Bilateral Investment Treaties : Why needed? – UPSC GS3

What are Bilateral Investment Treaties (BITs)?
  • Bilateral investment Treaties (BITs) are agreements between two Countries (States) for the reciprocal promotion and protection of investments in each other’s territories by individuals and companies situated in either State.
  • Aim: To encourage foreign investors to invest in a State and there by contributing towards overall developments and advancements of the economy.
  • Some essential clauses covered under BIT:
    • Applicability
    • Fair and Equitable Treatment and Full Protection & Security
    • National treatment and Most-favoured-nation treatment,
    • Expropriation,
    • Dispute settlement mechanisms, both between States and between an investor and a State.
Facts about BIT:
  • India changed its model BIT treaty in 2015. This model pays a greater emphasis to the state’s regulatory power.
  • India is one of the most sued countries in world as per UNCTAD.
  • Indian signed  over 80 BITs from 1994-2011 which were investor friendly. Post 2011, India has terminated most of BITs unilaterally.
What is expropriation?
When the state grabs private property, this constitutes expropriation.  In an early-stage democracy like India, the checks and balances that control the behaviour of the state are limited. From the viewpoint of a foreign investor, making business plans in India involves expropriation risk.
Importance of BIT to a foreign investor
Other than expropriation risk, a foreign investor is marred by following issues:
  • Low voice in the political system: Locals have a greater voice in the political system and have a better sense of how policies will evolve in the future. While  Foreign investors know less about India, have a low voice in the political system.
  • Lack of confidence: Local companies are more confident in their activities, and take greater risks in the interpretation of law. Foreign companies are more unsure, and opt for extremely conservative interpretations. Hence, the rate of tax payment by foreign companies operating in India is systematically higher than local companies.
  • Expropriation is difficult to quantify and insure: Expropriation risk and policy risk is difficult to quantify and impacts upon different situations in a non-uniform fashion. It is not easy to label a precise outcome as having involved expropriation. Hence, it is not an insurable risk. It is not a risk against which the global insurance market will supply protection to foreign investors.
Hence,  if we do nothing about this, the required rate of return for investment into India is enhanced and many investments do not take place.
How to address the issue?
BITs are an effective mechanism through which this issue could be solved. It consists of following benefits :
  • They act as an insurance for foreign investors against expropriation risk and policy risk
  • Provides for effective dispute redressal mechanism such as hearing, at a neutral forum, where both sides argue their case
  • Creates additional layer of checks and balance against arbitrary behaviour of government
  • Encourages greater investment into India, which is in the country’s interests
  • Strengthen investment policy framework where lost cases act as feedback
Main features for new Model BIT 2016:
  • Deleted the MFN clause.
  • Enterprises based definition of investment: Investors who do not set up an enterprise in India to carry business cannot seek protection under BIT.
  • Compulsorily exhausting the local courts first before approaching international tribunal for dispute resolution.
  • List of subject exceptions where provisions of BIT would be invalid are health, environment etc.
Parliament Standing committee on Status of BITs:
  • India has signed very few investment treaties after the adoption of model BIT. It recommended that India should expedite the existing negotiations.
  • Committee recognizes the potential of BITs in attracting foreign direct investment. The committee recommended that India should sign more BITs in core or priority sectors.
  • Committee recommended fine-tuning of BIT. Model BIT should keep two things in mind.
    • It should tighten the provisions to curtail the discretion of Investor-State Dispute Settlement (ISDS) arbitral tribunals.
    • It should strike a balance between goals of investment protection and state’s right to adopt regulatory measures for public welfare.
  • Committee recommended strengthening the capacity of government officials in the area of investment treaty arbitration.
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