Draft Model Indian Bilateral Investment Treaty

In December 2015, the government of India had made public a draft of its new model bilateral investment treaty (BIT). Bilateral Investment Treaty is one of the types of the trade agreements. Before we discuss this BIT draft, here is a brief idea about different types of trade agreements.

Key Facts

• India has signed 83 bilateral trade and promotion agreements, of which 72 are in force currently. {this number is of June 2016 and keeps changing}
• The recently released draft is based on 260th report of Law Commission of India on the Draft Model Indian Bilateral Treaty (Model Draft).
• India’s first BIT was signed with UK in 1994.
• India has suffered loss / defeat in BIT related disputes in White Industries Case. Cairn Energy has also dragged India in another case related to India-UK BIPA.

Different Types of Trade Agreements

Trade agreements are usually focussed on economic cooperation that comprises removal of disputes, removal of trade barriers {tariff as well as non-tariff}, protection of investments and investors, leveraging economy of scale, leveraging combined economic productivity and so on. There is a hierarchy of trade agreements from simple to complex integration of economies into a common market. The least complex are TIFA and BIT. TIFA {Trade & Investment Framework Agreement} establishes the framework for economic cooperation and removed outstanding disputes if any, between two economies. In BIT {Bilateral Investment Treaty}, the two countries sit together and decide the conditions of private investments by citizens and firms {this means FDI and FII} of two countries. We note here that most countries have signed BITs with other countries and there are around 25,000 BITs around the world.

Next in the hierarchy come the PTAs and FTAs. PTA {Preferential Trade Agreements} aims at reducing the trade barriers. Usually tariffs are reduced and try to make them least possible by upgrading itself into FTA {Free Trade Agreement}. FTA does not mean that there are no tariffs at all, but the degree of such trade barriers is minimum possible between the two economies. India has signed  PTAs with many countries.

Third stage is of CEPA {Comprehensive Economic Partnership Agreement} and CECA {Comprehensive Economic Cooperation Agreement}. These not only cover trade, but also investment, services, intellectual property rights, fair competition and so on. There is not much difference between CEPA and CECA except that partnership is considered to be more comprehensive than cooperation. Example of CECA is ASEAN-India CECA; and example of CEPA is India-Singapore CEPA.

Fourth stage, the most complex integration is the common market. It brings down all tariffs and trade barriers to all time low and integrates two economies into one common market. European Free Trade Association (EFTA) and European Economic Area (EEA) are examples of such complex integration.

Model BIT of India and White Industries Case

The above discussion makes it clear that the bilateral investment treaties are signed during the initial stages of trade / investment cooperation between the two counters. India had signed its first BIT with UK in 1994. After this, many other BITs were signed. For any country which would be interested in signing such a treaty with India would like to see a draft of the treaty beforehand. Towards this purpose, the government releases a model BIT in public, which serves as a kind of prospectus for such treaties. Earlier, the Government had created a ModelBIT2 in 2003 {thus called 2003 Model}.

White Industries Case

The model served as a template for negotiation between India and other countries for quite a few years. However, in 2011, India faced a tough issue associated with the BITs. India’s Coal India Ltd had entered into a long term agreement with White Industries, an Australian mining company for the supply of equipment to and the development of a coal mine near Piparwar in Bihar.  However, a dispute arose on bonus and penalty payments as well as to the quality of the extracted coal. The ICC Tribunal found India guilty of violating the India-Australia bilateral investment treaty (BIT) and awarded  USD 4.08 million to White Industries in May 2002. This was the first known investment treaty ruling against India. As it is a common practice regarding the investment-treaty disputes, the award was kept confidential.

Similarly, the Cairn Energy had also initiated international arbitration under India-UK Bilateral Investment Protection and Promotion Agreement (BIPA), wherein it has sought USD 5.6 billion in compensation from India. This type of cases have far reaching consequences, and the need was felt to make required changes in BIT drafts. Government of India took step to renovate the text of its 2003 Model. Thus, the new draft has been put in place with objective of ensuring a safe and secure environment for foreign investors as well as Indian parties.

Salient Features of the new Model BIT

Here is a brief discussion about the salient features of new model BIT.

Preamble

The earlier draft envisaged only on promotion; and there was an absence of protection. The new draft includes protection of investment as an objective.

Definition of Investment

In the definition of the investments, the new draft has tried to limit and present more specific details on what an investment is. The 2003 draft had a broad ambit and could include any kind of assets as investments. The new approach is narrow and contains a negative list of investments {to reduce the claims against India}. Such negative list includes portfolio investments, intangible assets, interest in debt securities of the government etc.

Full Protection and Security (FPS)

The new draft has included provisions for investor protection under its FPS section. This was absent in earlier draft. Further, the meaning of FPS has been made little clearer so that vague interpretation by tribunal is not arrived at.

The model draft has also put in place a clear scope of National Treatment, Non-Discriminatory treatment, Transparency, Investor Obligations, Corporate Social Responsibility etc.

Questions for Analysis

• What is the importance of having a model BIT? What are the reasons for their frequent reasons?
• To what extent, the new model BIT has removed the problems of old draft?
• Does the new model suffer with some drawbacks?
• What is Investor-state dispute settlement? What role does it play?

What is the importance of having a model BIT? What are the reasons for their frequent reasons?

A model BIT serves as a prospectus or catalogue of the Government’s policy on investments and investor protection. They promote coherence in a country’s external investment; and present an overview of policy for ongoing and future negotiations. The Model BIT also enhances the bargaining position of a country during negotiations. When they are placed in public domain, they inform investors, tribunals, treaty partners about the country’s position on treatment of foreign investors.

Model BITs keep changing over time to reflect new developments / concerns. The reasons for frequent updates may be domestic or as a reaction to international developments. Domestic reasons include: change in government or government policy; change in domestic law; change in investment policy. International developments include investor-country disputes and their fall outs, change in international economic environment etc.

To what extent, the new model BIT has removed the problems of old draft?

There were several problems of the earlier draft as discussed in salient features above. It had not much emphasis on protection; had vague definitions and posed problems for India. It was also considered a pro-State document, heavily favouring the host state. Due to this, it created a problem for India to renegotiate the existing BITs with 73 different countries. Further, the language of the earlier draft was  that it inhibited India to negotiate BITs favourable to its own investors.

The recently released draft has made a balanced approach, is clear and tries to take care of not only foreign but also domestic investors. It also gives a fair amount of room to India to negotiate BITs with different countries on different terms.  It has done away with the vague norms of ‘fair and equitable treatment’ and replaced the same with clear and transparent standards of treatment, leaving no room for arbitration in future. It also inserts new concepts, like requiring arbitrators to be impartial, independent, and free from conflict of interest; transparency in arbitral proceedings; and acknowledges the possibility of setting up an appeals mechanism to review tribunal awards.

Does the new model suffer with some drawbacks?

Despite having accommodated positive changes, it suffers from certain fundamental drawbacks, for instance:

It restores its unconditional support of the Indian judicial system. It repeatedly refers to the need for “exhaustion of local remedies.” It is prescribed in the Model that foreign investors can raise a treaty dispute with India and similarly, an Indian investor can claim against a foreign state only after approaching local courts and eliminating the possibility of domestic resolution. The model also recalibrates the limitation period for such disputes, requiring that cases be filed before local courts within one year of acquiring knowledge of the disputed claim. The investor must then wait five years for that process to play out before seeking an arbitrated solution. Restoration of such traditional faith of the Model in the India judicial system – characterised with inordinate delays and systemic problems of quality of adjudication – sounds a utopian blare defeating the purpose of unlocking BIT-related deadlocks.

The removal of ‘most favoured nation’ clause – a standard element of typical BIT basket and which is expected by the USA to be an integral feature of BITs in India looks a intransigent approach of the Model.

Exclusion of taxation from its purview is a clear indication of the Government’s reaction to various disputes with firms like Vodafone, Nokia,andCairn on tax-related matters. As a response to the multifarious disputes India faces under the prevalent BITs, the Model has put in place an unbending grievance redressal mechanism (local remedies, lesser limitation, mandatory waiting period, etc.).

What is Investor-state dispute settlement (ISDS)? What role does it play?

Investor-state dispute settlement (ISDS) or investment court system (ICS) is an instrument of public international law that grants an investor the right to use dispute settlement proceedings against a country’s government.

The ISDS’s focus on weak access to justice for the host state’s local investors and a viable one for the foreign investors has drawn flares of objection from all quarters. Its self-imposed faith in the competence of the host country’s judicial system without considering the fact that the delicate issues of bilateral trade and commerce.  Like these the ISDS contains a substantially flexibility which affects justice delivery process in case of bilateral investment issues.