The Draft Model for Indian Bilateral Investment Treaties, which was released by the Government of India last month for comments, forms the basis to negotiate new and existing BITs with other countries. This Draft Model text is of critical significance at a time when India’s need for foreign investments and global assimilation is much desired and necessary for sustainable economic growth. It sets the tone on India’s position as an investment destination.

The importance of BITs was reinstated in 2013, especially when Etihad, a UAE investor, made its investments in Jet Airways conditional upon signing of a bilateral investment treaty between India and UAE

The Draft Model is a radical departure from the desired objectives of making India an attractive investment destination. Instead of restoring investor’s confidence in India, the Draft Model postures protectionism and conservatism and dismisses the core principles of security, reasonableness, non-discrimination, transparency, access and due process.

The Draft Model BIT appears to insulate India from any future claims by foreign investors aggrieved by India’s arbitrary and unreasonable actions.

For over forty years, bilateral investment treaties have been used to give security to foreign investors by protecting their investments in the host countries. The framework of bilateral investment treaties, besides encouraging foreign investments, are designed to appropriately address investors’ concerns of uncertain legal and political regime of a foreign country. The new Draft Model BIT takes a divergent approach of limiting the scope of protection granted to the investors and asserts India’s ability to regulate investments.

It is no guesswork that India’s decision to review the current Model BIT was in response to an Australian Investor’s (White Industries) successful investment treaty claim against India and a successive spate of notices of disputes by numerous foreign investors, notably upon cancellation of 2G licences and introduction of retroactive tax laws in 2012. In a brazen attempt to lessen the burden of defending these increasing claims of foreign investors, the draft model has introduced unprecedented exclusions and qualifications, which are not only alien to the international treaty practice but defeat the very purpose of BITs.

Paradigm Policy Shift – Growth vs. Conservation

It has been well established by various economic studies that India cannot maximize its economic growth, particularly in the infrastructure sector, without foreign investment and the bilateral investment treaties play a significant role in inducing foreign investors by the guarantees afforded therein.

Contrary to the assurances being given by the current Indian Government to the foreign investors who have been affected by the predecessor government’s policies and actions, the Draft Model BIT does little or nothing to restore their faith, and in fact, is likely to deter them even further.

In fact, the Draft Model BIT has a glaring omission: the stated objective of the current BITs found in the words “encouragement and reciprocal protection of investments for stimulation of flow of private capital” is missing.

Instead of providing for “a stable framework for investments”, the Preamble outrightly dismisses investors’ expectations of a stable environment by declaring that the host state has the “right to change conditions applicable to such Investments”.

This marks a paradigm shift in the government’s stance – a shift from inducement to deterrence, from liberalisation to conservation.

Reduced Scope of Protection

The Draft Model BIT has limited the scope of protection under the BIT by introducing an ‘enterprise’ based definition of ‘Investment’: only enterprises constituted in India that have ‘real and substantial business operations’ in India and are owned or controlled by the Investor qualify as Investment for the purposes of the treaty.

The enterprise will be considered owned by the Investor only if more than 50% of the capital is held by the investor. This definition excludes all minority investments unless they are controlled by the investor through voting agreements or any other agreements of similar nature.

Apart from a host of ambiguous conditions that an enterprise needs to fulfill to have “real and substantial business operations”, the enterprise must engage a “substantial number of employees” and make “substantial contribution to the development of the Host State”.

Such conditions have not been clarified anywhere in the Draft Model BIT, which in its present form, is bound to create uncertainty for the investors who may be denied treaty protection if they have employed only a few hundred employees, despite significantly, but not “substantially” contributing to Indian economy.

The definition of “investment” in the Draft Model BIT is restrictive. Besides excluding Indian holding companies and foreign portfolio investments from the definition of “investment”, it also sweeps out intangible rights like goodwill, brand value, investments in government debt and public sector undertakings, in addition to orders or judgments of any judicial, regulatory, administrative or arbitral authority.

Since all forms of investment can potentially contribute to the development of an economy, a broad and open-ended definition will be in the interests of both the investor and the state.

Further, considering the recent outcry on introduction of draconian retrospective tax, the complete exclusion of taxation measures from the scope of the treaty is likely to be frowned upon by the other countries while negotiating the treaty as being evidently detrimental to the investor’s interest.

This provision is preposterous considering that even developed countries like the United States allow taxation measures to be a subject matter of a BIT claim in certain circumstances.

To add to the existing concern, the Draft Model BIT takes away the authority of the Arbitral Tribunal to determine whether a measure is a tax measure or not and gives autonomy to the host state to determine the character of a measure to be tax or otherwise.

Thus, if the host state chooses to arbitrarily characterize a non-tax measure as a tax measure, then the investor has no recourse to the dispute resolution mechanism under the treaty.

Narrow Fair and Equitable Protection

The Draft Model BIT restricts the protection under fair and equitable treatment to only excessively qualified measures such as “un-remedied and egregious violations of due process”, “denial of justice” or “manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment”.

Such narrow formulation of this standard takes away a wide range of procedural and substantive protection to the investors and their investment, like legitimate expectations which have otherwise been covered under this standard of protection under almost all BITs, notwithstanding certain variations among texts of different BITs.

De-Leveling the Playing Field

The 'Most Favored Nations' clause, which has been traditionally considered to be extremely significant in economic treaties, guarantees the investors of a non-discriminatory treatment vis-à-vis investors of other countries.

However, in its endeavor to restrict the rights of the investors, the Draft Model BIT completely wipes out this clause. By omission of such cardinal protection, it appears that India is not serious in granting protection to the Investors but only wants to protect itself from a potential fate such as in the White Industries’ case, in which India had to pay the Australian investor over US$ 8 million on account of inordinate delay in Indian courts to enforce the award passed in a commercial arbitration.

The protection of national treatment, which ensures that the investors are not discriminated vis-à-vis domestic investors, has been diluted to exclude regional or local government measures.

Thus, a foreign investor cannot complain about a state government’s regulatory measure favoring local investment, under the BIT, even if it is for protectionist purposes.

Further extension of financial assistance in favor of its investors and their investments in pursuit of legitimate public purpose, including protection of public safety and environment has also been excluded from purview of national treatment.

Even for the available protection, the challenged measure has been qualified to be “intentional and unlawful discrimination”, notwithstanding that an act of discrimination based on nationality is per se wrongful and the State must not be allowed to escape such obligation under the subterfuge of qualified standards.

Even the exclusion of regional or local government measures is contrary to customary international law, wherein the acts of the regional or local government are considered to be the acts of the State for which the State becomes liable.

In order to satisfy the claim of indirect expropriation, the Draft Model BIT requires not just permanent and complete deprivation of the value of foreign investment but also transfer of this value to the expropriating country or its agency, which is an extraordinary qualification, unknown to the existing treaties.

Such qualification precludes claims of indirect expropriation upon measures like revocation of a license (resulting in complete deprivation of the value of foreign investment), as it may not be accompanied by transfer of the value of investment to the expropriating state.

Further, the Draft Model BIT departs from the practice followed in international arbitration disputes by taking away the authority of the Arbitral Tribunal to review the Host State’s determination of whether an expropriatory measure was taken for a public purpose or in compliance with its law or not.

While the requirement of exhaustion of local remedies is in consonance with the position under customary international law, considering the state of Indian judicial system it is an unattractive and unfair proposition for foreign investors to be subjected to lengthy and unending court proceedings in India.

Conclusion –Hope for a better draft

The changes brought in the Draft Model BIT grant minimal protection to investors and are more protective of India’s interests than of the investors. The current form of the Draft Model BIT makes it more of an anti-BIT and is not likely to be acceptable to other countries.

In order for India to conform to global practice and to continue be a safe haven for investors, it is imperative that the Draft Model BIT undergoes a serious transformation and return to the true intent and purpose of a bilateral investment treaty.

Shwetha Bidhuri (Senior Associate), Akriti Chaubey (Associate) and Aditya Sarin (Associate) are members of DMD Advocates’ Litigation & Arbitration Group.