The Model India BIT (2016) redefines India’s investment treaty framework, balancing investor protection with state sovereignty. It introduces clear investment definitions, excludes MFN clauses, limits ISDS, and prioritizes regulatory autonomy, addressing earlier flaws.
Introduction
India’s engagement with bilateral investment treaties (BITs) began during the early 1990s as part of its efforts to liberalize the economy and attract foreign direct investment (FDI). The first BIT was signed with the United Kingdom in 1994, followed by similar agreements with several other nations.[1] Over time, these treaties were criticized for their broad definitions, investor-centric provisions, and the lack of clarity in their terms.[2] The Model India BIT (2016) was developed in response to these concerns, serving as a framework for future BIT negotiations and addressing perceived imbalances in the earlier treaties.
The Model BIT of 2016 aims to strike a balance between investor protection and the host state’s regulatory autonomy. Key features include a revised definition of investment, limitations on dispute settlement mechanisms, and the exclusion of certain measures from its scope. This critical appraisal analyzes the provisions of the Model India BIT, focusing on its strengths, weaknesses, and potential implications for India’s investment landscape.
Background
India’s decision to revise its BIT framework was significantly influenced by the 2011 White Industries arbitration case.[3] The case highlighted deficiencies in India’s investment treaties, as the arbitral tribunal ruled against India due to delays in its judicial system. This and other disputes exposed vulnerabilities in India’s BIT regime, leading to concerns about sovereignty, regulatory autonomy, and the potential for misuse of treaty provisions.[4]
In 2014, at the World Investment Conference, India’s concerns over the discriminatory nature of investment treaty obligations were articulated. The government emphasized the need to balance the rights of foreign investors with the host state’s ability to regulate. Subsequently, the Model India BIT (2016) was adopted on January 14, 2016, to address these issues and create a more equitable investment framework.[5]
Key Features of the Model India BIT (2016)
1. Definition of Investment
The Model India BIT adopts a restrictive, enterprise-based definition of investment. It includes enterprises legally constituted under the host state’s laws and excludes intangible assets or speculative financial instruments. This approach aligns with the principles established in cases like Salini v. Morocco,[6] emphasizing characteristics such as contribution to economic development, risk assumption, and duration.
However, ambiguities remain in determining whether the characteristics of investment apply to the enterprise or its assets. For instance, the inclusion of assets such as shares or intellectual property rights may lead to interpretative challenges for tribunals.
2. Exclusion of Certain Measures
Article 2 of the Model BIT[7] excludes taxation measures and compulsory licenses related to intellectual property rights from its scope. This exclusion is rooted in cases like the Vodafone tax dispute,[8] where India faced criticism for imposing retrospective taxation. By removing these measures from the treaty’s ambit, the Model BIT aims to preserve regulatory autonomy while reducing the risk of investor claims.
3. Investor-State Dispute Settlement (ISDS)
The ISDS mechanism in the Model BIT imposes significant procedural requirements. Investors must exhaust all local remedies for at least five years before initiating international arbitration. Additionally, a 90-day notice period for amicable settlement is mandated before arbitration can proceed.
These provisions aim to prevent frivolous claims and encourage dispute resolution through domestic legal systems. However, the extended timeline and procedural hurdles may discourage legitimate investors from pursuing claims.
4. Expropriation
The Model BIT permits expropriation for public purposes, subject to due process and prompt, adequate, and effective compensation. Article 5[9] defines both direct and indirect expropriation, with tribunals required to assess factors such as economic impact and intent. While the inclusion of indirect expropriation reflects modern investment treaty practices, the reliance on tribunals for interpretation may result in inconsistencies.
5. Fair and Equitable Treatment (FET)
The Model BIT replaces the traditional FET standard with a provision prohibiting violations of customary international law, including denial of justice, fundamental breaches of due process, and targeted discrimination. This change addresses concerns over the expansive interpretation of the FET standard, which often undermined the host state’s regulatory autonomy.[10]
6. Exclusion of Most-Favored-Nation (MFN) Clause
The Model BIT excludes the MFN clause, which had previously allowed investors to import more favorable provisions from other treaties.[11] This exclusion prevents treaty shopping and aligns with India’s objective of negotiating tailored agreements. However, the absence of the MFN clause may limit the appeal of India’s BITs to foreign investors.
7. Removal of Full Protection and Security
The Model BIT limits the “full protection and security” standard to physical protection, explicitly excluding regulatory or legal security. This approach reinforces the host state’s regulatory powers while addressing concerns over the broad interpretation of the standard in cases like CME v. Czech Republic.[12]
Critical Appraisal of Key Provisions
1. Strengths
- Regulatory Autonomy: The Model BIT prioritizes the host state’s ability to regulate in the public interest, addressing concerns over sovereignty and policy space.
- Clarity in Definitions: The enterprise-based definition of investment and the exclusion of MFN provide greater clarity and reduce interpretative ambiguities.
- Safeguards in ISDS: Procedural requirements, such as exhausting local remedies, mitigate the risk of frivolous claims.
2. Weaknesses
- Ambiguities in Key Provisions: The lack of clarity in determining the characteristics of investment and the reliance on tribunals for interpretation may lead to inconsistencies.
- Investor Deterrence: The restrictive provisions, such as the absence of MFN and the lengthy ISDS process, may discourage potential investors.
- Pro-State Bias: The Model BIT’s provisions reflect a strong pro-state orientation, potentially undermining investor confidence.
Conclusion
The Model India BIT (2016) represents a significant shift in India’s approach to investment treaties, prioritizing state sovereignty and public interest over investor-centric provisions. By addressing the shortcomings of earlier BITs, it provides a more balanced framework for future agreements. However, its restrictive provisions and procedural hurdles may deter foreign investors, posing challenges for India’s investment climate.
As India continues to navigate the complexities of international investment law, striking a balance between protecting investor rights and preserving regulatory autonomy remains crucial. The Model BIT serves as a step in this direction, reflecting India’s evolving priorities and its commitment to a fair and equitable investment framework.
[1] Nishith Desai Associates, “Bilateral Investment Treaty Arbitration and India” (Nishith Desai).
[2] Mishra NK, “Indian Bilateral Investment Treaty‟ (Bit – 2016) and Analysis” (LinkedIn).
[3] “White Industries Australia Limited v The Republic of India”, IIC 529 (2011).
[4] Kachwaha S, “The White Industries Australia Limited - India Bit Award: A Critical Assessment” (2013) 29 Arbitration International 275.
[5] Ranjan P and Anand P, “The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction” (2017) 38 Northwestern Journal of International Law and Business 1.
[6] Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4.
[7] Article 2, Model India BIT (2016).
[8] “Vodafone International Holdings BV v. India”, PCA Case No. 2016-35.
[9] Article 5, Model India BIT (2016).
[10] Dolzer R and Schreuer C, Principles of International Investment Law (1st edn Oxford University Press, Incorporated 2008).
[11] Dautaj Y, “Between Backlash and the Re Emerging „Calvo Doctrine‟: Investor State Dispute Settlement in an Era of Socialism, Protectionism, and Nationalism” (2021) 41 Northwestern Journal of International Law & Business 273.
[12] Junngam N, “The Full Protection and Security Standard in International Investment Law: What and Who Is Investment Fully [?] Protected and Secured From?” (2018) 7 American University Business Law Review 100.
