Bilateral investment treaties (“BITs”) are agreements between countries that attempt to provide protections to investors from one state investing in the other (the “host state”). India’s experience with BITs and investor state disputes tracks the nation’s economic trajectory. India signed its first two BITs – with the United Kingdom and Russia – in 1994. This coincided with India’s economic liberalization in the early 1990s under the helm of the then-finance minister Manmohan Singh, who noted India’s efforts at the time to “negotiat[e] bilateral investment treaties with several major investor countries” in his February 1994 budget speech. And, corresponding with the consequent increase in foreign direct investment, India signed more than eighty BITs in the next two decades, as well as free trade agreements with investment chapters.
BITs are a two-way street. On the one hand, India (as the host state) can be sued by foreign investors investing capital in the country. On the other hand, Indian investors with investments in foreign countries that are counterparties to BITs with India also have the right to sue those foreign countries. Accordingly, BITs are not only instrumental in attracting foreign direct investment into the country but they also promote outward investment.
- India’s Backlash Against BITs
The early 2000s saw India being named as a respondent by foreign investors in nine investor state disputes, some under contracts and some under investment treaties. Each of these nine disputes related to the Dabhol power project in Maharashtra, which was at the time one of the largest sources of foreign direct investment in the country. These disputes reportedly settled without a final BIT award.
It is only a few years later – from 2010 onwards – that a wave of investors who had flocked to India post-liberalization started to exercise their rights under the BITs to sue India for violation of their treaty rights. From 2010 to date, India has been named as respondent in twenty investor-state arbitrations including, for example, CC/Devas et al. v. India (involving the expropriation of the investors’ interest in a long-term contract for the lease of satellite spectrum), Vodafone v. India (involving a retrospective transaction tax imposed by the state over claimants’ acquisition of India telecoms business) and Vedanta v. India (also relating to a tax bill imposed by the state for failure by the investor to pay taxes on capital gains). Some but not all of these arbitrations were decided against India with awards running in hundreds of millions of dollars of damages. India’s first reported BIT loss in White Industries v. India, although involving relatively modest amounts, was particularly notable in that an Australian investor seeking to enforce an ICC award in Indian courts for more than nine years was able to successfully invoke the India-Australia BIT’s most favored nation (“MFN”) clause to benefit from a provision in the India-Kuwait BIT protecting investors against judicial delays.
Apparently in reaction to the claims against it, in 2015 India revised its model BIT (the “2015 Model BIT”). The 2015 Model BIT limited investors’ rights and made it more difficult for investors to sue the country. For example: (i) the 2015 Model BIT has a requirement that foreign investors must pursue local remedies for at least five years before commencing a BIT arbitration against India (Article 15); (ii) the scope of protected “investments” is narrower (Article 1.4); (iii) the 2015 Model BIT specifically excludes any taxation measures imposed by India (Article 2.4(ii)); and (iv) the 2015 Model BIT does not include a MFN clause. In parallel to revising its model BIT, from 2015 onwards, India unilaterally denounced seventy-six of its existing BITs. Currently, India only has eight BITs in force.
- Sunset Clauses in India’s Now-Terminated BITs allow Foreign Investors to Continue Suing India and Indian Investors to Sue Foreign States
Notwithstanding India’s unilateral denouncement, given that the now-terminated BITs included “sunset clauses,” foreign investors who invested in India prior to termination of the BITs still have the right to invoke the treaty protections for a further period of 10 to 15 years. In other words, India may continue to face claims from investors under the now-terminated BITs for the next decade or so.
For example, India unilaterally denounced the 1995 BIT with Netherlands in December 2016. However, Article 16(1) of that BIT provides: “[i]n respect of investments made before the date of the termination of the present Agreement the [BIT] shall continue to be effective for a further period of fifteen years from that date.” Accordingly Dutch investors that made qualifying investments in India prior to December 2016 are entitled to commence arbitrations against India under the now-terminated BIT for another fifteen years until December 2031. And this is not just a hypothetical example. There have been several recent cases where foreign investors are relying on sunset clauses to continue to sue India. For example, in Earlyguard v. India, four years after India terminated the India-United Kingdom BIT, in 2021 a U.K. company (apparently owned by Japanese conglomerate Mitsui) subsidiary filed an arbitration against India under the treaty over a US$324 million retroactive tax bill.
By the same token, Indian investors, whose rights have been curtailed by the termination of Indian BITs, are also able to rely on the sunset and survival clauses. For example, in Patel Engineering Limited v. Mozambique, an Indian investor commenced a BIT against Mozambique by expressly invoking the terminated “[t]reaty’s 15-year sunset provision, which guarantees the Treaty’s continued effectiveness until 21 March 2035, for investments made prior to its termination.” That dispute relates to Mozambique’s decision to award a contract to a third party notwithstanding a memorandum of interest signed with the Indian investor and is still ongoing.
- The Future of BITs in India
Following the termination of its existing BITs, India sought to renegotiate new bilateral treaties with its counterparties based on its 2015 Model BIT. That effort, to date, has not met with success. Indeed, in September 2021, India’s Parliamentary Standing Committee on External Affairs issued a report noting with concern that:
The Committee treat the number of BITs/Investment Agreements signed post 2015 and the number under negotiations as inadequate and find that it is not commensurate with the growth of India’s interest in this domain and our rising stature in global affairs.
In addressing the Committee’s concern, a legal expert testifying before the Committee recommended that “India needs to revisit its Model BIT in order to strike a balance between giving investors the rights and also recognising the right of the Host State to regulate in public interest.” Based on its review, the Committee recommended the 2015 Model BIT be further reviewed to arrive at a more “balanced” text. In a subsequent July 2022 report, the Committee noted that the government in its ongoing BIT negotiations is considering amendments to the 2015 Model BIT focusing on “on both the investor’s right to get protection and also sovereign interest and States right to regulate.” More recently, in the context of the August 2023 G-20 summit in New Delhi, it has been reported that India is currently negotiating a new bilateral investment treaty with the United Kingdom and that the terms of this treaty will “vary significantly” from India’s 2015 Model BIT.
When one considers the future of investment treaty arbitrations in the Indian context, there are two perspectives that need to be accounted for. The first perspective is that of Indian sovereign. It is keeping in mind the sovereign perspective that India terminated its prior BITs and proffered the 2015 Model BIT, which clearly favors the state’s interests. The second perspective – which has largely gone ignored – is that of the Indian investors.
India has increasingly become a capital-exporting country. Even in the context of India-U.K. relations, India is no longer just a capital importer. The Tata Group’s recent decision to invest over US$5 billion towards building an electric car battery factory in the U.K. constitutes “one of the largest ever investments in the UK automotive sector.” As the home state of capital-exporters, India’s efforts in renegotiating its BITs should rationally factor in the interests of its own investors who are looking to invest abroad.
Indeed, there are at least eleven reported cases of Indian investors suing host states including Saudi Arabia, Poland, Germany and the U.K. While Indian investors – such as the investor in Patel Engineering v. Mozambique – have thus far been able to rely on the terminated BITs sunset clauses, those protections are set to expire in the next decade or so. That means that post 2035 or thereabouts, Indian investors investing in, say, Venezuela, will have no ability to have recourse to international arbitration but will have to litigate their claim in Venezuelan courts. Accordingly, the Parliamentary Standing Committee’s recommendation to consider revisions to the 2015 Model BIT and expedite negotiations with other countries is critical not only to attract foreign direct investment into India but to ensure that Indian investors who are investing outside the country have protections in place.
