India lost its first Investment Treaty Arbitration (ITA) claim in 2012 against White Industries, an Australian company. Taking a cue from the White Industries case, (read more on it here) around 17 fresh ITAs have been filed against India in last two years.

Beleaguered with these claims, a new model BIT is being considered by the Indian government for future negotiations of BITs with other States. USA would probably be the first country with which a BIT would be negotiated by the yardstick of the new model BIT. This piece discusses the features of the new Model BIT that is being contemplated.

Definition of Investment

The definition of “investment” in the new model BIT might be amended to make it exclusive and narrow. It is believed that “investment” would be restricted to financial investments directly made by an investor by incorporating an entity in India. The new model BIT would mandate real and substantial business operation as a precursor to be eligible for the benefits under the BIT. Investments made through holding companies overseas will not be covered under the new model BIT. It is also believed that intangible rights like goodwill, investments in government debt and public sector undertakings, as well as investments made before the commencement of real and substantial business operations in the host State, would not be entitled to investors under the new model BIT. Furthermore, investors would have to make disclosures concerning their activities, proprietorship and capital.

In the White Industries case, the arbitral tribunal had held that since India is not a party to ICSID, it does not matter if the investment was made long-term to qualify as one. To avoid such situations in the future, short-term investments are set to be excluded from the purview of the definition of “investments”.

Bar on Treaty Shopping

India’s loss in the White Industries case can be attributed to the use of Most Favoured Nation (MFN) clause by White Industries to benefit from a favorable clause from India-Kuwait BIT. It is a strong likelihood that the new model BIT will have a limitation on the scope of the MFN clause. Removal of the MFN clause altogether is also a possibility. Likewise, the government is likely to devise a mechanism in the new Model BIT to restrict foreign companies having a presence in multiple countries to pick and choose the most favourable BIT, depending upon the nature and scope of the dispute.

Limiting Liability

The new model BIT would seek to limit the liability of the State to the extent of a decision by the Executive only. Further, the new model BIT will entail in it time limits within which the decisions of the Executive could be challenged. This measure too, if finally incorporated, stems from the experience from White Industries case where the matter was initiated not because of an Executive decision but because of judicial delay in deciding the case.

Explicit Exclusions

To avoid ITA claims such as one initiated by Vodafone against India where the issue revolves around the change in taxation policy by the government, the new model BIT may exclude taxation related disputes altogether from the model new BIT. The taxation related matters will be instead dealt only under the Double Taxation Avoidance Agreements. Similarly, patent disabling compulsory licensing would be kept out of the scope of the model BIT.

Expropriation Redefined

Presently, the model BIT mentions that expropriation shall not be done “except for a public purpose in accordance with law”. This phrase may be expanded in the new model BIT. Additional categories of exception may be added to justify the need for expropriation. This would include a) public health and safety, b) stability of the financial system, c) protection of the environment, and d) conservation of natural resources.

Exhaustion of Legal Remedies

A significant change, likely to be incorporated, is exhaustion of legal remedies in the host state before initiating ITA. However, it would also mean that the clause would state that such legal remedies be exhausted in a set time period. Post-exhaustion of legal remedies, both the State and the investor would engage in conciliatory dialogue before being able to initiate ITA.

Counter-Claim by Host State

Another possible clause in the new Model BIT may state that hiring lobbying firms would not be permitted on behalf of any investor. Further, the new model BIT may contain a clause stating that an investor would not offer any kind of bribe to public servants of the host state in lieu of furtherance of their support. Although a bold move, it is possible that the new Model BIT would allow the host State to counterclaim against the investor for their illegal acts.

Analysis

India’s experience with various ITA claims is the reason for the aforementioned terms which are under consideration. While a new model BIT might be helpful in negotiating fresh BITs, it is unclear how useful it will be to tackle the existing claims and future claims which may arise from the BITs already signed. This becomes more important because of the fact that India has already signed BITs with 82 States, of which around 72 have been ratified. The new model BIT will have no effect on these BITs until they are renegotiated on terms of India, which is a difficult task. These States include major trading partners of India. As regards future BITs with new States also, it is not an easy task to get them sign it on the lines of a new model BIT which is heavily tilted in favour of either the investor or host State. A BIT, like any other treaty, is the process of mutually agreeing to a set of terms. A very crucial fact that should be borne by India while finalizing the new model BIT is that presently around 40 BITs entered into by India are with States where India is the capital exporting nation. As Indian companies are expanding and are investing elsewhere rapidly, it is important that BITs are also looked at from the perspective of the role of India as a capital exporting nation. A model BIT which is balanced and looks into the future instead of one being tailored on the recent experiences would be advantageous not only to build the confidence of investors but would also give courage to Indian investors to expand and grow in partner States.

A fair evaluation of the new model BIT would only be possible once the draft has been finalized is put in the public realm.


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10 comments

  1. Ashutosh, I’ve seen various Indian media reports about a draft model treaty. Is it those newspaper reports that you are basing your own report upon? Or has there been some draft or information statement released by the Government of India? Cheers, Luke

    1. Hi Luke. There has been no draft which has been released by the Government of India yet. According to the information I have, it still is with the Committee of Secretaries. I will let you know when I have more information. Thank you. Ashutosh.

      1. Ashutosh, Are you drawing your facts then from a particular report by an Indian media outlet? Which one? I’ve been watching the local media work this story, but not sure who has reliable info (and a track record of accuracy with respect to such technical stories).

        1. Luke, you correctly point out that news reports can not be trusted on their interpretation on a technical issue such as this. Hence, I had to delve into them and do further inquiries. Those insights in conjunction with the reports helped me structure this piece.

          1. Glad to hear (and thanks for your email!). You should trumpet the fact of your additional research in the post – even if you can’t reveal whom you spoke with – as it will offer an important signal to readers. While local media may need to be handled with a bit of skepticism – due to their garbling of technical points (for e.g. announcing arbitrations to have been initiated when only threats have been made) – you’ve managed to draw out a series of issues based on your independent inquiries. That’s great, and you should boast of having done so 😉 Cheers,

  2. Ashutosh i agree with our view point that the new BIT should not look like a knee jerk reaction pursuant to the White Industries Case. New Model BIT should indeed take into consideration interest of all the stakeholders in order to build confidence of the investors which will also give courage to the Indian investors to expand and grow in partner states.
    Prashant Kumar

  3. Ashutosh i agree with your view point that the new BIT should not look like a knee jerk reaction pursuant to the White Industries Case. New Model BIT should indeed take into consideration interest of all the stakeholders in order to build confidence of the investors which will also give courage to the Indian investors to expand and grow in partner states.

    Regards. Prashant Kumar

  4. Thanks, Ashutosh.

    Most of these proposals are consistent with evolving treaty practice. However, for example, especially if no more MFN clause, I think India will have difficult negotiations with counterparties under its new Model re the time limit for Exhaustion of Local Remedies (they will probably expect say no more than 3 years, whereas White Industries was still waiting for 10 years to enforce its commercial arbitration award through Indian courts before turning to its successful claim under the Australia-India BIT).

    Please let us know when the new Model BIT becomes available. It seems rather ironic that it (understandably) emphasises greater transparency, yet is not publically available (or indeed subject to widespread public consultation in deriving its provisions?). Also, does the Indian government or some other reliable source provide details of the 17 new claims you mentioned over the last 2 years? (Luke Peterson’s IAReporter recently summarised fewer cases.)

    Can you also point me to the text of the India-ASEAN agreement on services and investment signed last September, or confirm whether it includes ISDS – and if so, how those provisions compare with the new Model BIT provisions?

    Thanks and regards

    Luke Nottage

    1. Thanks Luke, Unfortunately, to my knowledge the government has not made this information freely available yet. May be it would be a good idea to ask for the information under the Right to Information (RTI) Act.
      As regard India-ASEAN agreement, I know that it will be coming from effect in July 2015 but I have not seen the text yet. I will point you towards it when I have it.
      Thanks, Ashutosh

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