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India's Revised Model BIT!

Published on Fri, Jan 22,2016 | 23:44, Updated at Wed, Feb 03 at 14:25Source : CNBC-TV18 |   Watch Video :

In April 2015, the Indian government published a draft model BIT in response to several claims that were brought against it under existing BITs. This draft sought to strictly limit the protections given to foreign investors. Last month, the Union Cabinet approved the revised the text of the Model BIT. But, does this version provide increased protection for foreign investors? Does it succeed in boosting investor confidence? Or has India taken a step backward instead? Aayush Ailawadi finds out…

The first thing that one notices with the new Model BIT is a much broader 'enterprise'-based definition of investment. In the last draft, investors were to satisfy certain ownership and control tests, which have now been done away with. The Model BIT requires investments to have specific characteristics, "such as the commitment of capital or other resources, certain duration, the expectation of gain or profit, the assumption of risk …”

The definition still doesn't include portfolio investments, interests in government issued debt, court judgments or arbitral awards.

Nicholas Peacock
Partner, Herbert Smith Freehills
Specializes in International Arbitration
 
“Many BITs will start from an asset based definition. So, you look at investments comprising assets and then you look at what those assets could include and that would include enterprise. Here, you have a definition that starts with the term “enterprise”, in that way funnels what can be included as an investment under the BIT. It’s clearly intended to restrict the scope of the BIT. There are other elements in the BIT that expressly limit what could be an investment, a qualifying investment under the BIT. But clearly, this use of an enterprise based definition is also a significant restriction on what is covered by the BIT.”

Jayant Dasgupta
Executive Partner, Lakshmikumaran & Sridharan
Former Ambassador of India to WTO

“Essentially, there are 4 elements there, one is that there should be flow of capital, there should be an expectation of gain or profit and there should be acceptance of risk and these have all been incorporated in the Indian definition and of course then, the TPP as well as ours, go on to elaborate that stocks and shares and IP, immovable and movable property and host of other things would be included in the definition of investment.”

Under Article 5 of the Revised Model BIT, “Expropriation” is only allowed for reasons of ‘public purpose’, in accordance with the due process of law and on payment of adequate compensation. To ascertain whether a measure amounts to expropriation, the revised BIT has a list of factors such as economic impact, duration, object, context and intent of the measure.

Jayant Dasgupta
Executive Partner, Lakshmikumaran & Sridharan
Former Ambassador of India to WTO
 
“There is always a problem with compensation! In the sense, that how do you calculate the compensation that should be made available to the investor and I think the Indian Model BIT strikes a fair balance because it says ‘adequate compensation’ and it says it should have a link with current market value and of course you have to take other factors also into account. For instance, if land has been acquired a long time ago and a lot of appreciation of the land value has taken place, then to give the current market value based on one or two transactions in the vicinity maybe a problem. So, once you have a number of indicators or indices which have to be taken into account then it would come to the right figure.”

The "national treatment" standard in the Draft BIT did not apply to acts of regional and local governments. The government has taken some steps to address the issue in the revised text of the BIT, which now covers acts of states governments.

Nicholas Peacock
Partner, Herbert Smith Freehills
Specializes in International Arbitration
 
“The national treatment standard in the draft was more restrictive. That stood out a little to anybody reading that draft. I think there’s been a reaction to that, I think that the Government of India has taken advice on board, it has taken advice from the Law Commission of India. What you have therefore is a national treatment standard that includes sub national governments. That will include state governments which of course is important in the Indian context when so much authority is devolved to the States. It still excludes local government but state governments are in there. So, certainly since the original draft, that national treatment standard has been opened up and been made less restrictive.”

At a time when many countries have grown wary of Investor State Dispute Settlement/ ISDS mechanisms, India’s Model BIT contains a refined investor-state dispute settlement provision… that now requires investors to exhaust local remedies within 5 years before a party can commence an international arbitration.

Mark Mangan
Partner, Dechert
Specializes in International Arbitration

“It may not be essential for a state to succeed economically in order to have investment treaties, nonetheless there is a weight of opinion that suggests that investors if they don’t have adequate investment treaty protection either will not invest in a particular state or expect a higher rate of return to offset the risk. And I’ve certainly seen that with investors when considering investments in the Asian region looking towards an investment treaty to see what protection there is and the extent to which that is sufficient to justify the investment they’re making. So without it there’s a real risk that a government will have less foreign investment. All of that to say I think the starting point for India is most reasonable. The need to modify its investment treaties going forward and it isn’t the only state doing so. Australia for awhile refused to have ISDS provisions in treaties because of a claim that was brought by Philip Morris. Indonesia is in the process of terminating all its BITs. Germany has made noises adverse to investment treaties, because of claims that have been brought against it for its nuclear power industry and notwithstanding Germany being the first country that entered into a BIT with Pakistan in 1959. Even the NAFTA states have expressed concerns about their exposure under that instrument and other treaties. So, India it is reasonable for it to modify and develop its investment treaty programme.”

Jayant Dasgupta
Executive Partner, Lakshmikumaran & Sridharan
Former Ambassador of India to WTO
 
“What we are now saying that local remedies must be exhausted and we have put a time limit there of 5 years! So, within that period, local remedies and recourse to law courts doesn't yield results then the investor is free to approach a tribunal so to that extent whether 5 years is too much, whether it should be shorter, that is a question which is open to debate. But, if you look at investments, long term investments, I think 5 years is a fair balance but it could have been shorter and then after that there is a 6 month provision for conciliation proceedings or compromise solutions to be worked out and within the next 6 months you have to then file an arbitration claim. So, in all when the clock starts ticking, you'll need 6 years before you can approach an arbitration panel, provided you have exhausted local remedies. In case there are no local remedies available then an investor can straight away approach the panel.”

Nicholas Peacock
Partner, Herbert Smith Freehills
Specializes in International Arbitration

“ISDS is controversial. There is a lot of pushback on that especially on the TTIP negotiations in Europe and North America. That said of course, the TPP of course does embrace international arbitration as a dispute resolution mechanism. This draft also embraces international arbituration, you’ve got provision for ICSID etc where they become applicable and UNCITRAL arbitration in the meantime. The inclusion of requirement to exhaust local remedies is significant. It will be significant to investors in particular in the Indian context, where of course the Indian courts do have the reputation for and do create difficulties for people in pursuing remedies. So, I think if you include the exhaustion of local remedies provision in the BIT that’s going to be a standout point for people looking at it. Of course, that said the Indian courts are subject to reform at the moment which is hoped will make the whole process quicker and it’s the speed that really concerns people. But, certainly I think this is a standout feature from this draft which people will look at in particular in the Indian context.”

Although, the Model BIT casts an obligation on states to provide equal treatment in relation to compensation of losses suffered by investors in times of war or natural disaster, there’s still no mention of two provisions which investors would have hoped to find in the revised text- that of ‘most favoured nation’ and ‘fair and equitable treatment’.

Jayant Dasgupta
Executive Partner, Lakshmikumaran & Sridharan
Former Ambassador of India to WTO
 
“I think there are 2 things which we have not included in this BIT and I fully support the government on that. One of them is the ‘most favoured nation’ which was leading to treaty shopping and it has led to a lot of problems for India and many other countries including Australia in the recent case of Phillip Morris, where the Australia/Hong Kong treaty was invoked. So, even the Law Commission has recommended that we should not include the MFN clause in our future BITs because every BIT will have its own special factors and sense of balance which can lead to giving concessions to one another in the BIT. The second thing is about fair and equitable treatment which has been open to many kinds of interpretation and that has also been exlcuded.”

Nicholas Peacock
Partner, Herbert Smith Freehills
Specializes in International Arbitration
 
“The omission of FET standard, again people will note that it does lessen the comfort level because you ask yourself why is the government not prepared to offer a FET, of course that definition brings with it certain baggage. But, I think that omission from the BIT will be significant. I think parties from other states when they negotiate with india will want to understand what that means. And of course, it’s not all about inbound investment to india. These are bilateral investment treaties. It also covers outbound investment by Indian corporates into other markets. So, the question is whether Indian corporates will also want to ensure FET in the market in which they are investing and whether that will adequately suit the interests of India Inc, as India becomes a capital exporting as much as a capital importing economy?”

But, that’s not to say that there haven't been investor friendly changes in the Model BIT! One such welcome change is the junking of a provision which barred an arbitral tribunal formed under the BIT from reviewing any case which has been settled by a judicial authority of the host state.

Nicholas Peacock
Partner, Herbert Smith Freehills
Specializes in International Arbitration
 
“The Government of India seems to have taken on board many of the comments made by the Law Commission of India including certain provisions in the draft which allowed the govt to self judge certain exclusions in the BIT. Also, which prevented an arbitral tribunal deciding disputes under the BIT from revisiting matters that have been decided by Indian courts. So, I think this draft does give autonomy back to the BIT tribunal that is there to resolve disputes and that must be a positive thing.”

The whole point of a BIT is to protect investors in India and abroad and to boost investor confidence. So, the question is, has the revised Model BIT succeeded in doing that?

Mark Mangan
Partner, Dechert
Specializes in International Arbitration
 
“It should be treated as a worthwhile exercise in developing a Model BIT and reflects the sophistication of the Indian government because we can see in the terms of the treaty because we can see that it has been prepared with recent jurisprudence and criticisms of ISDS in mind. So, its a very sophisticated document and one that I think is a worthwhile template for future negotiations.”

Nicholas Peacock
Partner, Herbert Smith Freehills
Specializes in International Arbitration
 
“You are looking at a draft which is largely reactive to past problems with inbound investments, but of course you also have to balance those concerns with the needs of outbound investors looking at India’s future phase of economic development. I think it’s a difficult tightrope, a difficult policy decision for the Government to take but clearly it has to balance out both of those concerns. They will become real once it starts when it starts negotiating with any counter party, when they start to look at the other state in question and whether it expects Indian investors to be going into that state. But, this draft does start from a restricted point in terms of protections that the GOI is offering but also those that it is seeking.”

Jayant Dasgupta
Executive Partner, Lakshmikumaran & Sridharan
Former Ambassador of India to WTO

“There are studies which have been conducted including by UNCTAD, which says that a BIT is not really a deciding factor which tilts the balance in favour of investment flow because India and US don't have a BIT as yet, neither is there one between the US and China or South Africa, and a lot of investments have flown bilaterally between these countries in the past. So, there are many factors which have to be taken into account into good governance issues, judicial remeidies and policy stability, so we have to take it as piece of the larger framework and we should not give it more importance than it deserves.”

I think it’s safe to say that the revised Model BIT is an improvement from the previous draft. Also, we must remember that the Model BIT is only a template and it remains to be seen how India’s investment treaties will be negotiated in the future.

In Mumbai, Aayush Ailawadi
 
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