An India-UK investment treaty might soon be clinched

Mint | 1 November 2023

An India-UK investment treaty might soon be clinched

by Jyoti Singh

The India-United Kingdom (UK) Free Trade Agreement (FTA) negotiations are currently at a very crucial juncture. Both countries are moving closer to signing the deal. Contentious aspects of the agenda, such as intellectual property rights, rules of origin and a bilateral investment treaty (BIT) have been under discussion. At its monthly trade briefing in early October, India’s ministry of commerce said that talks were at an advanced stage and efforts are currently underway to resolve the differences. The two countries seem to have moved towards common ground on dispute settlement, which was the most controversial part of the BIT, in an effort to ensure that this treaty is finalized at the same time as the FTA for goods and services.

The first-generation BIT between India and the UK was signed in 1994, which also happened to be India’s first experience with such a treaty. However, in the aftermath of the White Industries case, involving the alleged violation of a BIT with Australia, India decided to terminate all its 83 BITs with foreign countries; termination notices were sent to 77, including the UK, in 2016, and the Indian government decided to revise its model BIT. Several BITs that were to be terminated had “sunset clauses," which provided for continuing protective effects up to 10 or 20 years after their termination. The India-UK BIT is still under the sunset period.

Notably, while investment protection is not a chapter under the proposed FTA, it is being negotiated separately, and it was a few provisions of the BIT that the two countries were reported to have been at loggerheads on, with dispute resolution one of the most prominent disagreements. While India was insisting on the inclusion of a clause on exhaustion of local remedies (ELR), for example, the UK was not keen on this clause under provisions of dispute settlement. The ELR clause requires that an investor should first lodge its claim with the competent domestic courts or administrative authorities and exhaust all judicial and administrative remedies before initiating an international arbitration process. Once that effort is made for a period of at least five years, the investor may commence international arbitration proceedings by transmitting a notice of dispute to the defending party. An ELR clause, which has become a customary rule of international law, aims to safeguard the sovereignty of countries that are investment destinations, and international scholars like M.C. Porterfield, who have advocated the use of local remedies before resort to international arbitration, argue that this requirement strengthens the rule of law in host states.

Since India has been a witness to many investment treaty arbitrations as a respondent, of late, it’s unease with regard to investors directly going for international arbitration is understandable.

The pursuit of domestic remedies by investors has been criticized for leading to delays and increasing costs, in particular, as in many states it can take several years and multiple judicial reviews before a final judgement is delivered. According to one critic, an ELR clause could also carry disadvantages for the host state, as “public proceedings in the domestic courts are likely to exacerbate the dispute and may affect the host State’s investment climate." The UK might have had similar concerns. Nevertheless, there is reason to believe that both sides have been open to changed positions in the ongoing negotiations, ensuring flexibility, and India may back away from its approach under the model BIT in negotiations with the UK and may also drop the ELR clause insistence as both countries seek to reduce the time frame for settling investor-state disputes.

Another issue that is seen to bother foreign investors is India’s narrowed-down definition of ‘investment’ needed to qualify for BIT protection, from an ‘asset’ based to an ‘enterprise’ based one. The first-generation BITs signed by India had an ‘asset’ based definition of investment, which was replaced in India’s model BIT by an ‘enterprise’ based one. Investment can be defined either way. The latter formulation defines investment as the establishment or acquisition of an enterprise in the host state. By contrast, the asset-based definition is broader, covering more than just capital or resources that have crossed borders with an intent to create an enterprise. Experts point out that an asset-based definition of investment means that every kind of asset, moveable and immoveable, could qualify as ‘investment’ and enjoy protection under bilateral treaties, irrespective of whether such assets contribute to the development of host countries, whereas the purpose of having an enterprise-based approach is to narrow the scope of protected investments and reduce the potential liability of the state in case of investor-state dispute settlement claims. India has had its own share of ordeals that prompted it to switch definitions.

As reports suggest, Indian policymakers have indicated that the department of economic affairs in the ministry of finance would have to make concessions on the model BIT, and they have also stipulated tweaks for some of the country’s important trade partners. This demands some boldness, as moving away from the model BIT may possibly prove to be something of a challenge. If, however, both India and the UK eventually manage to ink a BIT that’s mutually acceptable, it could prove to be a major win for India, as the country has not signed any BIT with a major economy after the model BIT was adopted.

source: Mint