No Ifs or Buts on BITs

The Economic Times     30th December 2020     Save    

Context: The recent Vodafone case on retrospective taxation and The Permanent Court of Arbitration’s (PCA’s) displeasure over India’s failure to uphold its obligation under Bilateral Investment Treaty (BIT) exemplify how arbitrary exercise of sovereign powers could cost India dearly — and that sovereign commitments under international treaties must be honoured.

 Significance of BITs:

  • Definition: These are international reciprocal agreements between two countries that aim to promote and protect investments of one country in the territory of the other.
  • BITs play an unparalleled role in protecting Foreign Direct Investment (FDI) as they contain ‘survival clauses’ that extend treaty protections for a fixed term beyond termination.
    • According to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2020, India is among the top 10 FDI destination.
  • BITs contain subrogation provisions where an insurer could exercise rights and assert claims of the insured investors under a BIT, pursuant to the terms of the insurance.
  • Several insurers depend on a BIT, or access to a dispute resolution mechanism for a foreign investor to underwrite insurance, determine insurance premium and, thus, mitigate investors’ risks.

Ramifications of Treaty Termination: An ensuing spate of BIT cases compelled India to terminate 58 BITs in 2017. The number stands at 69 today. This is mainly because of losses in those treaties to India.

  • In their absence, fresh foreign investors no longer have the protection of international law against the unchecked exercise of legislative, executive and judicial powers by the State.
  • It could significantly increase the cost of investments due to lack of insurance or higher risk premium and, hence, affect the return on investments, which directly affects India’s ability to attract FDI.
  • The public exchequer continues to loom under a hanging sword of international law violations and the threat of paying out large compensations.
    • In the recent ruling by the PCA, Government of India will have to pay Cairn Rs 9,000 crore.

Conclusion: India recognizes that realizing the vision of atmanirbharta heavily depends on foreign investment. Termination of BITs, however, is anything but a votive gift to investors.