India bites the bullet, open to global arbitration of disputes

A Review of India’s Bilateral Investment Treaties and Foreign Direct Investment

A lack of takers for the 2015 model text for Bilateral Investment Treaties (BITs) and a slowing of foreign direct investment (FDI) inflows have prompted New Delhi to take another look at the template.

Re-drafting the Text to Address Concerns

To accommodate the concerns of potential partners, the government may choose not to insist on the stance that international arbitration can be explored as a means of resolution of disputes by a foreign investor only after domestic legal remedies are exhausted.

According to sources, a discussion paper to be floated soon will suggest re-drafting the text to allow first resort to “international arbitration within India”. The process, the paper will suggest, may be under the administrative supervision of the Permanent Court of Arbitration (PCA), located at The Hague, Netherlands. This significant change is expected to address the drought of new BITs since India shifted to the 2015 text — only four new treaties have since been signed.

The Importance of BITs for Investor Confidence

BITs are basically reciprocal agreements between two countries to promote and protect foreign private investments in each other’s territories, and are expected to help boost investor confidence.

Addressing Concerns about Bankable Projects and Legal Issues

The sources added that the discussion paper might also delve into the issue of India not having enough bankable projects for foreign investors to focus on. Issues concerning land acquisition and the Insolvency and Bankruptcy Code would also be addressed, they said.

The Trigger for Changes in the BIT

The changes in the erstwhile BIT were triggered by several high-profile international arbitration proceedings launched by global majors such as Vodafone and Cairn against the Indian government in different tax disputes. India lost these cases.

The Current Model BIT and its Limitations

The current model BIT explicitly bars any enterprise from a treaty partner country from seeking relief on tax disputes, and any dispute has to be resolved through the domestic judicial process, which could take years.

India’s BIT History

Till 2015, India had signed BITs with 83 countries/regions based on the Model BIT of 1993, and as amended in 2003. Out of these, 74 were ratified. Out of 74 BITs, India has unilaterally suspended BITs with 68 countries/regions with a request to re-negotiate based on the Model BIT 2015 while six BITs are still in force.

After the model BIT of 2015 was approved, India signed four agreements with relatively small countries including Cambodia, but only two of these are in force.

The Lack of Interest in India’s New BIT

As countries see India’s new BIT as very protectionist and do not offer quicker dispute resolution against policies that could harm the interest of foreign investors, there are no takers for it from major trade partners.

“The policy paper will seek wider consultation on the model BIT. We have to get practical as we are negotiating Free Trade Agreements (FTAs). FTA buttressed with BITs make sense as the objective of the engagement is to attract investments,” a senior official aware of the matter said.

Addressing Concerns for Foreign Investors

India’s ambitious National Infrastructure Pipeline (NIP) has an investment potential of Rs 111 trillion in six years through FY25. But many projects have been hampered by slower contract enforcement, land acquisition, and other issues.

As investors look to relocate from China or make fresh investments, India has to address their concerns about risks to their money due to possible regulatory discrimination on investments or repatriation of profits.

“There has to be a balance between protecting sovereign rights and allowing international arbitration for dispute resolution. As domestic remedy takes years, probably some arbitration mechanism within India which is acceptable to partner countries could be explored,” the official said.

The Role of BITs in India’s Economic Growth

India will be the fastest-growing G-20 economy over the next few years aided by its growing manufacturing and infrastructure sectors, but reform and policy barriers could hamper foreign direct investment, Moody’s Investors Service said recently.

“BITs would be complementary to the trade pacts between India and the other countries,” Sudhir Kapadia, partner, tax & regulatory services, EY India, said.

“With the measures being contemplated by GOI to set up international arbitration and mediation mechanisms in India (on the lines of countries like UK and Singapore), there would be greater comfort for countries entering into BIT with India,” Kapadia said.

Investor Reluctance Despite Incentives

Despite launching 14 production-linked incentive schemes, India attracted $70.97 billion FDI in FY23, down from $84.8 billion in FY22, indicating investor reluctance despite incentives.

The Need for Timely Settlement of Investment Disputes

A standing committee on external affairs in a report submitted in September 2021 noted that India till then had received 37 notices of dispute or letters intending to raise a dispute under various BITs. “Although only one case resulted in India paying an arbitral award, the said award resulted in a significant cost to the exchequer.” Underlining the need to avoid such losses in the future, the committee recommended timely settlement of investment disputes through pre-arbitration consultation or negotiations.

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 8: Decent Work and Economic Growth
• SDG 16: Peace, Justice, and Strong Institutions
• SDG 17: Partnerships for the Goals

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 8.9: By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products.
• SDG 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.
• SDG 17.16: Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology, and financial resources.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Number of new Bilateral Investment Treaties (BITs) signed
• Number of bankable projects for foreign investors
• Number of high-profile international arbitration proceedings
• Number of ratified BITs
• Amount of foreign direct investment (FDI) inflows

Table: SDGs, Targets, and Indicators

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Source: financialexpress.com

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