India And Post-Pandemic Bilateral Investment Treaties
As the Covid-19 pandemic crisis and its aftereffects continue in India and across the world, it is expected that global investors will seek strategic realignment to navigate an environment affected by economic uncertainties. Though GDP growth recovered in the January-March quarter the subsequent second virus wave has extinguished hopes of double digit growth this recovery year making it imperative to continue with regulatory easing, tax reforms, institutionalising arbitration and reviewing the Model Bilateral Investment Treaty, both in letter and spirit.
Remember, while global foreign direct investment plunged 35% in 2021, India witnessed a rise in foreign investment.
Factoring The Pandemic Risk In BITs
Post-pandemic of course, all states and investors will have to factor in Covid-induced risks in future bilateral investment treaties or investor protection agreements.
Though, this will not have any bearing on existing investment claims against India or by Indian investors abroad, incorporating the long-term investment impact of the pandemic will be a sensible policy move.
Another significant aspect is the strategic collateral impact of the severance of investment relation on both states and investors. In fact, there have been instances in the past where international investment agreements or BITs have served to mitigate the deterioration in international relations between sovereign states.
Consider the impact on Japan-China trade and investment post historical geo-political conflicts – their bilateral tension due to territorial disputes thawed to a large extent after the first China-Japan BIT in 1988. The two countries again entered into an FTA and executed IIAs along with South Korea almost 25 years later despite conflicts in the East China Sea.
In recent months, the India-U.K. virtual summit and the subsequent broad-based partnership proposals in their Roadmap 2030 has opened up the possibility for renegotiating the BIT that was terminated in March 2017. The legal and policy question that will arise is whether this broad-based partnership proposal—including identifying priority areas for investment such as the Production-Linked Incentive Scheme to U.K. companies and the Ease of Doing Business MoU—is sufficient to commit to a binding legal treaty over a decade or more? What about the roadmap and timeline for its implementation? Further, can it really persuade India to negotiate terms based on its hitherto dormant 2016 Model BIT?
Notwithstanding formal resumption of bilateral trade negotiations with the Eropean Union, the same questions will arise. Though, the announcement suggests that investment protection agreement is a serious indication that the bilateral ties with EU can work beyond the challenges of past investment treaties. Hence, it suggests that connectivity partnership has potential to create a wider economic framework and a better chance to come to fruition.
Proposing A New Approach To Investor Dispute Resolution Under The Model BIT
Though states cannot proceed against investors under investment treaties or BITs, at the negotiation stage there should be a mutual understanding and acceptance of terms which are in principle non-negotiable and those that will be legally binding.
In our view, India’s Model BIT is a unique example of balancing the sovereign state’s rights with the rights of investors and since it can continue as a means of negotiation in the present-day FDI policy framework, India should consider putting in place a comprehensive redressal mechanism which is fair and transparent while also being time-bound. This will necessitate reorienting the 2016 BIT model.
Moreover, since consistency and transparency on tax policy and legislation continue to remain among the bedrock principles of all BITs (even though the Model BIT has an explicit and categorical exclusion of taxation issues) fiscal and tax incentives by the central and state governments in the form of tax rate cuts and under the Make In India policy make up for perceived regulatory risks and apprehension about India’s complex tax code.
Even so, we still suggest that the Model BIT needs to be backed by a preventive approach to investor-state disputes through an empowered group of stakeholders and internationally reputed experts to provide a continuous channel of communication and facilitate institutional cooperation to build greater confidence in the resolution process for the investors, state, and the common citizenry.
Undoubtedly, to implement this, policymakers, legislators, and government agencies need to draw clear pragmatic lessons from past experiences on treaty arbitration, and, from the Vodafone and Cairn cases. The longer such cases pend the more harm they cause to the country's reputation.
For instance, the tradeoff between mandatory binding arbitration under the tax treaty versus state autonomy or sovereignty over taxation laws/policy can only be clarified by a consistent review of the treaty policy and mechanism such as acceptable bilateral negotiations on a case-to-case basis.
Enabling ICSID As An Option: Pros And Cons
Neither a tribunal nor a court, the International Centre for Settlement of Investment Disputes is an institution to administer disputes under the ICSID Arbitration Rules. It requires a minimum standard of transparency, in that every investment arbitration is mentioned in the public domain and every award must be published or at least its legal reasoning laid bare.
Past cases brought to ICSID show us that it has also dealt with issues that involve state and policy as against the solitary commercial focus of other arbitral tribunals and forums. In addition, the ICSID Convention is known to provide a more predictable enforcement of its awards.
We see that India’s stand with respect to ICSID has been guarded.
On one hand, since India is not a signatory to the ICSID Convention, arbitration awards can be challenged in its national courts. On the other hand, it lacks access to an institutional arbitration forum that seeks to resolve international investment disputes and makes such decisions automatically enforceable after it signs and ratifies the Convention. Of course, it is the absolute right of every sovereign nation to determine whether to join an international forum, although the reservations that India had expressed in 2000 were overcome to a large extent by the Model BIT. In later years, the Delhi High Court also held in Vodafone (2017) and again in Khaitan Holdings (Mauritius) Ltd. (2019) that investment arbitrations are not commercial in nature and therefore cannot be enforced using the New York Convention.
Reviving The Long-Term Investment Environment
In successive budgets before and after the Covid crisis, India has focused on making investment structures favorable to investors – both from a regulatory as well as a tax perspective.
Developments with respect to amendments to taxation of sovereign wealth funds, real estate investment trusts, alternate investment funds, offshore funds and amendments to the Arbitration and Conciliation Act demonstrate the government’s resolve to promote foreign direct investment, though, it would be incomplete without reforms on investment arbitration.
A long awaited reform would be an enabling legislation to deal with treaty-based dispute resolution.
In conclusion, to keep the investment ecosystem on a sustained path of growth and employability, it is time to review the treaty policy and consider dispute resolution options that preserve investors’ confidence along with the state’s commitment to attract global investment while safeguarding its core sovereign principles and national interests.
Mukesh Butani is founder at BMR Legal and Aparna Raman is an international investment lawyer and legal policy advisor.
The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.