs. Simultaneously, India had started receiving notices under various BITs in relation to the retrospective tax amendments and cancellation of 2G licenses.
In this background, in 2015, India started drafting a new model BIT to replace the existing model Bilateral Investment Promotion Agreement (2003).
The model BIT was finalized and released in public domain in 2016. While it has certain improvements on the draft model BIT, it continues to indicate the confusion in the government’s approach, in that it is not clear whether it wants to have a BIT in order to protect foreign investors or to reassert its sovereignty.
It is clear that the model BIT is reactionary in nature and was not prepared as part of a regular exercise to reform the existing framework. Pertinently, consequent to the release of the model BIT in 2016, India has given a notice of termination of its existing BITs to at least 74 countries and has released two joint interpretational statements with Columbia and Bangladesh.
These terminations are ongoing since 2017 and a few BITs are set to terminate in 2021 on expiry of the notice period.

Why a Standing Committee was appointed for reviewing the BITs?

The broader context in which the Committee took up the task of reviewing India’s approach towards BITs has three core elements.

First, since the White Industries case, foreign investors have sued India around 20 times for alleged BIT breaches. This made India the 10th most frequent respondent-state globally in terms of investor-state dispute settlement (ISDS) claims from 1987 to 2019 (UNCTAD).
Second, India adopted a new Model BIT in 2016, which marked a significant departure from its previous treaty practice.
Third, India is in the process of negotiating new investment deals (separately or as part of free trade agreements) with important countries such as Australia and the U.K.

Recommendations of the Standing Committee on BITs:

The Committee examined this overall context and made vital recommendations for the government to consider.

First, it articulated its discontentment at the fact that India has signed very few investment treaties after the adoption of the Model BIT. It recommends that India expedite the existing negotiations and conclude the agreements at the earliest because a delay might adversely impact foreign investment.
Second, contrary to the position of policymakers, the committee recognises the potential of BITs in luring foreign direct investment (FDI). This aligns with the findings of several empirical studies that show that while individual BITs do not impact investment inflows, the cumulative effect of all BITs signed by India positively influenced FDI inflows.
In this regard, curiously, the committee recommends that India should sign more BITs in core or priority sectors to attract FDI. Generally, BITs are not signed for specific sectors.
Asking India to do so will be a novel pathway to investment treaty-making. It will require an overhauling of India’s extant treaty practice that focuses on safeguarding certain kinds of regulatory measures from ISDS claims rather than limiting BITs to specific sectors.
Third, the committee recommends that India’s Model BIT be fine-tuned. This is welcome because the Model BIT gives precedence to the state’s regulatory interests over the rights of foreign investors.
However, the key question is, what trajectory will this fine-tuning take? The Model BIT should be recalibrated keeping two factors in mind: tightening the language of the existing provisions to circumscribe the discretion of ISDS arbitral tribunals that offer broad interpretations, and striking a balance between the goals of investment protection and the state’s right to adopt bonafide regulatory measures for public welfare.
The committee’s report mostly concentrates on the first factor. If the Model BIT is tweaked with the sole motive to reduce arbitral discretion, it might result in further skewing the balance towards the host state’s right to regulate. This would make it arduous for India to convince its potential treaty partners like the EU which already have misgivings about the Model BIT.
Fourth, the committee recommends bolstering the capacity of government officials in the area of investment treaty arbitration. While the government has taken some steps in this direction through a few training workshops, more needs to be done.
What is needed is an institutionalised mechanism for capacity-building through the involvement of public and private universities that have competence in this field. The government should also consider establishing chairs in universities to foster research and teaching activities in international investment law.

Way Forward:

A very large proportion of ISDS claims against India is due to poor governance. This includes changing laws retroactively (which led to Vodafone and Cairn suing India), annulling agreement in the wake of imagined scam (taking away S-band satellite spectrum from Devas), and the judiciary’s fragility in getting its act together (sitting on the White Industries case for enforcement of its commercial award for years).
The Committee could have emphasised on greater regulatory coherence, policy stability, and robust governance structures to avoid ISDS claims.
The government should promptly assemble an expert team to review the Model BIT. This team should involve critical voices because plural viewpoints can coalesce into an efficacious policy.

Source: The Hindu

Mains Question:

Q. Devas victory over ISRO in international arbitration brought again the issues of India’s bilateral investment treaty. In this context discuss the India’s bilateral investment treaty. What are the recommendations of the Standing Committee on BITs? Critically examine.