Bilateral Investment Treaties Issues in Securing Indian Investments Abroad

In Depth

Bilateral Investment Treaties Issues in Securing Indian Investments Abroad

Garima Sharma | February 2013

The recent case of Maldives government’s termination of the contract with GMR is an eye opener and a learning experience for Indian corporate and Govt. of India.

Prior to this, there have been other similar instances involving some of the top Indian companies. For example, the Tata Group’s Vietnam project has not been able to take off till date due to local government’s sparring over land acquisition compensation. As it has been reported in livemint that the project has been stalled after the provincial government of Vietnam estimated the acquisition cost at $200 million for around 4,000 acres of land, an amount Tata-Steel was not happy with and refused to pay. This resulted in Indian business giant not receiving the investment license for its 4.5 million-tonne steel plant at Vung Ang Economic Zone in Ha Tinh province. People close to the project feel that it was unfair on part of Vietnam to hold back investment license as India has been helping the country in various areas for last few decades, including in strengthening their defence capabilities. They said Tata-Steel felt discriminated as the land given to it originally for the plant was given to Formosa in 2008 and an alternative plot was offered to it in 2009. Similarly, Vedanta’s Konkola mines in Zambia are in trouble due to local government’s accusation to mining companies for evading taxes through transfer pricing. The matter is still being negotiated.

As we all know, 21st Century is the “age of globalisation” and “business collaboration” Foreign Direct Investment [FDI] between countries with an intention to create an integrated global market. Such foreign investments benefit both foreign investors and capital receiving states [host states] opening doors by offering opportunities in terms of capital, technological know how, resulting in improved public services, creation of jobs etc.

Indian companies have gone for overseas investments in off-shore financial centres, such as, Mauritius, Singapore and the Netherlands. It has been routed either by overseas locally- incorporated subsidiaries or by setting up holding companies and/or special purpose vehicles (SPVs) and has been made keeping in view the business and legal considerations, taxation advantages and easier access to financial resources in the countries.

As we all know that all these collaborations are based on Bilateral Investment Treaties. As per the ministry of finance, Government of India has, ‘so far, (as on July 2012) signed Bilateral Investment Promotion and Protection Agreements BIPAs with 82 countries out of which 72 BIPAs have already come into force and the remaining agreements are in the process of being enforced. In addition, agreements have also been finalised and/ or being negotiated with a number of other countries.’

So it is pertinent to discuss certain basic elements in BITs and find out the points to be kept in mind before investing abroad.

BILATERAL INVESTMENT TREATIES (BITS), THE CONCEPT

Bilateral Investment Treaties are agreements with other countries to ensure that an adequate safe business environment is provided for their mutual investors abroad and capital flows are freely encouraged into their own countries. It provides companies and individuals with special rights and legal protections when they invest in a foreign country (known as host state). BITs set out terms and conditions for investment in one country by private companies and individuals of another country.

TYPICAL SHIELD PROTECTIONS UNDER BITS

The key protection offered by the majority of bilateral investment treaties is to allow international arbitration in the event of an investment dispute, rather than forcing foreign investors to sue the host –state in its own courts. The specific content and protections provided by BITs do vary and it is essential to check the wordings of any particular treaty, as there are often important differences. BITs usually provide for the following standards of protection for an investor:

Fair and Equitable Treatment (FET): This is the most frequently invoked standard in the investment disputes. According to this concept, host states are to maintain stable and predictable regulatory environments for the investment and respect the legitimate expectations upon which the investors initially relied when they made investment.
Most Favoured Nation (MFN) treatment: This clause enables the investor to claim any favourable right that is available to any other state having BIT with the host state. The clause offers both procedural and substantive protection to the investors.
Full protection and security: The concept of full protection and security is to ensure that a host state takes active measures to protect a foreign investment from adverse effects of actions of (a) the host state (b) its organs or even (c) third parties.
Protection from expropriation: Expropriation is the confiscation of a foreign asset by the host state with no or minimal payment, thus depriving the foreign investor of his reasonable expectations of profits and returns.

DISPUTES RESOLUTION UNDER BITS

Typically, where BIT exists, investors are free to bring Investment Treaty Arbitration [ITA] actions in any one of the arbitral institutions identified in the treaty, and the host state is required to submit to the jurisdiction of the arbitration institution. They fundamentally differ from commercial arbitrations in two very specific ways; firstly investment treaty arbitration is based on either on (a) an investment treaty (b) host state’s national investment law or in certain circumstances, investment agreement, whereas commercial arbitration is based on an arbitration agreement. Secondly, in investment treaty arbitration, the arbitral tribunal judges the host states’ behaviour towards a foreign investor. In commercial arbitration, the arbitral tribunal judges the contract between the parties i.e. its conclusion, performance and termination.

Most of BITs allow investors to bring their disputes before one of the following arbitration institutions:

International Centre for the Settlement of Investment disputes (ICSID)
International Chamber of Commerce (ICC)
Stockholm Chamber of Commerce (SCC) Parties may also choose less formal ad hoc methods, such as conducting the Arbitration under the UNCITRAL Arbitration rules.

It is pertinent to note that India has not signed the ICSID Convention. As a result, India cannot be a party to ICSID proceedings. However, Indian investment treaties often provide that in an event either party is not an ICSID member; foreign investors may initiate ad hoc arbitration proceedings in accordance with UNCITRAL Arbitration rules.

INHERENT RISKS IN BITS

Though Risks are inevitable yet at the time of making investment decisions the corporates, should anticipate all potential risks, which may occur in the host state such as changes in political regime, changes in regulation, breach of contract, restrictions on currency transfer etc. Indian companies investing abroad, particularly in emerging markets, have faced similar risks.

CONCLUSION: HOW TO GO ABOUT IT

In such a scenario, the need of the hour for Indian corporates, seeking to invest abroad, requires a rigorous risk analysis and due diligence. The following other parameters should also be considered while concluding cross-border contracts:

Structuring iinvestments in countries where additional umbrella of legal protection is available from any applicable Bilateral Investment Treaty (BIT).
At the contract formation stage, reasonable foreseen events and protection of rights of the Indian corporates should be mapped out to avoid pitfalls later.
Drafting of clauses relating to dispute resolution mechanism, recourse to interim measures, jurisdiction of local courts should be carefully and clearly done. As far as possible, the venue of the arbitration should be a neutral country.
Whether dispute resolution procedures in any project or contract documents are consistent with applicable investment treaty procedures.
Try to incorporate the amicable settlement provision in addition to dispute resolution clause in the contract. The Indian corporates must consider and negotiate with the state officials first in order to explore the possibility of an amicable settlement. “The waiting” or “cooling period clause” before bringing a claim is usually provided in such cases. Indian investment treaties typically contain a six-month cooling-off period.