FinMin preparing draft Centre-state investment pact

Senior govt officials said that such agreement will ensure that states stick to the commitments that India guarantees foreign companies under Bilateral Investment Treaty

The finance ministry is preparing a model Centre-State Investment Agreement (CSIA), for effective implementation of the Bilateral Investment Treaty it is set to sign with other countries. The draft could be presented to the Cabinet for approval in two or three months, Business Standard has learnt.

Union Budget 2016-17, presented by Finance Minister Arun Jaitley on February 29, had proposed the CSIA, to be signed between the central and state governments. “This will ensure fulfilment of the obligations of state governments under these treaties. States which opt to sign these will be seen as more attractive destinations by foreign investors,” the annexure to the Budget speech had stated.

“There can be instances where a problem with a foreign investor might be due to a particular state. Signing a CSIA will ensure states stick to the commitments as well,” said an official.

Some of the features include an enterprise-based definition of investment, non-discriminatory treatment, protection against expropriation, an Investor State Dispute Settlement (ISDS) provision requiring investors to exhaust local remedies before commencing international arbitration, and limiting the power of tribunals to awarding of monetary compensation. “The Centre will not make it mandatory for states to sign these agreements but if any don’t, we will inform our counter-parties (other nations) and that foreign companies should keep that in mind before investing," said the official.

However, some critics say this does not make sense from the perspective of international law. “Whether a central government enters into any such agreement with states or not, the actions of state governments will continue to bind the Indian state,” said Prabhash Ranjan of South Asian University. Irrespective of a foreign company running into trouble with any state, the liability will be on the Centre, he said.

“This seems like a way for the Centre to internally shift blame,” he added. “And, if the Centre signs a CSIA with states in relation to the BIT, why not to the World Trade Organization agreements or the double taxation avoidance agreements it signs with various countries?”

The BIT language was cleared by the Union Cabinet in December. It keeps taxation out of its ambit, unlike the present Bilateral Investment Protection and Promotion Agreements, with the idea that foreign companies finding themselves in a tax row with the government will not be able to invoke the investment treaty their parent country has signed with India, as is the case at present.

India or any other country cannot nationalise or expropriate any asset of a foreign company unless the law is followed, is for the public purpose and fair compensation paid. Public purpose is not defined in any treaty India has signed with other nations. The BIT states that dispute-resolution tribunals, including foreign tribunals, can question ‘public purpose’ and can re-examine a legal issue settled by Indian judicial bodies.

BIT is expected to replace the existing Bippas. It is expected to be signed with all the countries India has bilateral investment treaties with. India has signed Bippas with 72 nations and signed but not enforced it with an additional 11.

British telecom major Vodafone had invoked the India-Netherlands Bippa, seeking international arbitration in its long-drawn Rs 20,000-crore tax dispute, following the cancellation of conciliation talks. Similarly, Finnish mobile handset maker Nokia resorted to this for resolving the tax department's claim of liability, existing and anticipated, for seven years from 2006-07. Cairn Energy, too, recently demanded compensation under the ambit of the India-UK Bippa for the Rs 10,200-crore tax notice slapped on Cairn India.