Bilateral Investment Treaties and FDI – UPSC GS3

Adverse judgements against Indian Government in Vodafone and Cairn Energy cases.
 What are BITs?
  • Definition: These are international reciprocal agreements between two countries that aim to promote and protect investments of one country in the territory of the other.
  • Protects FDI: BITs play an unparalleled role in protecting Foreign Direct Investment (FDI) as they contain ‘survival clauses’ that extend treaty protections for a fixed term beyond termination.
  • Protects Insurers : BITs contain subrogation provisions where an insurer could exercise rights and assert claims of the insured investors under a BIT, pursuant to the terms of the insurance.
  • Several insurers depend on a BIT, or access to a dispute resolution mechanism for a foreign investor to underwrite insurance, determine insurance premium and, thus, mitigate investors’ risks.
India’s issue with BITs:
  • India has terminated 69 BITs till today due to spate of BIT cases leading to losses in those treaties to India.
  • In their absence, fresh foreign investors no longer have the protection of international law against the unchecked exercise of legislative, executive and judicial powers by the State.
  • It could significantly increase the cost of investments due to lack of insurance or higher risk premium and, hence, affect the return on investments, which directly affects India’s ability to attract FDI.
  • The public exchequer continues to loom under a hanging sword of international law violations and the threat of paying out large compensations.
    • In the recent ruling by the PCA, Government of India will have to pay Cairn Rs 9,000 crore.
How to handle this situation?
  • Decision by India to appeal against these awards, have had an adverse effect on investor trust and India’s promise to honour its commitments to foreign investors under bilateral investment treaties (BITs).
  • Since the inception of the dispute, the Government of India has fervently defended its sovereign taxation powers.
  • It is important for the Government of India to reflect upon its international legal responsibility to uphold treaty obligations.
  • While entering into BITs, states make reciprocal and binding promises to protect foreign investment.
  • Mutual settlement of such issues is the way forward.
  • India has welcomed Cairn’s offer to settle amicably.
  • “Vivad se Vishwas” tax amnesty scheme can be used to resolve such issues.
Conclusion: India recognizes that realizing the vision of atmanirbhara heavily depends on foreign investment which will be impacted by termination of BITs
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