Synopsis–India signed its first BIT in 1994, and executed 84 BITs within a span of 15 years. In 2011, India lost its first BIT case initiated by White Industries Australia under the India-Australia BIT.
2020 witnessed a dent in India’s image as a global player that abides by the rule of law. On December 22, the Permanent Court of Arbitration at The Hague ruled in favour of the Edinburgh-headquartered Cairn Energy, stating that GoI had failed to uphold its obligations under the Britain-India bilateral investment treaty (BIT) and international laws in seeking ₹10,247 crore in retrospective taxes.
This came after the same court ruled on September 25 that India’s imposition on Vodafone of a tax liability, along with interest and penalties, amounting to ₹27,900 crore, was in breach of a Netherlands-India BIT. Unlike in the Vodafone case, GoI will have to pay Cairn ₹9,000 crore. Both cases exemplify how arbitrary exercise of sovereign powers could cost India dearly — and that sovereign commitments under international treaties must be honoured.
BITs are international reciprocal agreements between two countries that aim to promote and protect investments of one country in the territory of the other. They guarantee protections to foreign investors, regulate sovereign powers of States, and provide special mechanisms to resolve investor-State disputes at an international level. They are sovereign commitments respected under international law.
India signed its first BIT in 1994, and executed 84 BITs within a span of 15 years. In 2011, India lost its first BIT case initiated by White Industries Australia under the India-Australia BIT. An ensuing spate of BIT cases compelled India to terminate 58 BITs in 2017. The number stands at 69 today.
Yet, according to the United Nations Conference on Trade and Development’s (Unctad) World Investment Report 2020, India stands among the top 10 countries for inbound foreign direct investment (FDI). It might seem apposite to conclude that BITs don’t play a determinative role in attracting FDI in India. But they do play an unparalleled role in protecting FDI.
In the middle of a dynamic universe of policies and regulations, BITs provide steady access to foreign investors to an independent, neutral international forum to resolve disputes. When Parliament superseded the Supreme Court’s judgment and swiftly introduced retrospective tax amendments to bring Vodafone under the tax net in 2012, a BIT proved to be the sole beacon of hope for Vodafone.
Losses in previous BIT cases compelled India to react and terminate BITs. But BIT terminations may not mean end of disputes, as they contain ‘survival clauses’ that extend treaty protections for a fixed term beyond termination. Existing investors could initiate disputes under terminated BITs.
BIT terminations also have serious commercial ramifications. They provide a means for investors to escalate a government’s measures to international treaty violations. In their absence, fresh foreign investors no longer have the protection of international law against unchecked exercise of legislative, executive and judicial powers by the State and are left to resolve disputes in national courts, where their commercial rights could languish for years until justice is delivered.
Inertia is not conducive for foreign investment. Risk is corollary to foreign investment. As a result, foreign investment has fostered an ecosystem of political risk insurers. Several public, private and multilateral insurers have emerged over the last century to insure investors against a range of State measures such as expropriation, wars, civil strife and non-convertibility of currency.
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. BITs also contain subrogation provisions where an insurer could exercise rights and assert claims of the insured investors under a BIT, pursuant to the terms of insurance. Treaty terminations could significantly increase 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.
India’s investment-impacting measures, such as the ill-reputed 2012 retrospective tax amendments, continue to put foreign investors and India in troubled waters. As a result, the public exchequer continues to loom under a hanging sword of international law violations and the threat of paying out large compensations. In the past three years, India has expropriated shares of Britain-based Cairn Energy in Cairn India, failed to provide promised incentives to Japanese investor Nissan Motors, and has allegedly breached a fuel supply commitment with Korea Western Power Co (Kowepo). We haven’t learnt lessons from history, it seems.
India recognises that realising the vision of atmanirbharta heavily depends on foreign investment. Termination of BITs, however, is anything but a votive gift to investors.
(Loya and Khan are leader, investor state arbitration, and head, global litigation, respectively, Nishith Desai Associates)