Striking A New Balance - India's Model Bit And Customary International Investment Law
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STRIKING A NEW BALANCE: INDIA'S MODEL BIT AND
CUSTOMARY INTERNATIONAL INVESTMENT LAW
Geetanjali Dhillon, Symbiosis Law School, Pune
ABSTRACT:
This research paper attempts to analyse changes in the approach of India to international investment treaties by considering the major changes instituted with the introduction of the 2016 Model BIT. The paper follows the history of the Indian outlook on the BITs beginning with the first BIT signed with the Great Britain in the year 1994 and how key events such as the White industries dispute shifted India’s investment treaty making history. The bilateral model investments of 2016 evolved towards an effective policy that recognizes the need to augment foreigners’ investment and extricate state control over regulations. It examines customary law obligations as outlined in International Investment Agreements (IIAs): non-discrimination, fair and equitable treatment, full protection and security, protection against illegal expropriation, observance of undertakings and free transfer of funds.
The research shows how these obligations are preserved in the new model by exceeding the international minimum requirements while justifying claims to greater regulatory powers. Analysing particular examples and the mechanisms of their legal realization, the paper reveals the consequences of India’s new investment protection regime.
AN INTRODUCTION TO INTERNATIONAL INVESTMENT TREATIES
Foreign investment has, and always will continue to be a significant component in the cultivation of economic prosperity. It can bring not only capital but new technologies, practices, and knowhow to host economies. In the first place, foreign investment helps in improving their export potentiality and at the same time it creates employment opportunities locally through job creation which further develops productive skills. When it comes to investors, there are a number of other factors they take in when deciding where to put their money and that these considerations lean more towards commercial-oriented aspects. However, they also assess other factors such as the general ease of doing business, existing infrastructure, and regulatory environment in their possible host economy.
International Investment Agreements (IIAs) are treaties designed to promote and safeguard foreign investment between economies. These agreements usually take the form of Bilateral Investment Treaties (BITs) or investment chapters within Free Trade Agreements (FTAs). IIAs serve two primary functions-they create obligations for the government of the economy in which an investment is made (the “host economy”) to treat foreign investors according to particular standards which are set out in the treaty and they almost always grant foreign investors the right to bring claims for compensation against the host economy for violation of the standards of treatment contained in the treaty.
Customary law introduced six major obligations to be covered in an IIA- firstly, host countries are required to follow the principle of “non-discrimination”, secondly, the principle of “fair and equitable” treatment and thirdly, the principle of “full protection and security”. Fourthly, host countries are prohibited from illegal expropriation and are, fifthly, obligated to “observe undertakings”. Lastly, host countries must give guarantees of free transfer of funds related to investments. In effect, IIAs seek to incentivize inward investment and locating FDI through an attractive business climate of attracting foreign capital while simultaneously protecting investors from the outward investing country.
INDIA AND BILATERAL INVESTMENT TREATIES
BITs are agreements between two countries designed to protect investments made by investors from both nations. They achieve this by imposing conditions on the regulatory behaviour of
the host state. BITs between developed and developing nations increased substantially in the 1990s, with even more dramatic growth since then. The importance of BITs for the protection of foreign investment has been acknowledged; a United Nations Conference on Trade and Development (UNCTAD) report in 2000 concluded that "BITs are key instruments used by States to regulate international investments". 1 In 1994, India entered into its first BIT with the UK for attracting and promoting foreign investments. For nearly two decades that initial approach remained in place, helping to take the Wall Street edge off his interest-palate and prioritizing investment protection over state regulatory power. 2 It was the White Industries3 (discusses under [. ]) case in 2011 that started changing India's stance on investment treaties.
In response to these developments, India came up with the 2016 Model BIT4 in order enhance its capability for attracting investments while retaining their sovereign right to regulate. The
2016 Indian Model BIT contains seven chapters with 38 articles that should be taken as
indicative of the type of text foreseen in future BIT negotiations. These bonds were then radically revised by India in the aftermath of its signing. This research paper examines the 2016 Indian Model BIT in light of international investment law, emphasizing its compliance with customary international legal obligations. This is followed by an exploration of how India's Model BIT seeks to ensure enforcement of these obligations while accommodating the expanded claims from states for regulatory powers. This paper addresses investment lawyers, analysing the treaty in some detail to show how it meets (and does not meet) evolving international standards of protection for supporting fair and secure investment environments.
1 UNCTAD Bilateral Investment Treaties, 1959-1999 UNCTAD/ ITE/IIA/2 UN (2000) available at
http://www.unctad.org/en/docs/poiteiiad2.en.pdf 2 Rashmi Banga, Impact of Government Policies and Investment Agreements on FDI Inflows, Indian Council for Research on International Economic Relations, Working Paper No. 116, 2003 3 White Industries Australia Limited v. The Republic of India, Final Award, November 30, 2011 [hereinafter White Industries] 4 Model Text for the Indian Bilateral Investment Treaty’ (Department of Economic Affairs, Government of India) https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf (‘2016 Model BIT’).
KEY CHANGES IN THE MODEL BIT AND IT’S ALIGNMENT WITH
INTERNATIONAL STANDARDS
Definition of Investment The way in which an 'investment' is defined under a BIT determines the extent of rights and obligations that may arise from the treaty. It also has important implications for the jurisdiction of Investor-State Dispute Settlement (ISDS) tribunals in the event that claims are brought under BITs. Traditionally, Indian BITs have adopted a wide-ranging asset-based definition of 'investment', which includes every type of capital having economic value established or acquired by foreign investors. 5 The new 2016 Model BIT instead reverts to an enterprise-based definition6. This approach would treat an enterprise and all its assets as a single entity (so that only an Indiani ncorporated entity could bring a claim on these new BITs)7. This shift from asset-based to enterprise-based will limit the protective investments, and would hopefully limit BIT claims against India.
8 Under the 2016 Model BIT, 'investment' is defined as an enterprise that has been constituted, organized, and operated in good faith by an investor in accordance with domestic laws. Article
1.4 provides a non-exhaustive list of assets that an enterprise may possess9. Additionally, the
enterprise must exhibit certain investment characteristics, including-commitment of capital and other resources, duration, expectation of gain or profit, assumption of risk, significance for the host country's development. While a it provides for a more defined meaning, this definition still allows for arbitral interpretation and could contribute to some uncertainty as the jurisdictional stage regarding which types of investments would be afforded protection. Requirement of Non-Discrimination The principle of non-discrimination in investment law is primarily embodied in two concepts:
5 2003 Indian Model BIT, art 1(b)
6 2016 Indian Model BIT, art 1.4
7 2016 Indian Model BIT, art 1.3
8 Srikar Mysore & Aditya Vora, Tussle for Policy Space in International Investment Norm Setting: The Search for a Middle Path? 7 JINDAL GLOB. L. REV. 135, 143 (2016).
9 2016 Indian Model BIT, art 1.4
National Treatment and Most Favoured Nation (MFN) Treatment. Under the standard of National Treatment, the host economy is required to extend to protected investments and investors treatment no less favourable than that provided for national investors/investments in like situations. The non-discrimination principle also provides that the host economy shall accord treatment not less favourable than that it accords in like circumstances to investments and investors of any third state. Chapter 2, Article 4. 1 of the 2016 Model BIT provides that each Party shall extend to the investors or investments of the other Party treatment no less favourable than that it accords in like circumstances to its own investors and their investments, in relation to the administration, control operation and/or sale or disposal of such investments in its territory.
10 The Calvo doctrine11 that existed since the late 19th century which formed the red pill of how national treatment was first conceptualized, allow foreign things and owns to be treated in no better manner than co-nationals are. By contrast, capital-exporting countries have generally supported a version that is based on the international minimum standard and State Responsibility principles with some beneficial treatment lever if their nationals receive worse than what they could reasonably expect according to the international minimum standard. National treatment is of a standard form for national treatment and MFN provisions: "not less favorable" in any Model BIT. Yet, the 2016 Model BIT does not have an MFN clause – a feature frequently found in International Investment Law and increasingly typical under the protective pole of Calvo doctrine.
The omission of the MFN provision serves two primary purposes- it prevents a recurrence of situations like the White Industries case and it blocks foreign investors from "treaty shopping", that is the practice of borrowing more protective obligations from other BITs that India has concluded, which would otherwise allow investors to circumvent the intended limitations of the specific BIT in question.
10 2016 Indian Model BIT, art 4.1
11 The Calvo Doctrine is a principle in international law that asserts disputes between foreign investors and host states should be resolved within the host state's domestic legal system, rather than through international arbitration. It emphasizes national sovereignty and discourages external intervention, advocating that foreign investors have no greater rights than local citizens.
Obligation for Fair and Equitable Treatment The "fair and equitable treatment" (FET) standard establishes a baseline level of treatment for protected investors and their investments. Breaches of this standard constitute the most frequent type of treaty violation by governments. The interpretation of "fair and equitable treatment" is context-dependent, analysing all circumstances of a particular case. However, the exact wording of the treaty may influence how FET is interpreted and applied. Several factors typically contribute to determining whether fair and equitable treatment has been provided:
1. Fundamental changes in the host economy's laws contradicting the investor's legitimate
expectations.
2. The host economy reneging on specific representations that influenced investment decisions.
3. Denial of due process to the investor.
4. Lack of transparency in legal processes or government actions.
5. Instances of harassment, coercion, abuse of power, or bad faith conduct by the host economy.
6. Arbitrary, disproportionate, or inconsistent actions by the host economy.
Chapter 2, Article 3.1 of the 2016 Model BIT stipulates that no Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law through denial of justice in any judicial or administrative proceedings, fundamental breach of due process, targeted discrimination on manifestly unjustified grounds, such as gender, race, or religious belief and manifestly abusive treatment, such as coercion, duress, and harassment.12 Through excluding any mention of the FET standard and conceptualizing material treatment as a principle of customary international law based on denial of justice, it is evident that the Indian government eschews uncertain contents underpinning the FET obligation or changes in an evolutive minimum standard. Article 3.1 of the Model BIT specifically omits any reference to
12 2016 Indian Model BIT, art 3.1
challenging regulatory measures or acts of bad faith which are manifestly arbitrary13. Indeed, this is notable in its omission given regular findings by ISDS tribunals that manifest arbitrariness represents a breach of the international minimum standard. The Obligation to Provide "Full Protection and Security" The duty of “full protection and security” (FPS) usually requires the host economy to exercise some degrees of caution with regard to protecting investments and investors physically, having heed for respective circumstances or resources. Chapter 2, Article 3. 2 of the 2016 Model BIT states that each Party shall accord in its territory full protection and security to investments of the other Party and to investors with respect to their investments.
It clarifies that "full protection and security" refers only to a Party's obligations relating to the physical security of investors and investments made by investors of the other Party, explicitly excluding any other obligations14 This is based on the historical nature of FPS obligations that provide for protection and freedom from interference (the level agreed or promised) which cannot be changed through new legislation, etc. By contrast, Weiler writes that the conventional full protection and security clause states "an undertaking by a host state to use best (reasonable) efforts to protect foreigners from injury or other deprivation of legal right in its territory — but not beyond what is reasonable having regard for like treatment vis-a-vis local citizens.
"15 The 2016 Indian Model BIT, however, defines FPS in its narrower form, expressly stating that the provision does not extend to "any other obligation whatsoever," thus, excluding the protection of legal interests. This would be a big step away from the umbrella interpretation of FPS in so many international investment agreements and arbitral awards. Protection Against Illegal Expropriation Host governments have the power to expropriate assets of foreign investors, but appropriate conditions must be adhered. Expropriation needs to be for a public purpose, due process must follow regardless and not discriminate between people or the assets taken and compensation at
13 Ranjan & Anand, The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction
14 2016 Indian Model BIT, art 3.2
15 Weiler, The Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of Treatment in Historical Context, p. 61.
market value provided. However, failure to live up to these standards breaches international legal obligations of the host economy. Expropriation can occur in one of two ways- directly or indirectly. Direct expropriation is defined as the investor's property interests being legally transferred from the private to public sector. Indirect expropriation happens when governmental regulations or actions, while not legally transferring ownership, effectively deprive investors of their investment's economic use and enjoyment. Chapter 2, Article 5. 1 of the 2016 Model BIT prohibits both Parties from nationalizing or expropriating investments of the other Party's investors, either directly or through equivalent measures. Exceptions exist for public purposes, provided they follow due process and offer adequate compensation.
16 This compensation must equal at least the fair market value of the investment on the day before expropriation, disregarding any value changes resulting from prior knowledge of the intended expropriation. In the past, international law considered expropriations as illegal when a bias against foreign investment was detected. This danger worsened especially during the post-colonial period when new nations came into existence and adopted protectionist approaches which subordinated foreign investment protection to the general good17. Article 5. 1 of the Indian Model-BIT corresponds to these tendencies, not in its inclusions but by virtue of what it has left out. This causes a huge protection void whereby the host entities do not incur any costs of regulatory measures as far as the foreign investors are concerned, to the advantage of the host state.
Such a broad provision, which may be evasive in its limitations could be abused by the host countries such that drastic measures are taken forth under the pretext of regulatory purpose, which would interfere with the security of foreign investment. This is in keeping with the sustainable development concept discussed in the preamble18. It is suggested that normal investment protection is not compatible with ‘the common good’ which is the case with the new Indian Model-BIT designed to restrict investment protection by making reference to
16 2016 Indian Model BIT, art 5.1
17 Weiler, The Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of Treatment in Historical Context, p. 68. 18 Ranjan & Anand, The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction, p. 36.
sustainability – the Indian government is provided by the model with the unlimited regulatory power for the welfare of its people. Obligation to "Observe Undertakings" Quite a number of investment treaties have "umbrella clauses" that oblige the hosting economies to respect their investments “observe undertakings”. These provisions have, at one point in time or another, been construed as extending the coverage of the protection under the treaty to the contractual obligations of the host economy. Consequently, violations of contractual commitments may also constitute violations of the umbrella clause obligation under an investment treaty. The 2016 Model BIT holds the provision of Investor State Dispute Settlement (ISDS) procedure, however to a lesser extent. Article 15.
2 of the 2016 Model BIT adds that this chapter may only be initiated by the transfer of a notice of dispute by the investors to the Defending Party. However, this can only take place after the claimant has exhausted all available judicial and administrative recourse to the measure that forms the basis of the claim for not less than five years from the date of first knowledge of the measure, and no satisfactory settlement has been achieved. 19 Article 15. 1 adds clarification of this requirement stating that it will be waived only when investors show that reasonable relief for the same measure is not accessible in a domestic legal process. 20 This strategy includes some aspects of the Calvo doctrine, whereby international legal avenues such as ISDS are secondary to domestic ones.
Exemptions are not absolute as domestic legal avenues are virtually always exhausted and only in such situations are investors allowed exceptions from the correct access to ISDS arbitration. 21 The Obligation to Allow Free Transfer of Funds Related to Investments Investment treaties typically mandate that host economies permit protected investors to transfer funds related to their investments freely. This guarantee encompasses various financial flows,
19 2016 Indian Model BIT, art 15.2
20 2016 Indian Model BIT, art 15.1
21 Porterfield, Exhaustion of Local Remedies in Investor-State Dispute Settlement: An Idea Whose Time Has Come?
including:
1. Profits, interest, dividends, and other current investment income
2. Funds necessary for investment financing
3. Proceeds from investment sales or partial liquidations
4. Contractual payments such as management fees and royalties
5. Loan repayments
6. Salaries or other remuneration for nationals of the investing economy with appropriate
work permits The Model BIT includes some ‘capital movement and earnings repatriation’ provisions of the investors for economic development. This includes the freedom to transfer funds related to the investment including, inter alia, capital, profits, dividends, income and other earnings in any convertible currency22. In turn, in the Model BIT the host state occupies the right to impose such measures for a limited time on exceptional cases, namely appearance of drastic balance of payments problems, or other macroeconomic maladies. This balanced approach allows investors to transfer their funds when necessary and at the same time allows the host state to manage the stability of its economy.23
ENFORCEMENT MECHANISM FOR ARBITRAL AWARDS UNDER 2016 INDIAN
MODEL BIT
India has historically chosen not to join the ICSID Convention, mainly because it believes that the arbitration rules favour developed countries because Indian courts have limited authority to review awards that may violate public policy. This stance aligns with the withdrawal of countries like Bolivia, and Ecuador, which reflects a broader scepticism among developing nations. In 2000, the Indian Council for Arbitration advised against joining the ICSID due to concerns about these biases and the to seek review of awards within Indian courts24. Despite
22 2016 Indian Model BIT, art 6.1
23 2016 Indian Model BIT, art 6.2
24 24ICA against India joining global dispute settlement body. (n.d.). BusinessLine.
https://www.thehindubusinessline.com/todays-paper/tp-others/article29064097.ece
India's absence from ICSID, it remains the leading institution for investor-state dispute settlement worldwide. However, with the evolving landscape of foreign investment and outbound investments, there have been discussions about whether India should reconsider its position on joining the ICSID Convention. Currently, awards in India are enforced under the New York Convention, but the application of this convention is uncertain due to India's reservation under Article 1(3), which restricts its applicability to foreign awards arising from legal relationships considered commercial under Indian law25. As a result, courts have issued inconsistent rulings on the enforceability of investment awards. On the other hand, the ICSID Convention offers a more predictable and conclusive enforcement system where awards are binding and directly enforceable without intervention from national courts.
While India initially had concerns about the absence of a “public policy review” in ICSID awards, the safeguards incorporated into the 2016 Model BIT now addresses this concern. Therefore, it may be an opportune time for India to reconsider joining the ICSID system in order to protect its growing outbound investments.
CASE STUDIES
White Industries v. India26 On November 30th, 2011, India faced its known arbitral award in the White Industries v. India case. The case involved an Australian company, White Industries, which had a contract with Indian public sector company Coal India in the field of coal mining. Disputes arose, leading to an ICC arbitration in London, which ruled in favour of White Industries. However, the award was challenged by Coal India at Calcutta High Court while White Industries sought enforcement at Delhi High Court, causing a legal that lasted for over seven years. Frustrated with the delay, White Industries filed an ISDS claim in 2009, alleging that India breached it’s obligations under the India-Australia BIT. In the end, while the tribunal dismissed most claims, it found that India had violated the Most Favoured Nation (MFN) clause.
The tribunal allowed White Industries to borrow the "effective means" provision from
25 2016 Indian Model BIT, art 1.3
26 White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).
the India-Kuwait BIT, ruling that India's court delays denied White Industries an effective means of asserting claims and enforcing rights. 27 This decision triggered a surge of ISDS cases against India, with more than 22 cases lodged since then. These cases contested a range of regulatory measures, such as retrospective taxes and the cancellation of telecom licenses. The ruling in 2011 served as a up call for India, prompting the government to undertake a comprehensive reassessment of its extensive BIT program the Model-BIT established in 2003. This reassessment in the government openly acknowledging that Indian BITs were inadequately formulated, ambiguous provisions that could be broadly interpreted by ISDS tribunals. 28 Vodafone v. India29 The Vodafone v. India case centred on India's retroactive taxation policy.
In 2012, Vodafone contested the Indian government's imposition a retrospective capital gains tax its 2007 acquisition of Hutchison Whampoa's Indian telecom. Vodafone argued that tax demand breached the fair and equitable treatment standard under the India-Netherlands Bilateral Treaty. The case was brought before the Permanent Court of Arbitration under the UNCITRAL Arbitration Rules, where the tribunal ruled that the tax demand breached India's obligations under the BIT, finding that arbitrary and unexpected tax demands undermine the predictability and stability that investors rely on when making investment decisions. 30 The award prompted India to its BIT program and acknowledge vagueness its provisions. Consequently, the tribunal ruled in favour of India without any tax and ordered India to pay Vodafone its legal fees.
This development was very significant since it stressed the importance of Bilateral Investment Treaties and how it shields the foreign investors from the abusive nature of the State. This raised concerns that host countries must adopt in order to seek and sustain the influx of foreign capitals. This made the case of Vodafone, one of the first historic cases demonstrating the effective and practical use of bilateral investment treaties in case of direct foreign investments.
27 Kachwaha, The White Industries Australia Limited – India BIT Award: A Critical Assessment
28 White Industries Australia Limited v. Republic of India, UNCITRAL, Final Award (Nov. 30, 2011).
29 Vodafone International Holdings BV v. India (I), UNCITRAL, (PCA Case No. 2016-35)
30 Vodafone v. India (I) | Investment Dispute Settlement Navigator | UNCTAD Investment Policy Hub. (n.d.). https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/581/vodafone-v-india-i-
RECOMMENDATIONS AND CONCLUSION
India’s decision to introduce a new Model BIT is an effort to balance protecting foreign investments with the host country’s right to regulate, especially in response to a surge of investor claims against India under various BITs. The new 2016 Model BIT, however, takes a much more pro-state stance by limiting investor protections. It narrows the definition of what qualifies as an investment, excludes MFN clauses, and adds a complicated ISDS process. This shift shows India’s desire to shield itself from future claims, driven by concerns over the financial burden of past BIT awards. Despite this, many provisions in the Model BIT remain vague, leaving room for arbitrators to interpret them, which could still lead to disputes. India’s need to attract foreign investment, particularly for initiatives like "Make in India," makes these changes problematic.
BITs play an important role in attracting foreign capital, but the new Model BIT has not been well-received internationally. Negotiations with countries like the U. S. , Canada31, and EU members32 have stalled due to disagreements over the new framework. India’s challenging business environment, reflected in its low ranking for ease of doing business and contract enforcement, adds to the uncertainty for foreign investors. 33 An important consideration is that India is no longer just a capital importer but also an exporter. Indian companies have increasingly invested abroad, and several have successfully used BITs to protect their investments. Examples include the case of Flemingo Duty-Free34, which won damages from Poland, and Indian Metals & Ferro Alloys Ltd35. , which is pursuing a claim against Indonesia.
By adopting a Model BIT that limits investor protections, India risks reducing protection for its companies abroad. 31 Amiti Sen & Surabhi, Canada to India: Tighten Investment Protection Norms in New Model Treaty, THE
HINDU
(Oct. 23, 2016), http://www.thehindubusinessline.com/economy/ canada-india-bilateralinvestmenttreaty/article9258701.ece. 32 Indivjal Dhasmana, India-EU Ties Stumble Over Keeping Tax Out of Bilateral Investment Treaty, BUSINESS
STANDARD
(Apr. 10, 2017), http://www.businessstandard.com/article/economy-policy/india-eu-tiesstumbleover-keeping-tax-out-ofbilateral-investment-treaty-1170410 00416_1.html.
33 Ease of
Doing Business in India,
THE
WORLD BANK,
http://www.doingbusiness.org /data/exploreeconomies/india. 34 Flemingo DutyFree Shop Private Limited v. the Republic of Poland, UNCITRAL, Award, ¶ 942 (Aug. 12, 2016). 35 Indian Metals & Ferro Alloys Limited (India) v. the Government of the Republic of Indonesia, PCA Case No. 2015-40.