Government of India’s Termination of Bilateral Investment Treaties

  • Out of the 83 Bilateral Investment treaties signed by India so far, 58 treaties are being terminated. Notices have been sent to the respective Governments through diplomatic channels. In response to a starred question raised in the Parliament, Hon’ble Minister of Commerce & Industries informed the House in July 2016, that the Government of India proposes to renegotiate all those Bilateral Investment Pacts whose initial validity has expired and to replace them with new Bilateral Investment Treaties (“BITs”). It was further stated that the new Indian Model Bilateral Investment Treaty text aims to provide appropriate protection to foreign investors in India and Indian investors in the foreign country, in the light of relevant International precedents and practices, while maintaining a balance between the investor’s rights and the Government obligations.  These BITs will stand terminated from April 2017, though the existing investments will be protected under the “sunset” provisions contained in the Model BITs.
  • From 1994, when India started its BITs, until the end of 2010, BITs in India did not attract much attention. India also had only marginal involvement with Investment Treaty Arbitration (ITA), which refers to the dispute resolution mechanism available under BITs. During this period, India was involved in only one ITA dispute, and even this dispute did not result in an ITA award. However, the dispute which did not result in an ITA award against India is probably the most learning episode.
  • Following the closure of Dabhol plant in 2001, GE & Bechtel(the then shareholders of Dabhol Power Company) had pulled up GoI in arbitration proceedings under Indo-Mauritius BIT. It is now history. If one looks at the timelines, one realizes the great ignorance by the GoM, MSEB and GoI about the purport, the consequences and power of BIT arbitration especially when the Government actions are viewed by global standards of  “public good/ public policy” actions. It also reflected apathy towards the international law and sanctity of contracts.  Surprisingly, the turn of the events during 2002-2005 remarkably reflected GoI’s heavy reliance of its own Law Officers, protracted delays in Indian courts and such other factors that were seen as aiding and abetting “indirect expropriation”. Faced with prospect of an ex-parte award from International Arbitration Tribunal,on July 12, 2005, Bechtel and the Government of India and Maharashtra reached a settlement regarding the Dabhol power project. In exchange for $160 million in compensation for its equity and contractor claims, Bechtel agreed to forgo international arbitration over the expropriation of its investment. A portion of this financial settlement was subject to Indian taxation. Prior to the settlement under BITs arbitration on September 9, 2003, an independent arbitration panel had ruled unanimously that GE and Bechtel’s interests in the Dabhol Power Company (DPC) in the Indian state of Maharashtra, were improperly expropriated by the Indian Government.  The Tribunal had ordered a binding award of US$28.57 million each to Bechtel and GE for claims they brought against their political risk insurer, the Overseas Private Investment Corporation (OPIC), an agency of the U.S. Government.  The OPIC award was one of the pivotal aspects for expropriation claim under the BIT. The period after 2010 saw a surge in India’s involvement with ITA.Towards the end of 2011, India received its first adverse award in relation to a BIT in the White Industries Australia Limited V. Republic of India Case wherein the Tribunal held that India had violated its obligations towards the investor under the India- Australia BIT. This Award holds significance as it is the first known ITA Award against India. Besides the White Industries award, India has received numerous ITA notices from various investors and under various BITs. Claims by foreign investors against India have included challenges to various regulatory measures such as cancellation of telecom licenses and imposition of retrospective taxes.
  • The 260th Report of the Law Commission on Bilateral Investment Treaties submitted on August 27,2015 is probably the basis of Model BIT that the GoI initiated and currently wants the international community to adopt the Model BIT. The Model BIT attempts to address the problems faced by India especially regarding expropriation.
  • The 2015 Model BITs and the Law Commission’s Recommendations have probably missed out some very critical aspects relating to BITs.
  • BITs have mutual protection provisions and are reciprocal in nature. While GoI may try to reduce its risk on indirect expropriation claims, it ignores Indian investments at large and they become very risky, especially since Indian insurance companies do not offer comprehensive political force majeure risk cover. The Indian investors investing in foreign countries would also lose out on important risk mitigation measure.
  • The effect of serving notice to terminate existing BITs before new agreements are in place will result in the withdrawal of investment protection for investors into and out of India for a period of years, or indefinitely, pending the outcome of new negotiations.
  • As such, Indian policies (especially FDI Policies) do not give confidence to the international investing community. The regulatory and judicial intervention & delays in India are world-famous. Within the industry specific regulatory space, there are about 27 state jurisdictions (especially Electricity and now Real Estate Sector) with heterogeneous treatment to a given commercial or legal issue. The uncertainties in relation to the investments would not get compounded by the delays in entering into BITs.
  • When it comes to Foreign Investments, there is no argument about whether FDI in the nature of risk capital is a preferred destination compared to risk-free debt capital. However, when India embarks on promoting its destination through “Make In India”, we must realize that there is conducive atmosphere to protect FDI and not to embark on any action that is globally viewed as indirect expropriation. This is a large onus on India. This means that the regulatory, fiscal and legal measures undertaken in business are firm, enduring, non-discriminatory and sustainable. In the absence of these attributes and especially when the Governments are trying to protect the Public-Sector Undertakings, the Governments or domestic players in a discriminatory manner the consequences are detrimental. Instead of addressing these fundamentals, if BITs are tweaked to get out of the obligations, the inbound investments in India would suffer adversely. The risk coefficient of investing in India seems to have just gone spiral.
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