Protecting Investments of Indian Investors Abroad – The Other Side of The (Bit) Coin

PROTECTING INVESTMENTS OF INDIAN INVESTORS ABROAD – THE OTHER SIDE OF THE (BIT) COIN

Indian Investors Can Protect Their Past and Future Investments Abroad Under the Sunset Provisions of The Terminated Bits…

India has terminated nearly seventy five of its Bilateral Investment Treaties ("BIT") since the publication of the revised Model Bilateral Investment Treaty, 2015 ("Model BIT"). A BIT protects investors of either parties from illegal conduct of the other party. The termination of BITs by the Indian government does not only restrict the rights of foreign investors in relation to their Indian investments but it also equally affects Indian investors seeking to safeguard their investments abroad. The latter aspect has not been analyzed as frequently, and this is the proverbial other side of the (BIT) coin that is examined below.

APPLICATION OF TERMINATED BITs TO PROTECT PAST INVESTMENTS

After the spate of terminations alluded to above - only seven BITs and four free trade agreements with investment protections (FTA) involving India are in force today.¹

The present article will focus on investment protections available to Indian investors in the top 10 destinations of direct investment from India over the last twenty years. The list includes Singapore, Mauritius, USA, Netherlands, UK, UAE, Channel Islands, British Virgin Islands (BVI), Russia and Cyprus in that order.²

With the exception of Singapore and the UAE, none of the remaining countries have an active BIT/FTA with India. India has never entered into a BIT with USA, while the BITs with Mauritius, the Netherlands, the UK, Russia and Cyprus were terminated. The UK is responsible for international relations of the Channel Islands and BVI, and it appears that the India-UK BIT was never extended to these territories through the mechanism specified in the BIT.³

In relation to Singapore, which also happens to be the top destination of Indian capital going overseas, India has a Comprehensive Economic Cooperation Agreement (CECA).⁴ Chapter 6 of the CECA has a number of investment protections, including national treatment, protection against expropriation, compensation for losses due to war/civil strife, and free transfer of capital. Any disputes regarding the breach of such obligations can be agitated before an arbitral tribunal under the investor state dispute settlement (ISDS) mechanism. Notably, Indian investors in Singapore do not have a right to receive fair and equitable treatment including the protection of the investor's legitimate expectations under the CECA.

Under the India-UAE BIT,⁵ Indian investors have similar rights as above but also enjoy the right to receive fair and equitable treatment and a Most Favored Nation treatment. Any disputes involving an investor is subject to an ISDS mechanism.

Protections similar to the India-UAE BIT were also available to Indian investors in respect of their investments in Mauritius, Netherlands, UK, Russia and Cyprus. Since the termination of the respective BITs, the protections have ceased for any new investments. However, investments made before the date of termination will continue to be protected for a period of up to 15 years from the date of termination under the 'sunset' provisions of the BITs.

The protections available under the sunset provision can vary across BITs. For instance, the sunset provision of the India-Mauritius BIT⁶ is available for 10 years from the date of termination or any longer period that is agreed in the relevant investment contract. It also covers investments that are approved, but not made, before the date of termination unlike other terminated BITs. It is therefore important to analyze the terms of the applicable BIT to evaluate the precise protection available for past investments.

PROTECTION FOR INVESTMENTS MADE AFTER THE TERMINATION OF THE BITs

As investments made after termination of the BITs are not protected under the 'sunset' provision, the investor should consider if they can restructure their present or future investments through an investment vehicle (like a company) in a third country which has robust protections with the host state of investment.

Investment protections under a BIT/FTA are based on the principle that it extends to investors who are nationals of a contracting State other than the host State in which the investment is made. The nationality of the investor, thus, determines whether it is entitled to take the benefit of any treaty protections. In principle, an investor can alter nationality through a corporate restructuring in order to take advantage of treaty protections under a separate treaty. For instance, an Indian investor proposing to invest in the UK (with whom India does not have a BIT) can incorporate a company in Singapore to receive protection under the Singapore – UK BIT.

However, corporate restructuring to avail treaty protection is not legitimate in all circumstances. The timing of the restructuring is a crucial factor. The tribunal in Mobil v Venezuela⁷ has held that it is a "perfectly legitimate goal" to restructure investments to gain treaty protections in relation to future disputes. However, restructuring investments only in order to gain jurisdiction under a BIT for a pre-existing dispute would constitute an "abusive manipulation of the system of international investment protection." Therefore, investors should restructure their investments well before a dispute is foreseeable to avoid challenges based on abuse of rights or lack of good faith by a Respondent State.

The other relevant factor to consider before restructuring is if the specific BIT/FTA between the third state and the host state has a 'Denial of Benefits' clause. The clause addresses concerns about companies initiating treaty claims under a BIT/FTA when they have no connection to their home states other than their incorporation.

These clauses typically require a link between the company and its home state of incorporation by directing that the company have 'substantial business activities'. Article 10.17 of the India-Korea Comprehensive Economic Partnership Agreement8 and Article 6.9 of the CECA9 are instances of this clause. It is important to consider the specific terms of a BIT/FTA and examine if the investment vehicle will be able to satisfy the test prescribed in such a clause, if there is one.

Conclusion

Indian investors can protect their past and future investments abroad even if the Indian government has terminated most of its BITs. This can be achieved under the sunset provisions of the terminated BITs, or by restructuring their present or future investments through an investment vehicle in a third country that has robust treaty protections with the host state of investment. In either case, a comprehensive analysis of the applicable BITs/FTAs and advance planning are crucial.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.