Context-

The dramatic developments in Bangladesh that led to the resignation and fleeing of its former Prime Minister Sheikh Hasina have created a political vacuum and, thus, uncertainty in India’s eastern neighbour. Besides the political and diplomatic fallout of this crisis for India, another significant aspect is how this will impact Indian companies operating in Bangladesh.

Indian Companies Investment in Bangladesh

Indian companies have invested in Bangladesh in sectors such as edible oil, power, infrastructure, fast-moving consumer goods, automobiles, and pharmaceuticals. Despite political opposition, the Sheikh Hasina government rolled out the red carpet for Indian investors and adopted several measures to invite them, such as starting designated special economic zones.

Associated risk with Investment

Unhappy with India’s alleged support of Ms. Hasina’s regime, her opponents launched an “India out” boycott movement targeting Indian goods. Since Ms. Hasina is no longer in power, the interim or the new government may adopt a hostile attitude towards Indian companies. It might change the existing laws or adopt new regulatory measures that may adversely impact Indian capital.

Legal protection for Indian investors

Three basic legal frameworks broadly apply to foreign investment.

• First, the domestic laws of the country where the investment is made.
• Second, contracts may have been signed between the foreign investor and the government of the host state, or among foreign investors and companies of the host state.
• Third, the international law contained in applicable treaties, customs, and general legal principles that have attained the status of international law.

The Indian companies that have invested in Bangladesh can use the first two legal frameworks to protect their investments from regulatory risks. For instance, Indian companies can rely on Bangladesh’s Foreign Private Investment (Promotion and Protection) Act. However, there are limitations to relying on the domestic law of the host state because it can be changed unilaterally by the state to the investor’s detriment at any time. Likewise, contracts may be of limited value when it comes to challenging the sovereign actions of the state that adversely affect foreign investment. Therefore, the third legal framework, international law, assumes importance.

The India-Bangladesh BIT

International law cannot be changed unilaterally and can be used to hold states accountable for their sovereign actions. When protecting foreign investment, the most crucial instrument in international law is a bilateral investment treaty (BIT).

• What is Bilateral Investment Treaty? A BIT is a treaty between two countries aimed at protecting investments made by investors of both countries. BITs protect investments by imposing conditions on the regulatory behaviour of the host state, thus preventing undue interference with the foreign investor’s rights. These conditions include restricting host states from unlawfully expropriating investments, imposing obligations on host states to accord fair and equitable treatment (FET) to foreign investment and not to discriminate against foreign investment.
• What is investor-state dispute settlement (ISDS) ? BITs also empower foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations. This is known as investor-state dispute settlement (ISDS). According to the United Nations Conference on Trade and Development (UNCTAD), by the end of 2023, the total number of known ISDS claims that have been brought stands at 1,332.
• India-Bangladesh BIT 2009: In case of adverse sovereign regulation, Indian companies can rely on the India-Bangladesh BIT signed in 2009. While India has unilaterally terminated almost all its BITs, the one with Bangladesh continues to exist. The India-Bangladesh BIT contains broad substantive investment protection features, such as an unqualified FET provision that can come in handy for Indian companies challenging Bangladeshi sovereign regulatory conduct.
• Joint Interpretative Notes (JIN) impact: However, the twist in the tale is the Joint Interpretative Notes (JIN) that India and Bangladesh adopted in 2017 to clarify the meaning of various terms in the 2009 treaty. This JIN, now a part of the BIT, was adopted at India’s insistence. As part of overhauling its investment treaty practice to safeguard its regulatory power, India proposed such JINs to several countries. This was done without considering whether India has an offensive or defensive interest vis-à-vis a specific country. This JIN has diluted the investment protection features of the BIT. For instance, taxation measures are excluded from the ambit of the BIT.

Likewise, the FET provision is linked to customary international law that would require a higher threshold to show a violation of the treaty. The JIN has been designed from the perspective of the capital-importing country to safeguard its regulatory conduct from ISDS claims. Between India and Bangladesh, New Delhi is the capital exporter, and Dhaka is the importer. Ironically, the JIN that India developed might work to the advantage of Bangladesh, and not the Indian capital operating there.

Over all Implications

While Bangladesh provides the immediate reference point, the issue is not restricted to India’s eastern neighbour. India’s outbound investments have grown manifold. According to UNCTAD, outward foreign direct investment from India in 2023 stood at about $13.5 billion. India is among the top 20 capital-exporting countries. Thus, the issue of legal protection for Indian companies abroad assumes salience. India should, therefore, evolve its investment treaty practice, keeping both its host and home status in mind and not just the former.

Conclusion

In essence, India's efforts to protect its domestic interests have inadvertently created a weaker shield for its investors abroad. A more balanced approach is essential to safeguard the growing Indian investment portfolio.

Source- the Hindu