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INDIA'S NEW MODEL INVESTMENT TREATY!

Published on Sat, Apr 11,2015 | 12:42, Updated at Mon, Apr 13 at 23:08Source : CNBC-TV18 |   Watch Video :

India signed its first bilateral investment treaty in 1994 and since then has signed a total 83, of which 72 are in force. But, more recently 18 treaty claims have been filed by foreign investors in India and if they win, it could cost the country a pretty packet. So the government has decided to review its treaties and draft a new model treaty – that is currently open to public comments. The 2015 draft has many big changes when compared to the 2003 model BIT and they start right with the preamble – which no longer talks about fostering greater investment. Instead, it wants seeks to reaffirm the right to regulate investments. On the show, Richard Rossow, Nicholas Peacock and Rohan Shah join CNBC TV18’s Menaka Doshi to discuss whether India’s new draft will send foreign investors the right message?

MODEL INVESTMENT TREATY
Definitions

2003
‘Companies’

2015
‘Enterprise’ having real and substantial business operations in the Host State
NOT INCLUDED: Arrangements to avoid tax liabilities

MODEL INVESTMENT TREATY
Definitions

2003
‘Investment’ means every kind of asset established or acquired…

2015
‘Investment’ means enterprise in the Host State…owned or controlled by an Investor
OWNED: > 50% of capital
CONTROLLED: Right to appoint majority of the directors or to control management…

Doshi: Companies are out, enterprise is in and it must have a real and substantial business operation in India. So, no treaty protection to tax avoidance structures. The definition of investment has been altered to add ownership and control tests and portfolio investments and debt investments in Private Sector Banks (PSU) don’t qualify as investments.

Shah: The treaty protection under the investment treaty will only be afforded if both the investor company and the investee company in India, both of them satisfy these requirements of management control in real and substantial business operations. So, from that perspective onerous and in terms of the practical impact, one might say that this sort of brings into question everything which happens at least through Mauritius, if not through Singapore.

Peacock: So, those mailbox companies are very definitely excluded and certain categories of investment are excluded. Judgements and awards are excluded from protection. Government debt is excluded and for that matter, investment companies and holding companies are also excluded.

Rossow: I have heard people talk about concerns that portfolio investors would have by being excluded. But I have not actually heard portfolio investors talk about it. So, I do not know that portfolio investors necessarily thought because the investment is relatively fluid that they looked at the investment treaty anyway as the main tool that they would need to adjudicate the problems if and when they happen

Doshi: There are a large number of exclusions and exceptions in the 2015 draft bilateral investment treaty (BIT). For instance it excludes from its scope non commercial services by the state, tax matters, compulsory license matters, commercial contractual disputes and retroactive changes in law!

MODEL INVESTMENT TREATY
Exclusions

2003
No such exclusions from Treaty coverage

2015: Treaty shall not apply to...
Non-commercial Services by the State
Tax
Compulsory Licenses
Commercial Contractual Disputes
Retroactive Changes In Law

Peacock: As regards the inclusion of the provision of non-commercial services by the government, I read that perhaps as a reaction to the one BIT arbitration decision that has gone against India. So far, the White Industry’s decision where an award was made in favour of an investor based on delays in the Indian court system. And, I think you can read an exclusion for non-commercial government services to include within that services such as the court system.

Shah: Let me just take up the tax measure because that is the one which has got the maximum engagement in the recent past but the provision now says a) a tax measure is excluded, and b) whether or not a issue is a tax measure, itself is not arbitrable. So normally the arbitral tribunal would have an ability to rule on is this a tax measure and therefore does it warrant an exclusion. But, relevant to tax measures, even that scope has not been left for the arbitral tribunal. Also, earlier tax cases effectively slipped through. Normally under the expropriation article and you invoke the expropriation article to say that under this I could legitimately bring a tax dispute also before the tribunal. Now, that is also effectively closed. So, as you go through this and this whole long list, obviously the avenues available to the investor of recourse or of issues which are actionable has been cut down.

Rossow: Some of these inceptions probably will raise investor’s eyebrows. They will be a concern. But some of them that you mentioned, for instance, compulsory licences, cross-border taxation, broadly the concept of intellectual property rights for that one, and again I am speaking more from a US perspective since we want to restart negotiations with India, those would be less of a concern because frankly the US model also brought the excludes taxation especially in dealing with countries like India where we already have an existing double taxation avoidance agreement. So, we have already got a tax treaty with India, the US prefers to default to the tax treaty when tax problems arise. So, that is more or less taken care of in another forum. And also the US model, we do not mention compulsory licences quite as much as they do in the revised Indian model but on intellectual property rights at large, we default back to Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement.

Doshi: There is also a long list of exceptions ranging from protecting public morals to improving working conditions.

MODEL INVESTMENT TREATY
Exceptions

2003
No provision for exceptions

2015: State can take actions…
Protecting public morals, maintaining public order, financial system stability, public health & safety, environmental conservation, improving working conditions…

Peacock: One of the things you notice actually that the top of the treaty is an express statement of the right to regulate and some of the exclusions that you just mentioned reflects that right to regulate. Of course what is interesting is that whereas the protections are more tightly circumscribed and very precise languages attempted to be used in describing the protections available to the investor. When you talk about the exclusions which apply to the government and its discretion in other areas, these are very lucidified. So, it is quite hard to know actually what protection in public morals for example means.

Doshi: But that’s small worry – the biggest change is in the standard of treatment that India seeks to promise its foreign investors. The most common treaty promise of ‘fair and equitable’ treatment has been deleted. Instead investors will now receive protection only from denial of justice, egregious violations of due process or manifestly abusive treatment. That’s a much higher burden of proof on investors.

MODEL INVESTMENT TREATY
Standard Of Treatment

2003
Investors to be accorded ‘fair and equitable treatment’

2015
Investors shall not be subjected to
-    Denial of justice
-    Egregious violations of due process
-    Manifestly abusive treatment

Shah: The very glaring omission in terms of ‘fair and equitable’ treatment is certainly going to be something which makes foreign investors a little uneasy. We also have to understand that what we have now in terms of Article 3, is the three measures which you mentioned which are a bar. So the government cannot do anything which under customary international law is seen as the denial of justice. You cannot have egregious violations of due process and government cannot have a measure which is an abusive treatment, which is both continuous and constitutes in a way an outrageous coercion or harassment. So, from that perspective the threshold of what becomes actionable qua government, in the context of Article 3 is high.

Doshi: The most favoured nation clause has been dropped. Local and regional laws are not covered and the government reserves its right to exercise discretion on when and how to enforce or not enforce a law!

MODEL INVESTMENT TREATY
National Treatment

2003
‘Most Favoured Nation’ provisions

2015
Same treatment as domestic investors

EXCLUDED
Local/Regional Govt laws
Exercises of discretion – when/how to enforce a law

Peacock: Again, in part you can read that as a reaction to the White Industries case where the substantive protection that the government of India was found to be in breach of, was a protection that was imported into the India-Australia BIT from the India-Kuwait BIT. And that has caused a certain amount of distress and the government is keen that that should not happen again. But certainly the removal of most favoured nation (MFN) provisions altogether is a significant departure. As you say the national treatment standard is also somewhat caveated. It does not include behaviour of local government. Also another significant exclusion there, it does not include it says a discretion exercise by the government to enforce or not enforce certain laws. And that carve-out is potentially very substantial. You could have a situation where a government for example chose to enforce certain laws as a matter of discretion against certain investors maybe domestic ones, not against foreign ones or against all foreign ones, so that is a significant departure from the national standard.

Doshi: There’s a longer definition of expropriation, restrictions on compensation and fewer powers for the arbitral tribunal. The tribunal shall have no authority to review whether the expropriation was done for a public purpose. Nor can it re-examine or review a judicial order.

MODEL INVESTMENT TREATY
Tribunal Powers

2003
No such restrictions

2015
No authority to review whether expropriation done for public purpose
Cannot re-examine/review a judicial order

Shah: The expropriation as an article which normally supported a lot of these investment claims has now been re-drafted in a manner that much lesser can really be seen as actionable. And secondly even if actionable, the manner in which it can be tried and ruled on and the consequences of such a ruling, all of them in a manner have been curtailed. Coming to the tribunal itself, yes, there is a series of issues here which are said not to be triable by the tribunal and in that manner, certainly the scope of what the tribunal can do is lesser. And there is also a funny situation, for example, somebody would not be able to take recourse if they did not make a timely payment of taxes. Now, if they did have a tax demand, one part of it is that that tax demand will get determined under the local Indian law by an Indian regulator. But, when this issue is referred to an arbitral tribunal, they will also probably have the ability to say was this a timely payment or not. So, if on the very same issue, you have a Indian authority saying that this is not a timely payment, you have a foreign authority saying there was no payment required in the first instance in terms of the arbitral tribunal, then how do you effectively decide which has primacy?

Doshi: The 2015 draft treaty says in the dispute resolution process all local remedies must be exhausted before the investor can commence an arbitration proceeding! Interestingly the treaty also provides for the government to make counter-claims if the investor has breached minimum obligations such as anti-corruption obligations, disclosure requirements, and tax compliance

MODEL INVESTMENT TREATY
Dispute Resolution

2003
No such provisions

2015
Arbitration only after exhausting all judicial & administrative remedies
Counter claim provisions if Investor obligations not met

Rossow: Overall, that is the biggest negative about the revision of the model. It is a lot more difficult to prove that damages have occurred, that damages were done in way that is not covered under one of the broad exclusions that you mentioned and the way that you interact, you actually introduce arbitration, the fact that you are supposed to spend, initiate in local courts but not exhaust local courts because of course you cannot use the international arbitration to overturn judicial decisions. The fact that you have to prove that local courts have been frustrated to some extent so that you can take it out of those courts then to spend  a considerable amount of time trying to negotiate without actually going into arbitration with your partner. So, overall I agree, the threshold for how you institute and how you prove that damages and making sure that those damages done are not actually part of these broad exceptions. That is the broad area that people are going to find as more problematic with the revised model.

Doshi: So will this 2015 draft version of the model bilateral investment treaty be acceptable to other countries, foreign investors and why – even India Inc investing abroad?

Rossow: Overall an investor looks at a new model and they probably see more red flags then they see good things.

Peacock: That cuts both ways and so as India Inc as India companies in Indian PSUs invest increasingly outside India into jurisdictions where they also would like to have protection from investment treaties of this kind, certainly the standards of protection of the Indian government wants to afford to invest into India, the flipside is those are the standards of protection it will be able to offer to Indian companies going abroad.

Shah: This is a situation where you are trying to enthuse foreign investors saying they have a certain level of protection, but if they look at it in the form in which it is, this suffers in comparison to what you had and it also suffers in comparison to what is prevalent elsewhere in the world.

 
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