Bilateral Investment Treaties (BITs), or BIPAs, as they are known in India, are treaties signed by two countries to protect investments made by investors from each of the treaty partners in the other. In recent times, there has been a steady increase in foreign investors challenging India?s regulatory measures under BITs at international arbitral forums. This list includes some leading transnational corporations like Vodafone, which has challenged the 2012 retrospective amendment of taxation laws and, more recently, Nokia, which feels that India?s tax administration has left it high and dry. These arbitral notices have set the cat among the pigeons in Indian government. Concerns have been expressed about BITs unduly encroaching on India?s regulatory space. This disenchantment with BITs is quite evident from the recent statement of finance secretary Arvind Mayaram: Investments don?t come because of BITs. Some in the government, supposedly, are of the view that India should terminate the 80-plus treaties that were initiated as part of the economic reforms programme of 1991. Termination of BITs will provide a high degree of immunity to India?s regulatory measures impacting foreign investment from being challenged under international law.
Nonetheless, the proposal to terminate BITs is injudicious for the following reasons. First, those who argue for abrogation of BITs point out that these treaties do not play a significant role in attracting foreign investment. While it is true that the role of BITs in attracting foreign investment is often exaggerated, it would be incorrect to reach the polar opposite conclusion. BITs protect foreign investment by imposing restraints on the arbitrary exercise of public power of host states, which can be enforced through an independent investment treaty arbitration mechanism. This vital component of a global rule of law fosters the rule of law in host countries, which is critical in attracting foreign investment. Uncontrolled regulatory power could lead to arbitrary handling of foreign investments, which, in turn, could scare away foreign investors. The investment made by Etihad, an UAE-based company, in the Indian aviation sector is a useful example to demonstrate the link between BITs and flow of foreign investment. Before the investment was made, the UAE expressed concerns on the security of Arab investment in India, citing the lack of a India-UAE BIT. In order to assuage these fears, the Indian government signed a BIT with the UAE last year despite a self-imposed moratorium on signing BITs.
Second, some are of the view that since adequate protection, on a par with that provided to Indian companies, is also extended to all foreign corporations under India?s domestic laws, there is no need for BITs. This view suffers from a fundamental conceptual flaw. It confuses the legal protection enjoyed by foreign investors under a host country?s laws with the more expansive impact of international laws. BITs provide protection to foreign investors under international law, which is an extra layer of protection and is despite the protection available under host country laws. BITs protect foreign investors against the vagaries of domestic laws, such as the host country changing laws, even retrospectively, to the detriment of the foreign investor?as it happened in case of Vodafone, under UPA-II. This, unfortunately, has not been corrected by the present government.
Third, the termination of BITs will send a negative signal to foreign investors about the safety of their investment in India, which could dampen the investment sentiment. India cannot afford this at a time when it needs an estimated $1 trillion of foreign investment to overhaul its ailing infrastructure. As it is, in the ?ease of doing business? index, India ranks an abysmal 134th of 189 countries. A drastic move like abrogating BITs will only exacerbate India?s business-unfriendly image.
Fourth, despite any abrogation of BITs, treaty provisions will continue to apply to existing investments for 15 years from the rescinding of the treaties. Thus, the goal of immunising India?s sovereign regulatory measures from challenges under international law can anyway not be realised for 15 years after abrogation of the BITs.
Fifth, proponents of abrogation often cite examples of other countries, notably South Africa that has decided to terminate its BITs. While it is true that few countries have terminated BITs, a very large number of countries have not done so and, in fact, continue to engage with the BIT regime. The BIT universe continues to grow as reported by Unctad?in 2013, 30 new BITs were signed, taking the total number of such treaties to 2,902 by the end of 2013.
Last but certainly not the least, repealing BITs will endanger the interests of Indian investors abroad. Absence of BITs would mean that Indian companies would not be able to challenge objectionable regulatory measures of host countries under international law at independent investment treaty arbitration forums. Instead, they will be at the mercy of the domestic laws of the host countries and will have to litigate in their courts, which could be frustratingly time-consuming and complex. There have been many recent cases of Indian companies suffering abroad due to regulatory obstacles put by host countries. For example, Jindal Steel and Power Company faced regulatory skirmishes in Bolivia due to which it termianted the contract to develop an integrated mining and steel project n Eastern Bolivia. GMR faced regulatory troubles in Maldives which forced it to exit the $511 million-international ariport project in Male. Colgate-Palmolive (India) sold its wholly owned subsidiary, Colgate-Palmolive (Nepal), in Nepal due to political uncertainity. Concerns related to the safety of Indian investment in Nepal led India to sign a BIT with Nepal. Thus, as more and more Indian corporations invest arboad, BITs can play an important role in protecting Indian foreign investment.
This is not to argue that the concerns about BITs unduly curtailing India?s regulatory strength are not genuine. However, the solution is not abrogating BITs but reviewing and renegotiating these to minimise their adverse consequences without necessarily sacrificing their useful features. Throwing the baby out with the bathwater will not be sagacious.
The author teaches International Investment Law at the South Asian University, New Delhi.
Views are personal
