Bilateral agreements

India must align its treaties with best global practices

Union Finance Minister Nirmala Sitharaman’s Interim Budget statement that the government was negotiating bilateral investment treaties (BITs) with several countries should be good news at a time when foreign direct investment (FDI) has been slowing. By setting out a reciprocal framework of investment rules, including the settlement of arbitration disputes, BITs protect the rights of both inbound and outbound investors. Ms Sitharaman went on to explain that the BITs were being negotiated in the spirit of “first develop India”, an alternative expansion of FDI. Experience suggests that this stance as a negotiating position could be a serious sticking point, since mutual benefits are implicit in all BITs. Indeed, the fact that India has been able to sign few significant BITs since it unilaterally cancelled 77 of its 84 treaties from 2015 onwards and came up with a “Model BITs” framework points to the deficiencies in approach.

The Model BITs framework was a response to a slew of unfavourable arbitration rulings — including Vodafone, Cairn, and Devas — with damages running into millions of dollars. The unusual aspect was that India declined to accept some of the adverse verdicts, resulting in at least two companies, Devas and Cairn, moving to seize the overseas assets of Air India (then government-owned) to give effect to the awards. Rather than focusing on policies to make the investment environment conducive and predictable, the Model BITs framework appeared to draw the opposite lesson. It focused on buttressing sovereign interest. Among its key measures are the requirement that foreign investors must pursue local remedies for at least five years before going for arbitration against India; the exclusion of any taxation measures imposed by India; and an exclusion of the Most Favoured Nation (MFN) clause.

Three aspects of various moves on the BIT front show that the gains for India have been negative. First, all existing BITs have sunset clauses, which give investors the right to invoke the treaties for 10 to 15 years after the treaty lapses. This leaves the Indian government vulnerable to further action by investors under the revoked BITs. Second, the absence of BITs with significant countries impacts Indian investors seeking opportunities abroad, such as the Tata group’s $5 billion electric car battery factory in the UK. Third, given the glacial pace at which the Indian justice system moves, it is no surprise that the country signed only four BITs in the past nine years, though it is negotiating with 37 others. Of the four agreements — with Brazil, Kyrgyzstan, Taiwan, and Belarus — the first two are not yet in force.

In 2021, the Standing Committee on External Affairs noted: “The number of BITs/Investment Agreements signed post-2015 and the number under negotiations is inadequate [and] not commensurate with the growth of India’s interest in this domain and [her] rising stature in global affairs.” Among other things, the committee suggested that the Model BIT adopt best global practices by advanced countries, including developing an international arbitration centre. The fact that the BIT being negotiated with the UK is reported to “vary significantly” from the 2015 Model suggests that the government may have understood this weakness. India would do well to adopt a more flexible position that will enhance investor confidence and invite significantly higher levels of foreign investment over time.