Remodeling India’s Investment Treaty Regime

[Oscar]

Remodeling India’s Investment Treaty Regime

[ http://www.madhyam.org.in/remodeling-in ... ty-regime/ ]

By Kavaljit Singh & Burghard Ilge | Commentary | July 12, 2016

On July 6, 2016, the Dutch government announced that it has received an official notification from Indian authorities seeking termination of the bilateral investment protection treaty (BIT) [ http://investmentpolicyhub.unctad.org/D ... yFile/1584 ] signed between the Netherlands and India in 1995. The Netherlands is not the only country which has received notice of termination. India has recently served similar termination notices to as many as 57 countries (including the UK, France, Germany, Spain and Sweden) with whom the initial duration of the treaty has either expired or will expire soon.

For the remaining 25 countries (such as China, Finland and Mexico) with whom the initial duration of the treaty will expire from July 2017 onwards, India has requested them to sign joint interpretative statements to clarify ambiguities in treaty texts so as to avoid expansive interpretations by arbitral tribunals. In this regard, a comprehensive joint interpretative statement text has been prepared by the Indian government clarifying the meaning and intention of key treaty provisions.

India has recently served termination notices to as many as 57 countries with whom the initial duration of the treaty has either expired or will expire soon.

The India-Netherlands BIT has recently come into public notice owing to a high profile capital gains tax dispute between the UK-based telecom giant Vodafone Group Plc and Indian tax authorities. In April 2014, Vodafone International Holdings BV (Dutch subsidiary of Vodafone Group) served an arbitration notice to India challenging the tax demand worth more than $2 billion for acquiring 67% controlling interest in Hutchison Essar Limited in 2007. Since Vodafone routed this investment through its Dutch subsidiary, it launched arbitration proceedings against India using India-Netherlands BIT.

Does the termination of India-Netherlands BIT mean the end of the protections? The answer is No. This treaty contains a so-called “sunset clause” which extends protection to all qualifying investments (made before the date of termination) for additional 15 years. In other words, investments made in India before December 2016 (by Vodafone and other Dutch-based firms) will continue to benefit from the Treaty’s protections until December 2031.

India’s New Policy Framework

This bold policy initiative is essentially an outcome of India’s new Model BIT [ http://finmin.nic.in/the_ministry/dept_ ... _Annex.pdf ] which was released in December 2015. The government decided to prepare a new model BIT text in 2013 when more than a dozen foreign corporations served arbitration notices to India challenging various public policies and judicial decisions for the alleged violation of investment treaties signed by it.

The new Model BIT is a major departure from earlier models (1993 and 2003) as it provides protection to foreign investors in limited circumstances. Under the new Model, controversial clauses such as Most Favoured Nation (MFN) have been completely dropped while the scope of national treatment (NT) and Fair and Equitable Treatment (FET) clauses has been considerably narrowed down.

India’s new Model BIT is a major departure from earlier models (1993 and 2003) as it provides protection to foreign investors in limited circumstances.

Although investor-state dispute settlement (ISDS) mechanism – which allows investors to initiate international arbitration against states and thereby bypass domestic courts entirely – has been retained but access to ISDS mechanism has been made conditional on the exhaustion of local remedies. In simple words, foreign investors will have to first approach the relevant domestic courts for the resolution of an investment dispute before commencing an arbitration case.

Besides, the new Model provides an exhaustive list of economic, environmental and social measures which shall be exempted under the Treaty. This includes taxation matters, intellectual property rights and measures to protect macroeconomic stability.

Putting New Model into Practice

The decision to terminate 57 existing treaties may have surprised many critics who believed that this new policy framework can’t be put into practice.

The next big task for India is to negotiate its future investment treaties as per the new Model text. India is currently negotiating standalone BIT with the US and Canada besides investment chapter is part of proposed free trade agreement with the EU. The negotiations for India-EU FTA were launched way back in in 2007.

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[Oscar]

India seeks new bilateral investment treaties in bid to protect government from foreign lawsuits

[ http://www.chinapost.com.tw/business/as ... -seeks.htm ]

By Katy Daigle, AP July 12, 2016, 12:26 am TWN

"Foreign investors are always coming from advanced economies, so they already have the upper hand," said economist and trade expert Biswajit Dhar, a professor at Jawaharlal Nehru University in New Delhi. "The countries that need more investment are the ones worried about giving too much away."

The trend among developing countries stems from a growing feeling that investment treaties, as initially designed by Western nations, give too much protection to investors without safeguarding a country's ability to manage policy or regulations. That puts countries like India — still working out how to exploit natural resources or farm out telecom licenses — at a disadvantage in working out their policies, analysts say.

Failing to negotiate replacements before old treaties expire wouldn't necessarily affect all business; existing investments would be covered by the old treaty for a period of about 10-15 years.

But new investments would not be protected, and for a job-hungry nation like India, that could be a problem.

India has been aggressively courting foreign investment and manufacturing to boost its economy. Since taking office in 2014, Prime Minister Modi has spent much of his time visiting foreign capitals and touting his "Make in India" campaign showcasing the country as a manufacturing destination — with its large labor force, young population and investor-friendly tax regimes.

Yet, India remains at the low end of the World Bank's ease of doing business ranking, currently placing 130th out of 189 countries surveyed. While foreign investment shot up to more than US$44 billion in 2015 — a 65 percent jump from when Modi took office — the manufacturing drive so far has had lackluster results. The sector accounts for about 15 percent of India's gross domestic product, while employing about 12 percent of the work force.

India entered into its first bilateral investment treaties as it was liberalizing its markets and courting foreign investment in the 1990s. Its first bilateral investment treaty, with Britain, went into effect in 1995, and was followed by more than 80 others.

The idea for renegotiating quickly took hold about five years ago, as it was hit by a series of lawsuits. In 2011, India lost the first case in international arbitration to Australia's White Industries, a manufacturer of metal components that argued that the cancellation of a contract with Coal India violated the terms of Australia's 2000 bilateral investment treaty with India.

Since then, more than a dozen cases have been filed against India, over issues such as retroactive taxation or canceled licenses. Britain-based Vodafone has a case pending with the International Court of Justice for arbitration over a bill for US$2.5 billion that India's tax authorities say the company owes for a 2007 asset purchase, based on legislation passed only in 2012. And last month, an arbitration panel based in The Hague began adjudicating a similar dispute over retroactive taxation imposed on Cairn Energy, an oil and gas exploration company based in Scotland.

'Held hostage by investors'

"India is understandably worried about being held hostage by investors," said Dhar, the New Delhi professor. "It is very bad publicity to get caught up in disputes where the government looks helpless."

Still, India's sudden move to renegotiate 47 treaties, by some reports, was jarring.

"It's a huge number," Dhar said. "I'm worried about how it's going to play out in the next year."

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