India's Bilateral Investment Treaty: Benefits And Challenges

Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other's territories. They are designed to encourage and protect investments made by investors from respective countries in each other's territory. India has been entering into BITs for the past three decades, with nearly 40 BITs in place with various countries, including Germany, Nepal, the United States, and China. These treaties cover areas such as the scope and definition of investment, admission and establishment, most-favored-nation treatment, and fair and equitable treatment. BITs also provide mechanisms for dispute resolution, such as arbitration, and establish minimum guarantees for the treatment of foreign investments, including national treatment and protection from expropriation.

India's historical use of BITs

Since the revision, India has signed new BITs or Investment Agreements with only four countries and is currently negotiating with 37 others. Notably, India has terminated its older BITs with 77 countries, leaving only six of the older agreements in force. The Standing Committee on External Affairs has recommended that India should sign new BITs, particularly with countries with which it has had such treaties in the past.

The Committee has also suggested that India should sign BITs selectively in identified priority sectors and that the Ministry of External Affairs should work towards the early completion of treaty negotiations in coordination with other ministries and departments. The Committee has recognised the potential of BITs to attract foreign direct investment (FDI) by providing investors with a higher degree of confidence.

In addition to promoting and protecting investments, BITs also provide a mechanism for settling disputes between investors and the host country. Arbitration is the preferred mode of settling disputes, where parties agree to have a neutral arbitrator decide instead of going to court.

To avoid potential losses, the Committee has recommended the timely settlement of investment disputes through pre-arbitration consultation or negotiations. Furthermore, the Committee has emphasised the need to develop local expertise in investment arbitration and treaty law to reduce reliance on foreign lawyers and law firms.

The scope and definition of investment

Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other's territories. The scope and definition of investment within a BIT encompass the following key areas:

Scope and Definition of Investment

• Admission and Establishment: BITs outline the parameters for companies from one country to enter and establish themselves in the market of the other country.
• Most-Favored-Nation Treatment: This principle ensures that investors and their investments are treated as favourably as the host country treats its own investors or those from any third nation. It applies throughout the investment lifecycle, from establishment to expansion and disposition.
• Fair and Equitable Treatment: BITs aim to provide fair and equitable treatment to foreign investors, on par with domestic companies, in accordance with international law.
• Compensation in the Event of Expropriation or Damage: These treaties establish clear limits on expropriation, providing for prompt and adequate compensation when it occurs.
• Guarantees of Free Transfers of Funds: BITs facilitate the free movement of investment-related funds into and out of the host country, using a market rate of exchange.

National treatment

Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other's territories. National treatment is one of the minimum guarantees established by BITs, which ensures that foreign investors are treated at par with domestic companies. This means that investors and their "covered investments" are entitled to be treated as favourably as the host country treats its own investors and their investments.

The United States, for example, offers National Treatment as one of the benefits of its BIT program, which aims to protect investment abroad and encourage market-oriented policies. Similarly, India has been entering into BITs with other countries for the past three decades, with nearly 40 BITs in place. These agreements help investors understand dispute resolution and legal mechanisms, and provide a basis for the mutual and legal recognition of bilateral investments.

Expropriation and compensation

Expropriation refers to the taking of private property by a government for public use, typically with compensation for the property owner. In the context of BITs, expropriation refers to the host country taking over or interfering with the investments of foreign investors within its territory. BITs aim to protect foreign investors from expropriation by imposing restrictions on the host country's ability to nationalise or seize foreign-owned assets.

Compensation provisions in BITs ensure that investors receive timely and appropriate compensation if their investments are expropriated. This compensation should reflect the market value of the investment and be paid without delay using a market rate of exchange. The specific details of compensation, including the method of valuation and payment, may vary depending on the specific treaty and the circumstances of expropriation.

The inclusion of expropriation and compensation clauses in BITs provides investors with a level of assurance and protection when investing in a foreign country. It establishes a framework for resolving expropriation cases and ensures that investors are treated with fair and equitable treatment, in accordance with international law.

India has recognised the importance of BITs in promoting foreign direct investment (FDI) and has actively pursued such treaties with various countries. As of 2021, India had signed BITs with 83 countries, with 74 of those in force. However, India has recently terminated many of its older BITs and is in the process of negotiating new agreements. The Indian government has expressed a desire to selectively sign new BITs in identified priority sectors while ensuring that the treaties are drafted unambiguously to avoid potential disputes.

Dispute settlement mechanisms

Bilateral Investment Treaties (BITs) generally provide a mechanism for settling disputes between investors and the country receiving the investment. The most common method is arbitration, where parties agree to have a neutral third party (the arbitrator) decide the dispute instead of going to court.

The Standing Committee on External Affairs noted that, as of 2021, there had been 37 notices of dispute or letters intending to raise a dispute against India under various BITs. Although only one case resulted in India paying an arbitral award, the award resulted in a significant cost to the exchequer. To avoid such losses in the future, the Committee recommended timely settlement of investment disputes through pre-arbitration consultation or negotiations.

On the basis of rules and procedure, arbitration may be institutional (administered by an arbitral institution as per its rules) or ad hoc (mutually arranged by the parties). The Ministry of External Affairs has signed an agreement with the Permanent Court of Arbitration (PCA), which is the oldest institution for international dispute resolution, under which an arbitration administered by the PCA can be conducted in India.

The Committee recommended that the Ministry ensure the early implementation of the agreement so as to make India a hub for international arbitration. It also recommended that BITs should be drafted without any ambiguity to avoid overbroad interpretation by arbitrators and tribunals, investment disputes or claims against India, and the abuse of certain provisions by investors.

The Committee further noted that India does not have a sufficient number of lawyers/judges with the requisite expertise and experience, resulting in huge fees being paid to foreign lawyers and law firms engaged to represent India in investment arbitration. It recommended developing panels of domestic lawyers and law firms with the requisite expertise in investment arbitration to represent India and experience in investment treaty law to ensure good drafting of BITs. It also recommended training government officials in the field of investment treaties and promoting the New Delhi International Arbitration Centre as a world-class arbitration centre.

The investor-state dispute settlement (ISDS) mechanism grants foreign private investors special rights to initiate dispute resolution proceedings against sovereign governments before ad hoc tribunals. However, this mechanism has been criticised as outdated and problematic. ISDS arbitrations often involve matters of public policy and interpretation of national laws, rather than disputes arising from commercial matters.

The ISDS mechanism has had a chequered history, with fragmented and contradictory jurisprudence emerging from hundreds of ad hoc tribunals. Even one of its biggest early proponents, the US, has questioned its wisdom. The US-Mexico-Canada Agreement (USMCA), which replaced the NAFTA in 2020, phased out the availability of ISDS for US and Canadian investors. Since then, the US has not included ISDS in any of its agreements.

Alternatives to ISDS

Brazil has remained an attractive investment destination without using ISDS in its deals. Its model focuses on investment facilitation with a focus on conflict prevention. The Brazil-India Investment Cooperation and Facilitation Treaty is an example of this approach.

The India-Brazil treaty provides for national-level ombudsmen dedicated to supporting each other's investors through a collaborative approach to prevent disputes. Matters that get escalated can be referred to a joint committee with representatives of both countries. If dispute prevention fails, then either country can seek arbitration.

Another model is the Investment Promotion and Cooperation chapter under the Trade and Economic Partnership Agreement that India signed with Switzerland, Iceland, Norway, and Liechtenstein, which focuses on investment promotion and cooperation. These seemingly soft obligations are given teeth through the institutional mechanism of a subcommittee tasked with engaging the private sector to identify obstacles and opportunities. It also puts in place a consultative mechanism for governments to resolve disputes.

Frequently asked questions