Trade Bilateral Investment Treaties: Undoing the Damage
Mukesh Aghi, President of the industry lobby group, US India Business Council (USIBC), does not think twice before answering a question on the most pressing problem USIBC members looking to invest in India face. "We need to make progress on the India-US bilateral investment treaty," he says. US companies need assurance, he says, and the investment protection treaty will allow global multinationals to stop routing investments through other countries (like Mauritius and Singapore).
"If we do it directly, we will save a lot of cost," he says. The pact has been in the works for some time. But Aghi says the two sides may be far from signing it. "The gap between positions adopted by the two countries is huge. Expectations from the US side were very high, very different from India's. We are trying to bridge the gap," he says.
This will be easier said than done. The reason is that the treaty is being worked out at a time when India is in the middle of a complex and longdrawn process of controlling the damage being caused by the 83 Bilateral Investment Promotion and Protection Agreements, or BIPAs, that it has signed with different countries over the past two decades. This is because several companies (investors), using the BIPA shield, have dragged it to international arbitration tribunals against policy decisions or tax notices that apparently harmed their interests. For instance, Edinburgh-based Cairn Energy is seeking - by invoking the India-UK BIPA - $5.6 billion from the Central government as damages after the Income Tax Department retrospectively demanded capital gains tax in connection with an internal reorganisation that resulted in public listing of its domestic subsidiary, Cairn India. Companies such as Nokia and Vodafone have also issued similar notices under BIPA. The arbitration award that Australian mining company White Industries won, in which Coal India had to pay it `45 crore compensation in 2011, is another example of a BIPA proving costly for India. India has decided to rewrite all BIPAs on the lines of a model text approved by the government in December 2015.
It is this model Bilateral Investment Treaty (BIT) - which plugs several loopholes that allow companies to sue the government at will - that is the biggest stumbling block for an India-US treaty. It has considerably narrowed the scope of clauses on national treatment and fair and equitable treatment. It also seeks to allow international arbitrtion proceedings, such as the ones initiated by Cairn Energy and Vodafone, only as a last option, after all possible local remedies have been exhausted. Existing BIPAs allow investors to bypass domestic courts and directly seek international arbitration proceedings. The model BIT also talks about a set of economic, environmental and social measures that will be outside the purview of BITs. These include intellectual property rights and taxation, the two major areas of interest to foreign multinational firms keen to invest in India. It also says that measures to protect macroeconomic stability should not be questioned under any BIT.
Changes in the Air
A major dilution of the Model BIT is unlikely as the government looks serious about wriggling out from the mess that the earlier BITs have created. After finalising the Model BIT, the government wrote to 57 countries, including the ones such as the UK, Denmark and The Netherlands with which India had signed its first set of BIPAs, seeking new agreements.
Since BIPA is a 10-year treaty with a clause that it will be renewed automatically if neither party shows interest in terminating or re-drawing it after the end of the term, the notices will serve as termination letters and the partner countries will have to decide their next course of action. "If they do not respond to our notices, the BIPAs will automatically terminate after the 10-year term. If both parties are interested in negotiating a new text, they can initiate a fresh discussion," says Kavaljit Singh, Director of Madhyam, a New Delhi-based investment policy think-tank.
The government is also known to have prepared a strategy to deal with the recent BIPAs. It plans to ask the countries in question to sign a joint statement to clarify the ambiguities in the texts. "The objective is to minimise the possibility of arbitral tribunals interpreting treaty provisions vastly differently from what the contracting parties had in mind when they signed these treaties," says Singh.
UNCTAD's World Investment Report 2016 says that "with 70 cases initiated in 2015, the number of new treaty-based investor-state arbitrations set a new annual high" last year. "Publicly available arbitral decisions in 2015 had a variety of outcomes, with States often prevailing at the jurisdictional stage of proceedings, and investors winning more of the cases that reached the merits stage," it says. Among the decisions that were based on merit, 60 per cent were decided in favour of the investor.
The UNCTAD also says that developed country investors brought most of the 70 known cases in 2015. According to the agency, this follows the historical trend in which developed country investors have been the main users of the inter-State dispute mechanism, accounting for over 80 per cent of all known claims. With several countries facing the problem, India's model BIT could have some acceptance, at least among developing nations that are facing a similar onslaught of arbitration proceedings.
Incidentally, BIPA is not the only treaty with investment protection clauses. Some bilateral economic cooperation treaties also have chapters on investment. With the government keen to renegotiate its rights, its approach towards such agreements will also be critical in the coming days.
USIBC's Aghi will face an additional problem. Since his agency represents companies based both in the US and India, he will have to nudge the US government towards action, too. However, finding a middle path will be difficult as the US is also negotiating a bilateral investment treaty with China and so may not be willing to have different rules for India and China. With the next US-India Strategic and Commercial Dialogue set to take place in India in August, the BIT will be high on the agenda. That's perhaps Aghi's best hope for the moment.
