Turning the clock back

prabhash ranjan

prabhash ranjan  

With several bilateral investment treaties lapsing on March 31, FDI inflows could take a hit

Come April 1, the Narendra Modi government would have taken India back to the pre-1991 inward-looking economic era as far as India’s approach to bilateral investment treaties (BITs) is concerned.

Till the early 1990s, India didn’t sign BITs because foreign investment was not considered significant in a statist India. The absence of BITs meant foreign investors couldn’t use international arbitration to hold India accountable under international law for any detrimental regulatory overreach. So, when the Foreign Exchange Regulation Act that came into force in 1974 required a foreign company to convert foreign equities into minority holdings of 40%, many helpless foreign companies like Coca-Cola, IBM, Kodak and Mobil either quit India or applied to the government to do so.

In 1991, India lifted its self-imposed economic exile by starting the process of experimenting with the market and wooing foreign investors. As part of this image makeover, India started signing BITs from the early 1990s. The signing spree continued unabated till 2010 with India inking BITs with 83 countries. However, rattled by many BIT claims brought by foreign investors from 2011 onwards, last year, India unilaterally issued BIT termination notices to 58-member countries. Reportedly, these BITs would lapse on March 31 after the expiry of the mandatory one-year notice period. Although the terminated BITs will continue to be relevant for existing foreign investment in India and Indian investment in these countries for the next 10-15 years due to survival clauses, any new investment, either from these 58 countries to India or vice versa, shall not enjoy BIT protection as was the case before 1991.

BITs and foreign investment

Some argue that foreign investment inflows to India are not dependent on BITs. Two studies question this wisdom. The first, done by Rashmi Banga, examines the impact of BITs on FDI inflows in 15 Asian developing countries including India from 1980-81 to 1999-2000. The study shows that BITs signed by these 15 countries with developed countries had a stronger and significant impact on FDI inflows in these 15 countries. However, BITs signed by these 15 countries with developing countries didn’t have much impact on foreign investment inflows. Till the year 2000, out of the 14 BITs India signed, nine were with developed countries. Therefore, BITs had a significant impact on FDI inflows in India, which rose from $393 million in 1992-93 to $4,029 million in 2000-01. The second study, a very recent one by Niti Bhasin and Rinku Manocha, considers the impact of BITs on FDI inflows in India from 2001-2012. This study also demonstrates that BITs signed by India contributed to rising FDI inflows in the said period by providing protection and commitment to foreign investors. The significance of BITs in attracting investment was also emphasised by Canada’s Trade Minister during his recent visit to India. The Minister said that absence of an India-Canada BIT is restricting the scope and volume of investments that Canadian pension funds can make in India.

It is nobody’s case that BITs alone determines FDI inflows, but they do play a critical role in mitigating regulatory risks and thus encouraging investors to invest — critical for India, which has a dubious distinction of not being a friendly place to do business in.

Few takers for the Model BIT

To be fair to the government, it wants to sign new BITs with all these 58 countries based on the new Model BIT adopted in 2016. However, most developed countries have not shown much interest in the Model BIT because instead of striking a balance between investment protection and state’s right to regulate, it tilts towards the latter. There are fundamental differences between the Indian approach and the Canadian and European approach to protection of foreign investment, as reflected in the investment chapter of the recently signed EU-Canada Comprehensive Economic and Trade Agreement (CETA). First, the EU-Canada CETA contains a ‘most favoured nation’ (MFN) provision — a cornerstone of non-discrimination in international economic relations — which is missing in the Indian Model BIT. Second, the Indian Model BIT, unlike the EU-Canada CETA, mandatorily requires foreign investors to litigate in domestic courts for five years before pursuing a claim under international law. Third, the EU-Canada CETA provides protection to foreign investors in situations where the state goes back on the concrete representations it made to lure an investor, which the investor relied upon while investing. The Indian Model BIT is silent on this, thus exposing foreign investors to regulatory risks. Fourth, the EU-Canada CETA talks of pursuing the establishment of a multilateral investment court to settle investment disputes. Will India support such a proposal?

Due to these differences, an India-Canada BIT or an investment treaty with EU looks difficult. Will the Modi government reconsider its BITs policy? If not, we are set to return and remain in the pre-1991 era, ironically, under the leadership of someone who was entrusted with the mandate to deepen economic reforms.

Prabhash Ranjan is an Assistant Professor of Law at South Asian University. The views expressed are personal

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