Bilateral Investment Treaties (BITs) are agreements between two countries that establish the terms and conditions for private investment by nationals and companies of one country in the other country. Read here to learn more.
India, like many other nations, has entered into BITs with various countries to encourage and protect foreign investments, stimulate economic growth, and reduce investment risks by providing a stable and predictable legal framework for investors.
Bilateral Investment Treaties (BITs)
Bilateral Investment Treaties (BITs) are agreements between two countries that establish the legal framework for investment by investors from one country in the territory of the other.
- These treaties are pivotal in the international investment landscape, providing protection to foreign investors against unfair treatment and ensuring a level of predictability and security for cross-border investments.
- BITs are integral to encouraging foreign direct investment (FDI), fostering economic growth, and developing international economic relationships.
Key Features of BITs:
- Investment Protection: Bilateral Investment Treaties typically offer protections against expropriation without compensation, guarantee fair and equitable treatment, provide for the free transfer of funds related to the investment, and protect against arbitrary or discriminatory measures by the host state.
- Most-Favoured-Nation (MFN) Clause: MFN clause ensures that investors from the treaty-signing countries receive treatment at least as favourable as the host country’s treatment of investments from any third country. It aims to prevent discrimination between foreign investors.
- National Treatment: BITs often include a national treatment clause, which guarantees that foreign investors will be treated no less favourably than the host country treats its domestic investors in like circumstances. This promotes a non-discriminatory investment environment.
- Dispute Settlement Mechanisms: Bilateral Investment Treaties provide for the resolution of disputes between investors and states (Investor-State Dispute Settlement, ISDS) and between the states themselves (State-State Dispute Settlement). ISDS allows investors to directly sue countries for alleged treaty breaches, typically through international arbitration.
- Pre-Establishment and Post-Establishment Protections: Some BITs cover pre-establishment rights, offering protections from the moment an investment is contemplated, while others focus on post-establishment, protecting investors after their investments have been made.
Evolution of Bilateral Investment Treaties
Over the years, the scope and nature of Bilateral Investment Treaties have evolved. Initial BITs were often quite broad in their protections, reflecting a strong emphasis on investor protection.
- However, in recent years, there has been a shift towards more balanced treaties that consider the host state’s right to regulate in the public interest, particularly in areas such as environmental protection, labour rights, and public health.
- This shift has been partly driven by criticism of BITs, especially concerning ISDS mechanisms.
- Critics argue that ISDS can undermine national sovereignty by allowing foreign investors to bypass domestic courts and challenge government policies in international arbitration.
- There is also concern about the transparency of the arbitration process and the potential for large financial awards against states, which could deter them from enacting policies in the public interest.
In response to these criticisms, newer BITs and model BITs proposed by various countries incorporate several reforms, such as:
- More explicit carve-outs to preserve policy space for health, environment, and social regulations.
- Improved transparency in arbitration proceedings, including provisions for public hearings and the publication of documents.
- Enhanced roles for domestic courts, encouraging the exhaustion of local remedies before resorting to ISDS.
- Provisions for expedited review of frivolous claims to discourage baseless lawsuits.
- Consideration of sustainable development goals, integrating environmental and social considerations into the investment framework.
Evolution of Indian Bilateral Investment Treaties (BITs)
India’s approach to BITs has evolved significantly over the years, especially in response to its economic liberalization in the 1990s and subsequent experiences with international investment arbitration.
- Initially, India pursued Bilateral Investment Treaties aggressively to attract foreign direct investment (FDI), signing its first BIT with the United Kingdom in 1994. Over the next two decades, India entered into more than 80 BITs with countries around the world.
- However, a series of international arbitration cases against India, initiated by foreign investors under various BITs, led to a reevaluation of its BIT strategy.
- A notable case was brought by Vodafone International Holdings B.V. against the Indian government, which raised concerns within India about the implications of its existing BIT framework on its sovereign right to regulate investments for legitimate public welfare objectives.
India’s New Model Bilateral Investment Treaty (BIT), 2016
In response to these concerns and challenges, India released a new Model Bilateral Investment Treaty in 2016.
This model treaty represents a significant shift from India’s earlier BITs, aiming to balance investor protections with the government’s ability to regulate in the public interest.
Key features of the 2016 Model BIT include:
- Narrower Definition of Investment: The new model provides a more restrictive definition of what constitutes an investment, focusing on characteristics such as the commitment of capital and the expectation of gain or profit.
- Exclusion of Most-Favored-Nation (MFN) Clause: Unlike many traditional Bilateral Investment Treaties, the new model does not include an MFN clause, which obligates countries to extend to each other any more favourable treatment given to investors from any third country.
- Limited Fair and Equitable Treatment (FET): The model specifies limited conditions under which investors can claim fair and equitable treatment, focusing on the denial of justice under due process.
- Exclusion of Taxation Measures: The model excludes taxation measures from the scope of the BIT, responding to disputes that have arisen from tax-related measures in the past.
- Pre-establishment Commitments Subject to Negotiation: The model does not automatically allow for the pre-establishment rights of investors (i.e., market access or the right to invest) but leaves these to be negotiated between the parties.
- Investor-State Dispute Settlement (ISDS) Reforms: The model introduces a more stringent process for resolving disputes between investors and the state, including requirements for exhaustion of local remedies and a time frame within which claims must be brought.
Why in the news?
The Prime Minister’s Office has directed the commerce ministry to review the existing model text of bilateral investment treaties (BIT) to enhance the ease of doing business.
- Currently, only seven countries have accepted this model, with many developed nations expressing concerns, particularly regarding dispute resolution provisions.
- These pacts are important as India has earlier lost two international arbitration cases against British telecom giant Vodafone and Cairn Energy plc of the UK over the retrospective levy of taxes.
Criticism
India’s new Model BIT reflects a growing trend among nations to reassess their investment treaty policies in light of experiences with international investment arbitration.
While it aims to protect the government’s regulatory space, some critics argue that the model may be too restrictive and could potentially deter foreign investors due to perceived reduced protections and increased risks.
Way forward
- Using a Hybrid Definition: A hybrid definition of investment that combines elements of an asset-based and enterprise-based definition is necessary in light of foreign investors’ aversion to risk.
- Such a definition would guarantee that direct and indirect investments are protected under the Bilateral Investment Treaties while maintaining a negative list (to exclude those particular categories or sectors that the Parties believe appropriate) and also allowing room for exclusions for regulatory reasons by the State.
- Adhering to International Norms: India may consider amending the standard of treatment clause to incorporate the customary norm of protection of just and equitable treatment and bring it into compliance with international standards.
- Additionally, the Model BIT’s open-ended phrases need to be clarified thus reducing the disputes and BIT claims.
Conclusion
Countries continue to negotiate, revise, and sometimes terminate Bilateral Investment Treaties as they seek to find an optimal balance between attracting foreign investment and preserving their regulatory autonomy.
The landscape of international investment law is, therefore, in a state of flux, reflecting broader debates about globalization, sovereignty, and economic justice.
India has been actively renegotiating its existing Bilateral Investment Treaties based on the new model and has also served termination notices for several of its old BITs that it found inconsistent with its revised investment policy framework.
The impact of these changes on India’s investment climate remains a subject of ongoing debate and analysis, balancing the need for foreign investment with the necessity of preserving the regulatory autonomy needed to achieve public policy objectives.
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-Article by Swathi Satish
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