BILATERAL INVESTMENT TREATIES (BITS)

Why in the News? 

India is negotiating BITs with trade partners to boost the inflow of foreign direct investments (FDI).

About BITs

Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other’s territories.                    

• Indian Model BIT of 1993: India had signed BITs with 83 countries of which 74 were in force till 2015.
• India revised its Model BIT in 2016. Since 2015, India has signed new BITs only with four countries and is negotiating with 37 countries and terminated its older BITs with 77 countries.
• Key Features of Model BIT 2016
  •  “Enterprise” based definition of investment: It means an enterprise that has been constituted, organised, and operated in good faith by an investor in accordance with the domestic laws of the country
  • Non-discriminatory treatment through due process: Each Party shall accord full protection and security to the investments and investors
  • National treatment and protections against expropriation: Neither Party may nationalize or expropriate an investment of an investor directly or through measures having an effect equivalent to expropriation.
  • Investor State Dispute Settlement (ISDS) mechanism: A foreign investor should first exhaust local remedies at least for a period of five years before going for ISDS mechanism.

Existing issues with Model BIT 

• Reactionary approach of model BIT of 2016
  • Experts suggest that India brought in Model BIT 2016 in reaction to series of notices that India received.
  • It has too many exceptions which limit the liability for the host state and raises the bar required to bring a claim under the BIT.
• Arbitration Mechanism is considered to be the most contentious issue which insists on the investor exhausting the domestic remedies for at least five years before commencing arbitration under the BIT.
• Enterprise based definition of investment narrows down the definition of investment. Moreover, it is considered to have vague qualifications such as “certain duration” and “significance for development of the party in whose territory the investment is made.” 
• Omission of “fair and equitable treatment” standard. It has been replaced with protections that require steep thresholds to be triggered and/or invoked. Moreover, the doctrines of Most-Favoured Nation and “legitimate expectation” are also absent. 
• Exemption of taxation measures from the protections offered under BIT seems to be restatement of sovereignty rather than a treaty meant to protect cross-border commercial transactions.
• Lack of professionals as India does not have sufficient number of lawyers/judges with the requisite expertise and experience. Thus, huge fees is paid to foreign lawyers firms which represent India in investment arbitration.

Way Forward

After a comprehensive analysis done by Parliamentary Standing Committee, following recommendations have been suggested:

• Timely settlement of investment disputes through pre-arbitration consultation or negotiations to avoid cost to the exchequer.
• Further changes in the Model BIT 2016 should be done in accordance with
  • Continuous up gradation and review of Model BIT 2016 based on experiences gained in disputes arising out of BITs
  • Continuous incorporation of best practices and provisions from BITs adopted by advanced countries after studying implementation and outcome of such treaties.
• Building domestic legal expertise through training lawyers, firms, and government officials is crucial for effective BIT drafting and representation in investment arbitration.
• Promotion of the New Delhi International Arbitration Centre as a world-class arbitration centre.
• Non-Ambiguous and Forward looking BIT should be drafted to avoid overbroad interpretation by arbitrators and tribunals, investment disputes or claims against India, and the abuse of certain provisions by investors.