Law Commission suggests changes in BIT model to attract investors

New Delhi: The Law Commission of India on Thursday called for slew of changes in the draft model Bilateral Investment Treaty (BIT) introduced by the government in March to make it more investment friendly and transparent.

The commission, in its 260th report, has suggested changes to the most-favoured nation (MFN) clause and inclusion of dispute settlement mechanisms in the model treaty. The report also calls for removal of restrictions with regard to procurement.

BIT, an agreement establishing the terms and conditions for private investment by nations and foreign companies in India, is expected to replace all the existing bilateral investment protection and promotion agreements. India has so far signed 83 bilateral trade and promotion agreements, of which 72 are in force, according to data on the finance ministry website.

The report also said the government procurement should not be excluded from the treaty protection.

“Excluding public procurement could lead to the exclusion of many activities that would otherwise meet treaty objectives of contributing substantially to the host State’s development,” it said.

It also noted that absence of treaty protection could lead to an exodus of foreign investors.

The commission said it is not necessary to exclude taxation from the purview of the treaty as “power to tax is an integral part of the State’s police powers in international law”.

“The power to tax exists independent of a treaty, unless the tax itself is arbitrarily imposed to destroy the State’s regulatory freedom,” the report said.

Commission chairperson A.P. Shah, who submitted the report to Union law minister Sadananda Gowda, noted that the suggestions are in line with the government’s aim to encourage ease of doing business in India.

According to Naresh Thacker, partner (litigation and alternate dispute resolution) economic laws practice, the suggested changes to BIT will help in attracting investors. “The model text, in fact, seems reactionary and defensive. There are many aspects which would be unacceptable to an investor, so valid suggestions and reforms are much needed,” he said.

However, one of the glaring omissions in the model text, which the commission has not looked into, is the “guarantee to fair and equitable treatment” clause. “Over the last couple of decades, that guarantee is what investors world over have relied upon most for redressal of their rights. Unfortunately, the law commission has not suggested inclusion of the FET provision in the model text; rather it has merely suggested doing away with words like ‘egregious’, ‘outrageous ‘ and ‘manifestly abusive’ from the Standard of Treatment clause. This may yet act as a damper to investments,” Thacker said

The report has also suggested exclusion of the controversial most favoured nation clause, which has been a bone of contention in an Indo-Australian Bilateral Treaty in 2011. In terms of transparency, the commission has suggested that all documents in relation to the investment treaty should be made public.

“When substantial public resources are used in an investment treaty between two countries or a foreign corporation, there is no reason why related information should not be made public. This is a standard international practice,” said Anirudh Krishnan, partner, AK Law Chambers, and a member of the sub-committee of the Law Commission in this study.

“We have tried to find a balance between making India attractive to investors and minimizing risk for the government. There are reasonable caveats to the rights of the investor,” he said.

The most important aspect for an investor would be the dispute resolution mechanism and under the current model BIT, an investor has to exhaust local remedies before approaching the arbitration tribunal. “One of the suggestions is that the investor should not be barred from initiating arbitral proceedings after pursuing available local remedy in the host country. There cannot be a limitation of time as well to approach the arbitral tribunal,” said Anirudh Wadhwa, advocate and member of the Law Commission sub-committee.

Separately, the commission has also brought out a report titled Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations, with suggestions to address the growing challenge of international corruption.

The Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill of 2011 had lapsed with the dissolution of the 15th Lok Sabha, and the proposed recommendations are likely to be incorporated in the fresh bill of 2015.

This is a move to fulfil India’s obligations under the United Nations Convention Against Corruption, 2003 (UNCAC) of which India is a signatory. It has analysed the issue of accepting or giving bribe by a foreign official and establishes it as a criminal offence entailing a jail term of up to seven years while providing for certain exceptions under it. It also criminalizes the act of abetment of commission of the offence and an attempt at commission of offence, laying down term of imprisonment in each case.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.