FDI in Indian economy

Indian investments and BITs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : ISDS

Mains level : Paper 3- Termination of BITs and its implications for India

The article examine the termination of agreement for the development of East Container Terminal by Sri Lanka in the context of unilateral termination of bilateral investment treaties by India.

Context

  • Recently, Sri Lanka terminated 2019 agreement with India and Japan that aimed to jointly develop the strategic East Container Terminal (ECT) at the Colombo port.
  • Apart from analysing the diplomatic fallout of this problematic decision for India-Sri Lanka ties, the issue also needs to be looked at through the prism of the India-Sri Lanka bilateral investment treaty (BIT).

India-Sri Lanka  BIT and its termination

  • In 1997, India and Sri Lanka signed a BIT to promote and protect foreign investment in each other’s territories.
  • It empowers individual foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations.
  • This is known as investor-state dispute settlement (ISDS).
  • Article 3(2) of this treaty provides that investments and returns of investors of each country shall, at all times, be accorded fair and equitable treatment (FET) in the other country’s territory.
  • The normative content of the FET provision has been fleshed out by scores of ISDS tribunals in the last two decades.
  • The tribunals have persistently held that an important component of the FET provision is that the host state should protect the legitimate expectations of foreign investors. 
  •  In a case known as International Thunderbird Gaming Corporation v Mexico, it was held that the concept of legitimate expectations relates to a situation where the host state’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure to honour those expectations could cause the investor (or investment) to suffer damages.
  • Sri Lanka, by signing the agreement to jointly develop the ECT at the Colombo port, created such expectations on the part of Indian investors.
  • However, the twist in the tale is that India unilaterally terminated the India-Sri Lanka BIT on March 22, 2017.
  • This termination was part of the mass repudiation of BITs that India undertook in 2017 as a result of several ISDS claims being brought against it.
  •  In cases of such unilateral termination, survival clauses in BITs assume significance because they ensure that foreign investment continues to receive protection during the survival period.
  • But, in the case of the investment in developing the ECT at the Colombo port, this survival clause will be inconsequential, since the agreement was signed in 2019, i.e., after India unilaterally terminated the BIT.

Important lessons

  • As a consequence of the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs.
  • However, an important attribute that perhaps has not received much attention is that BITs are reciprocal.
  •  BITs do not empower merely foreign investors to sue India, but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
  • Accordingly, given India’s emergence as an exporter, and not just an importer of capital, the government should revisit its stand on BITs.

Consider the question “Examine the implications of unilateral termination of bilateral investment treaties(BITs) by India.”

Conlcusion

India needs to adopt a balanced approach towards BITs with an effective ISDS provision. This will facilitate Indian investors in defending their investment under international law should a country, like Sri Lanka, renege on an agreement.

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