The 2015 Model Bilateral Investment Treaty (BIT): The timing may just be right

Rebuttal Rounds

This is part of a September Feature at Legally Flawed, where writers choose an article and try to rebut it using logic and reason. Enjoy Rebuttal Rounds!

There has been much criticism regarding India’s New Model BIT. In this article, author Girish Deepak tries to quell these ideas regarding the drawbacks of the BIT and gives an idea as to why India is now in a position to make such changes. Read on to know more!

The 2015 Model BIT has been heavily criticized for its overtly protective approach and the lack of incentives which it provides to foreign investors to make significant investments into India. This seems, on the face of it, counterproductive to the approach adopted by the present Government, with our Prime Minister taking great efforts to invite foreign investment into India. However, a deeper analysis of the same would reveal an interesting viewpoint for this much criticized change in approach.

History of India and BITs

To understand this change of heart, it is important to analyse the original purpose of BITs and the context in which these came into being. At the time India signed its first BIT (with UK in 1994, which de facto became our model BIT), the political and economic demographic of India was very different to the present day. In 1991, having just opened up our economy, we signed BITs at a rapid pace racing to 83 BITs by 2015.

However, in this rapid pace we failed to analyse the provisions in depth and followed a boilerplate format without really understanding the impact these provisions would have. This was not entirely India’s fault however as this body of law itself had not been developed sufficiently at the time India signed its first BIT, with many of the provisions like MFN, FET and umbrella clauses (See SGS v. Pakistan, SGS v. Phillipines and SGS v. Paraguay) still undergoing judicial interpretation by arbitral tribunals.

Key BIT Disputes involving India

The international political demographic also to an extent played a role in this as these BITs came as a package deal to invite foreign investments (as was intended by developed nations who wished to guarantee certain minimum standards. Being in a dominant position, they were able to ensure that their concerns were addressed). Additionally, India has since become one of the highest Respondents in Investment Arbitration cases since receiving its first adverse award in White Industries case (2012). However, does the same political scenario which encouraged India to enter into such unfavourable terms and conditions still exist today? While the jury is still out on whether BITs actually effectively increase investment, is it truly in India’s best interest to continue extending favourable provisions to investors and high costs to the Indian taxpayer?

Why a New Model BIT may benefit India?

1. Increased Labor Costs

Several articles as the one rebutted here seems to believe that there is indeed good reason to believe that once India starts negotiating on such protectionist provisions, it will see a steady decline in investments from foreign countries. However, the contrary could also be true considering that China has now started increasing labour costs due to the improvement in living conditions of people (the Country has developed and labourers expect higher wages as they are more accustomed to a better lifestyle now.) India thus remains one of the last refuges for a large amount of cheap labour. Additionally, having the second largest population in the world (soon to be first at the rate it’s growing), India represents the biggest consumer market available. All the big conglomerates are moving towards India (if the recent Walmart example may be quoted) sensing the immense potential it represents.

2. No Requirement for BITs

This inflow is despite the termination of 58 out of 83 BITs which India previously had and the conclusion of only one or two new BITs on the basis of the new model BIT. Even if the argument is sustained that developed countries will not sign a new BIT based on such protectionist provisions, perhaps such BITs are no longer required in the first place. Several countries such as South Africa have completely renounced the practice of signing BITs. Brazil, on the other hand, does not provide for Investor State Arbitration due to the lack of consistency by Tribunals while giving awards and damages and prefers State – State dispute settlement instead. These developments have so far not shown any significant dip in investment into these countries.

3. Costs of Investor State Arbitration

Additionally, one must also quantify the costs associated with investor state arbitration and the exorbitant damages awarded for breaches, which are extremely high and can run into millions or even billions of dollars. Under such circumstances is not prudent to limit liability by the removal of MFN clauses, exemption for taxation and reserve regulatory space required to develop the country without becoming subject to investment arbitration cases.

Adding exhaustion of local remedies (another controversial issue) would also aid in reducing the claims that India would face in future. In fact, India, to an extent, seems to have modeled the BIT in a fashion which allows them to control the claim process instead of being at the mercy of the investor and constantly on the defensive. It has further learnt from previous mistakes and excluded all the scenarios which have in the past led to claims against it (Vodafone, White Industries, Carins).

4. Allow the same opportunity of growth to developing countries

Another angle to view this debate of regulatory space of a country versus the promotion of investment would be that the developed countries of today, (USA, Europe, Japan and Australia to name a few) attained this status without such shackles binding them in their respective development phase. Why should India then, be bound by such rules before they can make such investments?

While indeed a few years back taking such a strong stance against the might of the developed nations might have been unimaginable, perhaps the time has come for India to make its mark and start taking a stronger stance. The time is right for India to stand its ground as it has the negotiating power (soft power) to do so. As the world is swept with a wave of protectionism, perhaps it is time India also learnt how to gracefully ride these waves.

Girish Deepak is an alumnus of the National University of Advanced Legal Studies, Kochi. He is currently pursuing his Masters at the MIDS Programme in Geneva. Apart from utilising his time to read up on trade and investment, he also spends time either playing football or watching football.

3 thoughts on “The 2015 Model Bilateral Investment Treaty (BIT): The timing may just be right

  1. Hi Girish
    Does India have enough standing to bargain with the developed nations even today, in your opinion? We do need investments and are already in the midst of trade war. Do you think India would be able to stick to its position in case of BITs?

    1. Hey Apoorv. So my opinion on the issue is basically that India is already attractive enough, even without BITs, considering that we have really low labour costs and a huge potential consumer market. There have been several studies more over, none of whcih have directly linked FDI to the significa of BITs, i.e its still unclear whether signing BITs of itself makes India more attractive to investment.

      The signing of BITs on the other hand exposes India to a lot of liability in the form of investment arbitration claims. So instead of signing BITs which expose us we could instead focus on structural internal reforms in judiciary to make it more effective whcih would also in itself make india more attractive. This is in fact the approach South Africa has taken.

  2. Makes sense. I’ve been hearing a lot of opposition to the FTAs and BITs in IP circles. Given India’s population, it is a market which can’t be ignored. But labour costs are not that cheap in India now, though comparatively it may be cheaper. India’s stance on BITs does make sense. Thanks for the response Girish.

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