Proposed Centre-State Investment Agreement

As proposed in this year’s union budget, the finance ministry has started to prepare a model Centre-State Investment Agreement (CSIA). This agreement will be signed between the Centre and various states for the effective implementation of Bilateral Investment Treaties (BIT), signed by India with other countries.

What is a bilateral investment treaty (BIT)?

A bilateral investment treaty (BIT) is an agreement entered by two countries regarding promotion and protection of investments made by investors of these two countries in each other’s territory. By regulating the host nation’s treatment of investment, it tends to protect the investments made by an investor belonging to one country in the other.

Why the government has come up with this proposal?

The motivating factor behind the proposal is to facilitate ease of doing business for foreign investors and their domestic recipients. There can be a few instances where a problem with a foreign investor is due to a particular state. CSIA will address this by ensuring commitment and fulfillment of obligations by the State governments. It is provided that the government will not make it mandatory for the states to sign CSIA, but the information of those states which did not sign CSIA will be given to India’s BIT partner. So, the states which opt to sign this agreement will be a more attractive destination for foreign investors than the one which does not. Some of the features of the agreement may include an enterprise-based definition of investment, non-discriminatory treatment, protection against expropriation, an Investor State Dispute Settlement (ISDS) provision requiring the investors to first exhaust local remedies before seeking international arbitration etc.

The finance ministry came up with a new Model BIT Text in December last year. This basic template will be used during treaty negotiations with other countries. In the past with several instances of investors suing governments and claiming huge compensation for their ‘losses,’ the government has come up with these initiatives to protect the government’s interests. BIT is expected to replace the existing Bilateral Investment Protection and Promotion Agreements (BIPPA). The BIT language cleared by the Union Cabinet in December keeps taxation out of its ambit.  Unlike BIPAs, BITs will not allow foreign companies finding themselves in a tax row with the government to invoke the investment treaty their parent country has signed with India, as is the case at present. Vodafone had invoked the India-Netherlands BIPPA after the cancellation of conciliation talks and sought international arbitration in its Rs 20,000-crore tax dispute. Recently, Cairn Energy invoked India-UK BIPPA and demanded compensation for the Rs 10,200-crore tax notice served on Cairn India.

What are the issues/criticisms?

Obligations under international law

Critics argue that irrespective of a foreign company running into trouble with the state, the onus and the liability will be on the central government. Whether a state government enters into agreement or not, the actions of the state government will bind the Indian state. Further, if the state government infringes upon the rights enjoyed by a foreign investor under the BIT, the foreign company may challenge this as a violation under international law. In this case the Central government cannot justify its non-compliance with BIT obligations by invoking “provisions of its municipal law, or because of any special features of its government organization or its constitutional system”.

The judgment of Azadi Bachao Andolan Vs Union of India (2004) case and a combined reading of Entry 14 of the union list (Entering into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries) and Article 73, provides that the Central government, on behalf of the Indian republic has the power to enter into treaties. Once the Central government accedes to a treaty on behalf of the republic, the international obligations will bind the entire country, including its constituent states, at least externally. It does not matter whether the Central government has entered into an agreement with the State governments regarding the implementation of treaty or not. Under international law, distribution of sovereign powers among constituent states is deemed to be an internal matter. Hence, irrespective of whether the Centre warns India’s BIT partners about non-compliant States before they make their investment in the State, the proposal does not has much legal significance unless framed as a reservation to the BITs.

Cooperative federalism

India has a quasi-federal structure with Union and State governments often politically non-aligned. In this context, a proposal by the Centre to enter into investment agreements with States as an optional arrangement will become a challenge to the cooperative federalism and will further sour fragile Centre-State relations. The reasons being:

• The state governments may not like themselves to be blamed for the violation of a BIT.
• They may not like the idea of Central government informing the BIT partner countries about their non-compliance in case they are not willing to sign the agreement and downgrading its image to a non-safe destination for foreign investments.

What is the way forward?

• Given the direct impact that many regulations of State governments has on foreign investors, the central government can include sensitizing State governments as one of the objectives of the proposal.
• Institutionalizing the involvement of State governments in the treaty-making process can be thought of. Forums like NITI Aayog, can be used as a platform for Centre-State consultative process on treaty making.
• Apart from BITs, the sensitization of state governments should be extended to other international agreements like Free Trade Agreements (FTAs), Double Taxation Avoidance Agreements (DTAAs) and agreements concluded under the aegis of WTO.

Conclusion

The trade treaties assume significance because it covers many issues that fall in the State list like agriculture. Thus, with the spirit of cooperative federalism, the Centre and the States should work harmoniously for the benefit of the country and for the better implementation of international treaties.