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Protecting investor rights

Protecting investor rights
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First Published: Mon, Apr 23 2012. 09 05 PM IST

Jayachandran/Mint
Jayachandran/Mint
Updated: Mon, Apr 23 2012. 09 05 PM IST
Investor rights are making headlines these days as a number of foreign firms are threatening to take the government of India to arbitration for its failure to protect their rights under Bilateral Investment Promotion and Protection Agreements (BIPPAs) and Comprehensive Economic Partnership Agreements (CEPAs). According to information posted by the finance ministry, India has signed 82 BIPPAs, of which 72 are in operation. Besides, India has signed agreements with its partners to protect foreign investment in their respective jurisdictions that are part of CEPAs.
Jayachandran/Mint
The issue gained currency after the outcome of the first dispute in which a foreign firm won a case against the government of India for its inability to protect investor rights by invoking the investor-state dispute provisions included in BIPPAs. The provisions allow foreign investors to initiate dispute-settlement proceedings directly against the host state.
The case involved an Australian firm engaged in the mining business, White Industries Ltd, and Coal India Ltd, which India lost in a tribunal of the United Nations Commission on International Trade Law (UNCITRAL) in Singapore. The damages could be well in excess of A$13 million. Coal India had contracted White Industries in the late 1980s for developing a mine. The Australian firm was to supply equipment and services for the mine and also undertook to provide production guarantees over which the dispute began.
White Industries approached the UNCITRAL tribunal after it was unable to get an award given in its favour by an International Chamber of Commerce tribunal based in Paris enforced by Indian courts. Its justification for approaching UNCITRAL was that India, “by the actions of its courts and by the actions of Coal India” had breached several provisions of the India-Australia BIPPA. White Industries’ argument was that its interests in India constituted an act of investment, since the term “investment” was defined in BIPPA “in the broadest terms”. Substantiating its claim, the firm alluded to two of the definitions of “investment” included in BIPPA: “right to money or to any performance having a financial value” and “business concessions and any other rights required to conduct economic activity”. India argued otherwise, but the tribunal found ample justification to consider the claims that White Industries had made.
Although White Industries made its initial claims citing the provisions of the India-Australia BIPPA, it strengthened its claims at a subsequent stage by citing provisions of the India-Kuwait BIPPA, which affords a greater degree of investor protection. The foreign firm could do so by invoking the most favoured nation clause in the India-Australia BIPPA (and all other BIPPAs as well), which states that the treatment to investors from Australia shall not be less favourable than that accorded to investors of any third state. This implies that in the event of a dispute, foreign investors can opt for the provisions of the agreement, which best suit their interests, from among the available BIPPAs that India has signed.
The White Industries case has raised a number of questions about BIPPAs, the relevance of which have increased in light of the reports that several foreign firms are queuing up to start arbitration proceedings against the government to seek redressal of what they consider the abridgement of their rights. This development has evoked a response from some quarters that the BIPPAs that India has signed need to be reviewed. A review seems the right step forward since Indian BIPPAs have not been subjected to a thorough-going review, which some of the mature economies such as the US have routinely done. The most recent of the reviews resulted in the 2012 model Bilateral Investment Treaty (BIT).
One of the key planks on which the US has been reviewing its BITs is to ensure that these agreements are consistent with the public interest and the administration’s overall economic agenda. In fulfilment of these objectives, a major change incorporated in the model BIT in the previous review undertaken in 2004 was narrowing the definition of investment. Following this trend, the 2012 model BIT defines investment to include every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. This implies that the US will provide protection only to those investors that have undertaken a degree of risk by committing resources in its territory.
A disconcerting fact emerging from the implementation of BITs is the steep increase in disputes between foreign investors and states. This has happened largely because policies host states have adopted in pursuit of public policy objectives have run counter to investor rights. Investors, who have enjoyed virtually untrammelled freedom to operate in their host countries because of BITs, have exercised their rights by using the investor-state dispute provisions to approach a tribunal of their choice for the settlement of disputes. Several countries have raised a red flag against investor-state dispute provisions: among the more recent is Australia’s opposition to the inclusion of these provisions in the proposed Trans-Pacific Partnership Agreement.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi
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First Published: Mon, Apr 23 2012. 09 05 PM IST
More Topics: Biswajit Dhar | Investor | Economy | BIPPAs | CEPAs |