Address investor concerns, don’t make BIT unusable
Given that as many as 17 foreign investors like Vodafone and Sistema have either threatened to, or have taken India to arbitration under various bilateral investment treaties (BIT) — India has a total of 83 BITs — you would think, as part of its make-in-India programme, the government would want to address the reasons for why firms need to use the BIT since, at the end of the day, a BIT is only a confidence-enhancing tool for foreign investors. Instead, it seems to be focussing on adding more exclusions to ensure firms don’t find it easy to use various BITs. While justifying its moves, the government’s argument is that several other countries, including the US, are either reworking their model BITs or are junking them. The model BIT, should the Cabinet clear it, has so many exclusions, it will apply to really very few cases. So, for instance, an enterprise has been defined as one that has ‘real and substantial business operations’ in India with a ‘substantial number of employees’. That single definition—and we haven’t even reached the clauses yet—can knock out a lot of potential companies looking to sue India under a BIT.
The model BIT rules out it being used by holding companies or investment companies, effectively ruling out a very large chunk of investments since most companies tend to invest through such structures. Nor is it clear if, say, a Dutch holding company coming in through Mauritius to take advantage of the taxation structure there will be covered by the Indo-Dutch BIT. Tax measures such as the retrospective tax ones that knocked the bottom out of companies like Vodafone and Cairn can no longer be remedied since the treaty specifically removes tax changes from the ambit of BITs. The model BIT also rules out protection to portfolio investors like The Children’s Investment Fund that objected to how the government was restricting Coal India’s profitability. No investors, the BIT adds, can claim their investment has been appropriated if a compulsory licence has been issued or if, say, a subsidy is given to a PSU or a state monopoly has been created—both would, naturally, affect the foreign investors’ business in India. If there is still any category of investor that can still file under a BIT, an overriding clause says any aggrieved investor must first exhaust all local remedies, or prove that the process for obtaining legal relief is so long-drawn, it is pointless to even pursue it.
Theoretically, an investor can still sue under BIT, but the conditions are so onerous, few projects are likely to make the grade. The idea of a BIT is to provide comfort to investors who are worried about not getting justice from India’s normal channels of remedial action, and who are worried about increasingly arbitrary government action. And it is expected that since, in a law-abiding country, there will be few such cases, the chances of the government getting sued will be low; meanwhile the comfort this will provide investors will far outweigh the costs from getting sued — in that sense, a BIT is a bit like selling an insurance policy to comfort investors. With all the caveats being put in, however, the foreign investor is pretty much left to the mercies of the legal system and its limited ability to deal with high-handed government behaviour. In terms of signalling comfort for investors, this is a really bad move.