India may provide most favoured status to RCEP investors

Development marks significant easing of investment rules that could also become the template for future bilateral investments treaties

Asit Ranjan Mishra
First Published12 Oct 2015, 12:22 AM IST
Photo: Hindustan Times<br />
Photo: Hindustan Times

New Delhi: India is likely to grant most favoured nation (MFN) treatment to 15 countries that are in talks to conclude an agreement on the Regional Comprehensive Economic Partnership (RCEP), marking a significant easing of investment rules that could also become the template for future bilateral investments treaties.

The offer to provide a level playing field to foreign investments without discriminating among source countries has been absent in India’s model Bilateral Investment Treaty (BIT) that was in the public domain for discussions and is now under consideration for a cabinet decision.

To start with, it is likely to be included in the Indian submissions to negotiations of the proposed 16-nation RCEP starting in Busan, South Korea, on Monday.

“We have taken a forward approach on investment. Our offer will include elements of both ‘pre-establishment’ and ‘post-establishment’ commitments,” a government official said, requesting anonymity.

Pre-establishment commitments oblige the host country to provide protection to foreign investors during the process of an investment being made. Post-establishment commitment, on the other hand, refers to the protection offered during the life-cycle of an investment. Such protection mostly involves granting “national treatment”—treating foreign and local investors equally in similar circumstances—and MFN status.

However, most countries including India provide national treatment to foreign investors only after an investment is made—that is, at the post-establishment stage. The US has been demanding that India accord its investors national treatment at the pre-establishment stage—the main reason for delays in India and the US agreeing a proposed BIT.

It will be difficult for India to accord national treatment at the pre-establishment stage, said T.S. Vishwanath, principal advisor on trade policy at APJ-SLG Law Offices.

“To satisfy investors and source countries, it may talk about facilitating investment in a way that encourages transparency and make sure all partners are treated equally,” he said.

When it comes to MFN treatment, India so far has been providing it at both the pre- and post-establishment stage. However, the government withdrew the provision from the model BIT after being dragged into international arbitration by foreign investors who sued for discrimination citing MFN commitments made by India to other countries in bilateral treaties.

Such a trend has come to be known as “treaty shopping”. In the case of White Industries versus the government of India, for instance, the Australian investor cited a favourable substantive MFN provision in the India-Kuwait BIT that it said was absent in the India-Australia BIT. The Australian company, which argued for including the provision in the India-Australia BIT, won the case in 2012.

India’s Law Commission, which studied the model BIT, has pointed out that while the absence of an MFN provision will prevent a foreign investor from indulging in treaty shopping, it could also expose the investor to the risk of discriminatory treatment by the host state in the application of domestic measures.

“Thus, absence of an MFN provision does not balance investment protection with regulation. In order to achieve this balance, India could consider having an MFN provision whose scope is restricted to the application of domestic measures. This will ensure non-discriminatory treatment to a foreign investor, and, at the same time, will not allow a foreign investor to indulge in treaty shopping,” it said in its review.

The government now seems to have accepted this recommendation by the Law Commission and has included the same in its submission to the RCEP.

At the Busan meet of RCEP members, India is unlikely to submit its actual tariff lines of commodities for tariff elimination as the list is yet to be finalized, the official cited earlier said. India has already submitted its positive list on services.

Started in May 2013, RCEP comprises the 10 economies of the Association of Southeast Asian Nations (Asean)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam—and six of its free trade partners—Australia, China, India, Japan, New Zealand and South Korea.

In the Kuala Lumpur RCEP ministerial meeting, held this August, members of the trade grouping sealed the modalities or the initial offers for tariff liberalization to each other after China agreed to accept India’s initial offer of 42.5% market access.

According to the agreement, India followed a three-tier approach for making tariff liberalization offers based on whether it has a free trade agreement with the country or not. Among its free trade partners also, it made separate offers to Asean on the one hand and Japan and South Korea on the other.

The grouping envisages regional economic integration, which will lead to the creation of the largest regional trading bloc in the world, accounting for nearly 45% of the world’s population with a combined gross domestic product of $21.3 trillion.

The regional economic pact aims to cover trade in goods and services, investment, economic and technical cooperation, competition and intellectual property. India’s interests lie mostly in services, the removal of technical barriers to trade such as those taken under sanitary and phyto-sanitary measures, and trade in goods such as pharmaceuticals and textiles.

Vishwanath said that after the US-led Trans-Pacific Partnership trading group concluded its talks last week to reach an agreement, there will be more pressure on the RCEP to speed up negotiations. “However, it will take time for RCEP members to conclude a deal. India has taken a balanced position at the RCEP and going forward it will use the flexibilities available to us to finalize the deal,” he added.

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First Published:12 Oct 2015, 12:22 AM IST
HomepoliticspolicyIndia may provide most favoured status to RCEP investors

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