Shri Narendra Modi
Shri Narendra Modi
Prime Minister of India
International Trade
Stocktaking of India Bilateral Agreements for the Promotion and Protection of Investments
WT/WGTI/W/71 13 April 1999
Working Group on the Relationship between Trade and Investment (99-1468)

The following communication, dated 22 March 1999, has been received from the Permanent Mission of India with the request that it be circulated to Members.

Stocktaking of India Bilateral Agreements for the Promotion and Protection of Investments
  • Many developing countries have gradually opened up their economies and are actively soliciting foreign direct investment (FDI) primarily to attract capital in the hope of availing with it foreign technology and management skills. In view of the increasing number of options available to the foreign investors for investing their money, they are seeking destinations which afford highest yield, provide hospitable investment climate, protection of their investment and rights of repatriation of their investment/returns on investment.
  • The need for investment protection differs from country to country. For a country with strong macro-economic parameters and a sound political system, investment protection may not be a strong factor in determining the investment destination. On the other hand, countries with weak economies and unstable political systems may require a strong element of investment protection. Therefore, various countries have been entering into Bilateral Investment Promotion and Protection Agreements (BIPAs) or Bilateral Investment Treaties (BITs). The agreements by and large have standard elements and provide a legal basis for enforcing the rights of the investors. Typically, BIPAs try to “Promote” foreign investment through “protection”, this is to say, by assurance to foreign investors that foreign investment that has been admitted in accordance with the host country’s policies, laws and regulations is guaranteed fair and equitable treatment including national and MFN, full and constant legal security and dispute resolution through international mechanism including for investor to state disputes.
  • India has also pursued a policy of entering into BIPAs with a view to providing predictable investment climate to foreign investment in India as well as to protect Indian investments abroad. Since signing the first BIPA with the United Kingdom in March 1994, India has signed BIPAs with 25 countries. Agreements have also been finalized with 9 other countries and negotiations are going on with another 7 countries. Many of these countries are developed countries. India has been conducting negotiations for BIPAs based on an investment promotion and protection policy drawn up in consultation with all concerned Ministries of the Government of India incorporating Indian sensitivities, while taking note of several other bilateral agreements which have been negotiated earlier by the other countries.

Some of the main features of BIPAs signed by India are:

  • Definition of Investment: Investment is defined as every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws of the contracting party in whose territory, the investment is made and in particular, though not exclusively, includes:
    • movable and immovable property as well as other rights such as mortgages liens or pledges;
    • shares in the stock and debentures of a company and any other similar forms of participation in a company;
    • rights to money or to any performance under contract having a financial value;
    • intellectual property rights, goodwill, technical processes and know how in accordance with the relevant laws of the respective contracting party;
    • business concessions conferred by law or under contract, including concessions to search for and extract oil and other minerals.
      As may be seen, in Indian BIPAs the coverage and scope of investments is determined by the national laws of the contracting parties.
  • Scope of the agreements: The agreements apply to all investments made by investors of either contracting party in the territory of the other contracting party, accepted as such in accordance with its laws and regulation.
  • Most-favoured-nation (MFN) Treatment: Investment from the contracting party shall not be given less favourable treatment than that accorded to investors of any third state.
  • National treatment: Foreign investments are given the same treatment as given to domestic investments. National treatment is, however, not given to the foreign investors. As per India’s present foreign investment policy, foreign investors have to follow a different investment. Thus the treatment accorded is different from treatment extended to Indian investors. However, taxation matters are an exception to MFN and National Treatment.
  • Investment protection: Fair and equitable treatment and full and constant protection and security, and non-impairment of operations, management, use, etc.
  • Expropriation and compensation: Expropriation/nationalization of the investments from the contracting country will not be made except for a public purpose. Such an eventuality will be on a non-discriminatory basis and against fair and equitable compensation. Judicial review is available to the affected parties, if desired.
  • Repatriation facilities: Free repatriation of its capital profits, dividends, disinvestment proceeds, royalty, etc., is permitted. Also, safeguard is provided for allowing repatriation in the currency of the original investment at the current exchange rate prevailing on the date of transfer.
  • Subrogation: Recognition of assignment of any right or claim of investor in favour of the other contracting party or a designated agency and the right to exercise such rights and claims.
  • Dispute settlement mechanism: Elaborate provisions exist for resolution of disputes between the investor and a contracting party as well as between the contracting parties. In the former case flexibility is provided for settlement of disputes either under the domestic laws or under international arbitration.
  • Entry and sojourn of personnel: Free movement of personnel is provided for in connection with the investment related activities, subject to the domestic laws relating to entries of foreign personnel.
  • Applicable laws: the substantive laws applicable on investments will be the domestic law unless otherwise provided in the agreement. Overriding provisions also exist for the host country to take appropriate action on security and environment grounds.
  • Duration and termination of the agreement: The agreements are initially valid for a period of ten years and thereafter shall continue indefinitely unless either of the contracting states gives written notice of its intention to terminate the Agreement in which event the Agreement stands terminated one year after the receipt of such notice. In the event of termination of the Agreement, investments made prior to the termination will continue to enjoy the provisions of the Agreement for a further period of 15 years.
  • The Indian system also has in-built provisions for various elements of the investment protection agreements. It is an accepted principle that all foreign investments at post establishment stage are treated on par and no discrimination is made in the foreign investment made in convertible foreign currencies. Similarly, India’s Exchange Control Regulations already provide for facilities for repatriation of investment proceeds, return on investment, etc. Thus even without capital account convertibility, there is capital account convertibility in so far as the foreign investments are concerned. In the matter of dispute settlement mechanism, under an act of Parliament, international arbitration provision has also been introduced and thus enables the foreign investors with the option of redressing investment disputes with the state either under the domestic legal régime or going for international arbitration. Similarly, for entry and sojourn of personnel, our immigration laws and the Exchange Control Regulations, permit foreigners to take up employment in India, although with appropriate permissions.
  • BIPAs have found favour with developing countries like India because they do not place any restrictions on host countries in following their own foreign direct investment policies in the light of each country’s unique needs and circumstances. Generally, BIPAs aim at protection and equitable treatment of FDI after the investment has taken place in consonance with the host countries laws and regulations. Thus, a developing country has the freedom to grant national treatment only in the post- establishment phase for investments, subject to such qualifications as may be considered necessary, conforming to the host country’s policies, laws and regulations.
  • The increasing number of BIPAs is a result of a recognition of the positive rôle that foreign investment can play in economic development. However, as many of the BIPAs have been concluded in recent years, there is limited empirical evidence to establish a correlation between the conclusion of BIPAs and the growth in foreign investment. Therefore, BIPAs can perhaps be considered as one of the factors in creating a favourable investment climate. In fact, other factors such as size and growth of the market, the quality of infrastructure and skills, political, economic and legal stability may play a greater rôle in attracting foreign investments. Therefore, it is important for the developing countries to improve their investment climate and attract FDI flows through their own unilateral measures for liberalization of their FDI policies and regulation framework. It is felt that if developing countries keep their policies stable and transparent and foreign investors perceive their investment climate to be congenial in terms of fair and equitable treatment of investment and other factors bearing upon the investment decision of foreign investor, they will continue to receive FDI flows in line with their market and investment opportunities. The upsurge in FDI flows to developing countries in the 1990s shows that investment climate and investment opportunities can be synchronised under the existing arrangement through unilateral liberalization of their FDI régime as this provides developing countries the required freedom and flexibility necessary to ensure that a liberal investment climate is in harmony with their own developmental as well as political and social needs and concerns. The developing countries also need to have freedom to screen, regulate and appraise foreign investment in accordance with their own policies, laws and regulations. However, the foreign investment that is admitted can be treated at par with domestic investment and can be given full and secure protection through appropriate domestic legislation of BIPAs.