In the past couple of years, India signed bilateral investment treaties (BITs) with a few countries — most prominently, with Israel and the UAE. The success of a BIT lies not in the headline investment numbers announced, but in the chances of a mutually-agreed-to framework leading to the effective implementation of such treaties.
Recently, EU President Ursula von der Leyen urged India and the EU to conclude pending investment agreement negotiations soon. Leyen believes the agreement will unlock the full potential of the free trade agreement (FTA) the two sides signed last year. Economic theory supports the idea that trade and investment are joined at the hip — more so when we consider the current realities of global supply chains.
But, the fact is that the EU and India initiated separate negotiations on trade and investment in 2022, and the trade talks alone reached their logical conclusion. An investment deal is yet to materialise — thanks to differences between the two sides on several aspects of investment protection, including taxation, the most favoured nation (MFN) clause, and most conspicuously, the investor-State dispute settlement (ISDS) mechanism. These differences seem to be irreconcilable at the moment.
That said, stuck BITs are not just an India-EU problem. India is reportedly facing similar difficulties in its investment negotiations with other countries, including the UK. It is worth noting here that though India adopted a new BIT framework in 2015 — unilaterally terminating earlier BITs, including with EU member-countries — this framework has yielded investment agreements with just six-seven countries so far.
It is not as if India erred in adopting a new BIT framework — it was certainly not the only country disenchanted with the 2010s’ paradigm for investment treaties. In the last 15 years, there has been a global backlash against first-generation investment treaties, many of which were signed in the 1990s — a reflection of the then-pervasive Washington Consensus. First-generation BITs featured extensive protection for foreign investment with limited scope for State intervention to fulfil social needs. This, borrowing from the work of economic historian Karl Polanyi, represented the dis-embedding of the economy from society. Ever since foreign investors began bringing ISDS claims against States — challenging a wide array of sovereign regulatory measures — there has been a Polanyian countermovement focused on re-embedding the economy within society, in the context of BITs.
Apart from recognising the State’s power to regulate, this countermovement has taken the form of States de-legalising legacy frameworks governing international investment. States are wresting back control over foreign investment relations, which had been delegated to international law and global institutions earlier. Despite a few instances of extreme de-legalisation — States breaking away from all international investment laws — many countries such as India haven’t walked away from BIT.
They are attempting the “re-legalisation” of the investment treaty regime — by altering the terms. For instance, the EU is seeking to replace ISDS with an investment court system. This process will necessitate a rewrite of the existing rules of engagement for foreign investment and the creation of a new normative order for foreign investment relations.
The new investment-treaty practice of several countries/blocs needs to be viewed through this lens. The problem is not India seeking to de-legalise its international investment relations to create a new normative order, it is the degree of de-legalisation. Has India taken the de-legalisation process too far? Yes, for the three chief reasons. First, India’s new investment treaty practice leads to the atrophying of its commitment to substantive investment protection obligations — by altogether excluding the MFN rule from its binding commitments. In other words, even if India discriminates against investment by one State, favouring a different one, the investor from the first State will be left without remedy. Second, India seeks to limit the jurisdiction of ISDS tribunals by excluding a large number of critical issues, such as taxation, from the BIT’s ambit. Thus, even if India were to impose arbitrary taxes, those can’t be challenged under the BIT. Finally, India’s insistence that foreign investors pursue domestic remedies for five years before initiating an ISDS claim does not inspire investor confidence given the tardy pace of justice-dispensing in the country.
India must temper the degree of de-legalisation of its foreign investment relations and align it with that of countries/blocs such as the EU and the UK. This will provide effective and enforceable treaty-based protection for foreign investment without compromising the State’s ability to regulate in the public interest.
Prabhash Ranjan is professor and vice dean (research), Jindal Global Law School. The views expressed are personal
