Explained | What are India's BITs and how do they affect international arbitration?

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There has been increasing scrutiny on India’s model bilateral investment treaty (BIT) rules since the Supreme Court finally quashed an appeal by Devas Multimedia, a foreign multinational, in a legal battle with Antrix Corporation. Deutsche Telekom is one of the investors in Devas Multimedia while Antrix is the commercial arm of the Indian Space Research Organisation (ISRO).

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While Devas was officially charged years ago for defrauding ISRO, it subsequently launched an international case against India and secured a favourable ruling in most courts. These developments have again shone the spotlight on India’s struggle against multinational giants at international arbitration courts where the government is currently fighting nearly a dozen cases.

These cases have often resulted in unfavourable rulings for India, involving payments of billions of dollars as damages and denting the country’s global reputation as an investment destination, a point made by finance minister Nirmala Sitharaman recently. International arbitration is at the heart of the BITs signed by the government since 2015 after the Centre unilaterally decided to cancel all existing investment and tax agreements.

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Moneycontrol takes a look at the issue, whether progress has been made so far, and its impact on crucial foreign direct investments (FDI).

What are bilateral investment treaties?

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BITs are agreements between two countries containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the signatories in each other’s territories. These agreements establish the terms and conditions under which nationals of one country invest in the other, including their rights and protections.

They guarantee ’fair and equitable treatment’ that ensures foreign companies are not discriminated against and promise compensation in cases of breach of contract by both state and non-state entities.

BITs provide protection against illegal nationalisation and expropriation of foreign assets and other actions by a signatory of the BIT that may undermine the ownership or economic interest of a national of the other signatory. One of the main protections under a BIT is that it allows foreign investors to sue countries directly, by submitting claims for breach of the BIT to arbitration rather than to local courts.

What has been India’s experience?

Till 2015, India had signed bilateral investment protection and promotion agreements with 83 nations. Experts say these had led to a steady rise in foreign direct investment (FDI) since 2005, and culminated in record inflows after the Bharatiya Janata Party-led government took charge in 2015.

However, the Union government felt these treaties were unsatisfactory as they granted rights to the foreign investors and imposed responsibilities on the states and they were conspicuously silent on the obligations of the foreign investors.

New Delhi also felt that India’s reputation and its position as an investment destination had suffered after a series of high-profile international disputes over tax claims whereby multinationals dragged India to international courts of arbitration. Most notably, cases filed by Vodafone and Cairn Energy over the government’s decision to enforce retrospective taxation soured investor sentiment worldwide about India.

Devas, on its part, sued India in an international court and won the case. According to the United Nations Conference on Trade and Development, which keeps an account of the number of disputes, a total of 17 known investor-state dispute settlement (ISDS) cases had been filed against India by the end of 2015.

What is the government’s model BIT rule?

To address these challenges, the finance ministry created a model BIT, the draft of which was cleared by the Union Cabinet in December 2015. It aimed to ensure a clear framework based on which individual agreements were to be negotiated with other nations while protecting India’s national interests.

Among its salient features is a clause stipulating that if an investor-state dispute arises, a foreign investor can only seek the option of international arbitration when all domestic legal routes have been exhausted. While India feels this is required to keep control on litigation and reduce the chances of extremely high penalties from international tribunals, other nations have called the Indian legal system slow and corrupt.

The model BIT also states that India or any other country cannot nationalise or expropriate any asset of a foreign company unless the law is followed, it is done for a public purpose, and fair compensation is paid. Public purpose is not defined in any treaty India has signed with other nations.

However, it assures foreign entities that dispute-resolution tribunals, including foreign tribunals, can question ‘public purpose’ and re-examine a legal issue settled by Indian judicial bodies. The model BIT also brings in a new definition of investments, which is ‘enterprise-based’.

How has the model BIT been received?

After launching the model BIT, the government unilaterally cancelled the 83 investment agreements and began fresh negotiations based on the model BIT guidelines. Such new BITs have been signed so far with only six countries: Bangladesh, Belarus, Colombia, Taiwan, Kyrgyzstan and Brazil.

The reason for limited success in negotiating new BITs is unequivocal opposition to the domestic arbitration clause by all major investment partners, especially the European Union, United States and Japan. Even offshore investment hubs with liberal financial rules such as Mauritius and Cayman Islands, which have historically served as a route for Indian money to be ‘reinvested’, often illegally, to India, objected to the clause.

Other nations have repeatedly pointed out that a major hitch in the model BIT law is that it does not place time-bound deadlines to complete negotiations with various countries. In 2015-16, this had led to a situation where companies from many countries lost their investment protection cover in India as the existing investment and tax treaties between India and those countries ended before a new agreement under the model BIT could be drawn up.

What has been the impact of the model BIT on trade and investments?

The model BIT has become the single most serious point of contention in the array of trade deals currently being negotiated by the government. Talks on the broad-based trade and investment agreement with the European Union had hit a wall after existing BITs with 23 European countries were suspended. As of September 2021, EU member nations were leading sources of FDI to India, with the Netherlands at fourth spot and Germany seventh.

FDI from the US (the third largest source) had also remained under a cloud of uncertainty after the United States trade representative also complained against the model BIT. Talks on trade deals with the US, the United Kingdom and Australia have also been held up on the issue. Foreign investors have argued that the current model BIT does not project India as serious about offering a predictable legal and taxation framework.

The government, however, claims that talks are ongoing and India’s demand for taking recourse to the domestic legal system has not affected incoming FDI. Case in point, investments from all the above-mentioned nations have continuously risen over the past four years.

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