Treading the Delicate Balance with Respect to Expropriation in India: Newer Approaches to further the Aim of the Model BIT.

[By Shreya Jain]

The author is a student of Rajiv Gandhi National University of Law, Punjab.

 

Introduction

India has emerged as a major investment hub in the recent years. According to the World Bank, India will be the most resilient of the large economies in 2023 with an impressive growth rate of 6.6%. Additionally, as per a new assessment by the International Monetary Fund (“IMF”), India is one of the bright spots in the global economy at present with a growth rate of 6.8% in 2022. India’s growth trajectory is largely propelled by the massive FDI inflows received. Even during the pandemic, when the economy of the rest of the world was in shambles, India received FDI flows at record levels. In the year 2020-2021, for instance, a record US$81.72 Billion poured in.

As per a recent study of 1200 multinational businesses by  Deloitte, India remains an attractive investment destination for investors. However, the study also reveals that the perception amongst potential foreign investors needs to be drastically improved as the regulatory measures imposed by the government have deterred the investors to significantly invest in India. To further the vision of the ‘Make in India’ campaign and to emerge as an investor-friendly regime, it is paramount for India to make changes to the Model BIT of India, 2016 with respect to expropriation claims and the overall Fair and Equitable Treatment Standard as it is widely believed that a declaration of a State’s ideal policies (de lege ferenda) is provided by the Model BIT. It is imperative for India to keep up with the International Investment Law standard in order to emerge as a key player in terms of foreign investment. A study  examining the relation between BIT and FDI has pointed out,  the fact that the BITs signed by India with developed countries  had a positive impact on the FDI Inflows.

The Nuances of the Law on Expropriation

Expropriation is the taking of property belonging to a foreign investor by the State which results in substantial deprivation to the investor. An asset is capable of being expropriated so long as it constitutes an investment. The Salini Test, developed in the case of Salini v. Morocco, provides a holistic approach to the interpretation of the term “investment”. According to this test, “an investment is when there is a contribution of money or assets, a certain duration of the operation, an element of risk and a contribution to the economic development of the host state.” Expropriation can be categorised under two sub heads – direct expropriation and indirect expropriation. In instances of direct expropriation, there is a clear and unequivocal intent to deprive the owner of his property by an express physical act by the state. In the case of indirect expropriation, the states do not explicitly shift investors’ legal title over the investment but the economic value of the property is depreciated.

The tribunal in the case of Spyridon v. Romania put forth the different kinds of indirect expropriation. Accordingly, an indirect expropriation occurs if the measure “result[s] in the effective loss of management, use or control, or a significant deprivation of the value, of the assets of a foreign investor.” ‘Substantial Deprivation’ implies a significant interference with the usage and execution of the investment of the investor. To meet the threshold of ‘Substantial Deprivation’ in the context of indirect expropriation, there is no requirement of actual takeover of the investment, recognisable at first sight. For instance, the tribunal in the case of Mamidoil v Albania stated that to meet the threshold of ‘Substantial Deprivation’,“the owner [must have] truly lost all attributes of ownership.” To ascertain the value of the expropriated property, recourse can be taken to the case of Metalchad v. Mexico, where the tribunal adopted the ‘Actual Expenses’ approach. The ‘Actual Expenses’ approach is consistent with the dicta laid down in the Chorzow case, where it was held that “any award should, as far as is possible, wipe out all the consequences of the illegal act and re-establish the situation which would in all probability have existed if that act had not been committed (the status quo ante).”

  However, not all regulatory measures enacted by the state constitute an unlawful indirect expropriation. As per the case of Methanex v. USA “a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, a foreign investor or investment is not deemed expropriatory.” Newer investment treaties have taken into consideration factors like the ‘economic impact of the measure, the legitimate expectations of the investor and the purpose of the regulatory measure to ascertain the lawfulness of the expropriation undertaken by the state.’

Scope for Reforms in the Indian Law on Expropriation

Article 5 of the Model Text for the Indian BIT elaborates on the aspect of expropriation. As per Article 5.1, ‘regulatory measures enacted for reasons of public purpose, in accordance with due process of law and on payment of adequate compensation do not constitute unlawful expropriation.’ Furthermore, according to Article 5.3 , the economic impact of the measure, duration of the measure, character of the measure and the legitimate expectations of the investor needs to be taken into consideration to determine whether the measure has an effect equivalent to expropriation.

The rationale for the introduction of the Model BIT 2016 was to counter the increasing number of Investor-State Dispute Settlement (“ISDS”) claims brought against India and to balance the regulatory rights of the host state with investment protection. However, the Model BIT with respect to the provisions of expropriation has been unable to tread the delicate balance and tilts towards the regulatory powers of the host state.

The proportionality analysis which provides for a ‘restrictive means test’ as propounded in the case of S.D Myers exemplifies the way forward for India’s investment regime in the context of expropriation. A proportionality based approach would further the vision of the Model BIT 2016 as it would result in a balance between investment protection and public policy concerns of the state. Proportionality analysis is used to limit the use of police powers of the state to actions performed in pursuance of legitimate regulatory objectives and in good faith exercised proportionately as a means to attain such objectives. With respect to proportionality analysis, recourse can be taken to early NAFTA cases of S.D Myers v. Canada and Feldman v. Mexico. The tribunal in these cases gave insights about the aspect of how public policy of the state is to be preserved through the use of a least restrictive means test. The tribunal accentuated on the need to assess the ‘reasonableness’ of the measure to determine whether it fell within the police powers of the state. In S.D. Myers, it was laid down that it is imperative that a least restrictive measure should be selected to regulate foreign investment. An adoption of the proportionality based analysis in the Indian investment regime would also cater to concerns of state sovereignty and would not enable foreign investors to challenge legitimate regulatory measures of India for sizeable damages which places undue costs on the sustainable development objectives of states.

Additionally, with respect to claims for unlawful expropriation, an approach to assess them on the fulcrum of the multifarious criteria developed by tribunals recently on Fair and Equitable Treatment (“FET”) standard should be adopted in India. The Model BIT 2016, under Article 3.1 provides that the investments would not be subject to measures which constitute a violation of customary international law. Article 3.1 encompass the following violations in the treatment of investment– “denial of justice in any judicial or administrative proceedings, fundamental breach of due process, targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief, manifestly abusive treatment, such as coercion, duress and harassment.”By recognising customary international law as a standard for investment protection, India is following the  Minimum Standard of Treatment or the Neer approach which lays its roots to the 2009 Canada-Czech BIT and the Neer case before the USA-Mexico Claims Commission. The Neer approach sets a high threshold for the FET standard as only “actions that amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action that every reasonable and impartial man would readily recognize its insufficiency” are categorised as violations. Due to the high threshold set by the ‘Neer Approach’, the investors are unable to establish the extent of the expropriation, proving detrimental to the protection of the investors This defeats the proportionality approach and in turn contravenes the purport of the Model BIT 2016 which was to strike a balance between the concerns of the state and the investor.

While recognising these violations, Article 3.1 has missed important criteria given in the case of Waste Management v. Mexico, which has evolved the FET minimum standard of treatment as developed in the Neer case. This case included the lack of exercise of due diligence by the host state and the failure to provide a stable and predictable legal environment as FET standard violations. Article 3.1 does not encapsulate the duty to provide for a stable and predictable legal environment, which enables the protection of the investment. The idea of “stability” provides an assurance to an investor that a general regulatory framework that is in place at the time of investment will not be materially changed by the host State, as material changes to the regulatory framework of the host state may result in significant losses for investors. In multiple investment cases, the absence of a consistent and predictable legal framework has been effectively argued. Furthermore, in light of the FET standard’s consistent and rising growth as an autonomous standard, included in stand-alone clauses in various BIT’s, tribunals recently have departed from the Minimum standard of treatment standard. The autonomous approach with respect to FET is reflected in the case of Siemens v. Argentina, where the tribunal held that “in their ordinary meaning, the terms “fair” and “equitable” mean “just”, “even-handed”, “unbiased”, “legitimate” . This approach will provide protection to the investor against a wide amplitude of potential violations by the host state. By restricting the protection of investment under Article 3.1 in the Model BIT 2016, the recourse given to foreign investors to challenge the unjust regulatory actions of the state becomes limited, in turn affecting their willingness to invest in India. Accordingly, Article 3.1 should reflect these newer approaches put forth by international tribunals as this would remedy the Model BIT’s disproportionate tilt towards the regulatory powers of the state.

Conclusion

The Model BIT 2016 came into force in the wake of the case of White Industries Australia Limited v Republic of India which was decided against India in 2011. Against the backdrop of the rising ISDS Claims against India, the Government of India realised the need to have a new Model BIT in order to utilise it as a ground to sign new investment treaties modelled on the new law. While the concerns of the state are understandable, there is a requirement to attain a balance between the regulatory needs of the state and the protection to be accorded to the investor. The approaches suggested in the article if adopted would propel a more welcoming stance towards FDI’s in India which would enable it to attain growth and self-reliance as envisaged by the Aatmanirbhar Bharat mission. The FET Standard adopted by various tribunals provides the investor with the much required assurance that the host states would not engage in conduct that would frustrate the legitimate expectations of investors regarding the investments made in the country . Inextricably linked with the doctrine of legitimate expectations is the obligation of the host states to maintain a stable and predictable regulatory framework as alteration in the same may contravene the legitimate expectations of the investors. These approaches if adopted in India would further the aim of the Model BIT 2016 and enable India to become an investor- friendly country, thus  immensely contributing to its growth.

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