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Opinion

A national law may not protect foreign investments in India – analysis

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According to reports, the central government is working on a new law to safeguard foreign investment. Although the speech on the budget of the finance minister, Nirmala Sitharaman, said nothing about it, it is widely believed that the purpose of the proposed law is twofold. First, offer legal protection to foreign investors against sudden policy changes. Second, taking into account the slowness of the Indian legal system, to provide a faster dispute resolution. In general, the expectation is that the new law will help attract more foreign capital to boost the stuttering of economic growth.

The fact that such a law is being contemplated is an admission that foreign investors in India are subject to abrupt policy changes, which exposes them to high regulatory risks and sharpens the overall investment climate. For example, sudden changes in foreign direct investment (FDI) rules in 2019 related to e-commerce negatively affected Flipkart, owned by Amazon and Walmart. Such hasty policy changes are common in the states. After coming to power in Andhra Pradesh last year, the Jaganmohan Reddy government canceling or putting on hold several projects involving foreign investors is a good example.

The roots of this proposed law are found in India’s experience with bilateral investment treaties (BITs), treaties signed between two States for the protection of foreign investment in each other’s territory. BITs grant foreign investors the right to directly submit claims that challenge the sovereign action of the host State that violates the obligations of the treaty before international arbitration tribunals. This is known as investor-State dispute resolution (ISDS). In recent years, different foreign investors have filed more than 20 ISDS claims against India challenging a wide range of actions such as retrospective taxation, the cancellation of spectrum licenses and the withdrawal of tax concessions. Stunned by these claims, regardless of international law, India began unilaterally ending BITs and seeing ISDS with skepticism.

In this context, it is believed that the proposed new law, by offering an expedited remedy to foreign investors at the national level, would make the ISDS redundant. However, this argument is flawed for several reasons. First, national laws and domestic remedies cannot substitute resources under international law. A sovereign law may be legal according to domestic law and, however, illegal under international law. For example, a law passed by the Indian Parliament that imposes taxes retrospectively may be constitutionally valid at the national level, and still violate India’s obligations under BITs as part of international law. In addition, a national law can be changed when the State wishes. Therefore, you can never provide the kind of security to foreign investment that international law can do.

Secondly, it is not clear whether the law will allow foreign investors to challenge all sovereign acts of the State, as is the case under the ISDS, or will be limited to disputes related to contracts, licenses or private law matters. If it were the latter, it would restrict the type of disputes for which foreign investors can obtain remedy.

Third, the objective of rapid dispute resolution to boost investor sentiment, while achieving political optics, does not cut the ice much. A similar justification was offered when the Commercial Courts Act was enacted in 2015. However, the implementation of the law has been erratic and has negatively affected its effectiveness.

Fourth, while the judiciary in India is independent, a disturbingly discernible trend is that when faced with a powerful executive who shows autocratic tendencies, the judiciary tends not to assert. One witnessed this during the emergency rule of Indira Gandhi and the traces of it are evident in recent years. Therefore, foreign investors would prefer international arbitration under ISDS to the Indian judiciary.

Fifth, the real cause of several disputes with foreign investors in India is bad governance, such as canceling licenses without following due process or arbitrarily suspending projects. Therefore, the need is to improve the general levels of governance and to invest massively in the development of capacities of different State bodies to enable them to internalize India’s obligations under BITs.

India is a dualistic nation with regard to international law, that is, treaties are not binding at the national level (in courts, state governments, etc.) until the treaty is incorporated into national legislation, generally through Enabling legislation. If the proposed law seeks to incorporate India’s BIT obligations under national legislation, it would be a positive fact. However, if the proposed law intends to replace the protection of foreign investors under the BITs and the ISDS, it would be a regressive step. India should not shy away from being responsible under international law for its sovereign actions. Instead, it should work with other countries to reform and improve the ISDS system worldwide.

Prabhash Ranjan is an assistant professor of law in the faculty of legal studies at the University of South Asia.

The opinions expressed are personal.

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