Investment treaties again – Opinia News

Is the government still undecided on how to balance the dual goals of strengthening sovereign policy space and providing foreign investors with the comfort they seek in the face of potential policy volatility? Several provisions of the new bilateral investment treaty (BIT) with the UAE, which deviate slightly from the revised model text of such pacts introduced in 2015 and which lean towards the foreign investor, raise this question. India has signed no more than half a dozen BITs because it gave the model text a “restrictive” character by expressly obliging a foreign investor to exhaust local institutional and judicial remedies within five years before resorting to international arbitration. The country was clearly in no rush to sign new BITs, having lost high-profile arbitration cases with Vodafone and Cairn over the past few years. In fact, even the reason for the mass annulment of earlier format treaties – 77 out of 80 such older BITs were abrogated by India by 2016 – was the realization that it was easier for a foreign investor to thereby involve the Indian government in international arbitration.

Of course, BITs by definition do not offer great concessions. The obligation is simply that a foreign investor will be treated on an equal footing with a domestic investor, under the so-called “national” treatment, i.e. fair and equal. The investor will be protected against expropriation (taking over of assets by the sovereign), transfer (of resources), and will also receive compensation for losses resulting from any “internationally illegal act” committed by the sovereign. Simply put, it is simply a safeguard against intrusive and hostile behavior by the host country. Any additional incentives for foreign investors are usually granted in other ways.

As for India, there are cases where Apple is offering indirect tax concessions, import duty concessions for EV manufacturers, and production-linked incentives that are available to both domestic and foreign investors. Of course, easier foreign direct investment approvals, unlimited foreign ownership and ease of doing business are offered. If a foreign investor is really interested, even a coercive policy, such as high import tariffs, can be effective. India is also using free trade agreements to offer binding commitments to investors from partner countries, invoking “mode 3” of service delivery (trade presence), as defined in multilateral rules.

That said, there is little evidence to suggest that developing countries receive greater FDI flows simply because of the number of BITs they have signed. Cross-border investment is primarily a function of commercial viability. When it comes to basic guarantees, building institutional capacity will help gain the trust of global investors, not treaty promises. The country’s court delays are frustrating and contract enforcement is burdensome. In such circumstances, by allowing UAE investors to turn to international arbitration if the Indian court system is unable to resolve the dispute within three years (rather than the five years in the model text), the government has exposed itself to the risk of more frequent and more expensive arbitration matters. The value of UAE-India investment exchange currently stands at just $5-6 billion annually, with flows almost evenly balanced. However, the West Asian kingdom is currently India’s third-largest trading partner after the US and Europe, demonstrating the huge untapped potential for bilateral capital exchange. However, adding portfolio investment under the new India-UAE treaty goes beyond the revised model text and is fraught with risk.