Comments on Draft Indian Model Bilateral Investment Treaty National Association of Manufacturers

Comments on Draft Indian Model Bilateral Investment Treaty National Association of Manufacturers April 10, 2015 1

Comments of the National Association of Manufacturers (NAM) on the Draft Indian Model Bilateral Investment Treaty The NAM is the nation s largest industrial association and voice for more than 12 million women and men who make things in America. Manufacturing in the U.S. supports more than 17 million jobs, and in 2014, U.S. manufacturing output reached a record of nearly $2.1 trillion. It is the engine that drives the U.S. economy by creating jobs, opportunity and prosperity. Manufacturers in the United States participate in a global economy and are increasingly investing both domestically and overseas to grow opportunities. Foreign investment by U.S. companies is an important part of that global participation, helping to connect new customers with new products, expand innovation and build new opportunities for both the country from where the investment comes (the home country) and the country where the investment is destined (host country). Bilateral investment treaties (BITs) are important instruments in the global rulesbased system that have been adopted by countries around the world to attract and ensure basic rules are guaranteed to foreign investors in their economy, and enforced by neutral dispute settlement procedures. There are more than 3,000 BITs worldwide that are an important network of global rules that promote and protect growth-producing investment. High-quality, market-opening BITs play a strong role in helping countries to attract investment, particularly when there are substantial challenges in a market. Foreign investment is in high demand by virtually all countries in the world and investors are seeking markets where they can successfully grow their investment in a predictable and fair manner. Given the number of BITs worldwide, it is increasingly recognized that the quality of the BIT matters to businesses considering where to make investments. The NAM welcomes India s review of its Model BIT and the publication for public comment of its draft. However, the NAM finds that there are many aspects of the draft Indian Model BIT that deviate substantially from global standards, providing much lower and in some cases no protections on core issues. Indeed, the draft provides substantially lower protections and standards than in found in earlier Indian investment instruments, including with the United Kingdom, the Association of South East Nations (ASEAN) and the Comprehensive Economic Partnership Agreement between Japan and the Republic of India (India-Japan CEPA). It also diverges substantially from the Model U.S. BIT in terms of the standards of protection, the lack of major market-opening provisions, and major procedural limitations. The U.S. Model BIT is the U.S. negotiating position in ongoing trade agreements as well as relatively advanced negotiations with China. As well, the draft Model Indian BIT provides insufficient and more limited provisions on dispute settlement, including on the basic issue of the scope of investorstate dispute settlement (ISDS).

In its present form, therefore, the draft Model Indian BIT fails to provide adequate level of protections, enforceability or market opening for existing or future investment. It would detract from, rather than enhance, India s ability to attract new investment as it is much weaker than global standards and appears to seek to avoid any enforceability wherever possible. In short, the draft Model Indian BIT does not form an acceptable basis for the United States and India to continue BIT negotiations. If the Government of India is interested in improving its investment relationship with the United States and negotiating a BIT that would promote investment and economic growth, India would need to revise its draft BIT to include broad, strong and fully enforceable protections for foreign investment and new market opening disciplines that would enable investors to operate successfully in India. Given the limited time period provided by the Indian government to comment on the draft Model BIT, the NAM identifies below only the most concerning aspects of the draft Model Indian BIT on which we urge modification: Scope of coverage. In an increasingly global and integrated world economy, international investment takes many forms, both in terms of the actual type of assets involved and the ownership structure. Recognizing this fact, the U.S. and many other countries investment instruments have long included broad definitions of investment that includes all assets owned or controlled, whether directly or indirectly, that form the basis of an investment. Article 1 of the current draft Model Indian BIT, however, fails to provide a clear or well-defined statement of what an investment constitutes, defining it only as an enterprise in the Host State appearing to improperly exclude individual investments, portfolio investments and the consideration of real property and intellectual property as an investment. This language is much weaker than the India-Japan CEPA which provides a stronger definition of investment. Given the nature of foreign investment in the world today, the NAM strongly urges that the draft be revised to specifically cover all forms of investment, including: o an enterprise; o shares, stock, and other forms of equity participation in an enterprise; o bonds, debentures, other debt instruments, and loans; o futures, options, and other derivatives; o turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts or agreements; o intellectual property rights; o licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and o other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges. The draft Model Indian BIT further limits the application of the treaty by narrowly defining real or substantial business operations by requiring among other factors: 2

substantial and long-term commitment of capital; the hiring of a substantial number of employees in the territory of the host state; and, making a substantial contribution to the development of the Host State through its operations alongwith the transfer of technological knowhow, where applicable. None of these requirements is appropriate to limit the obligations of host states in regards to foreign investment as foreign investment may take many forms, be of varied lengths of commitment and may or may not require the hiring of substantial local employees or the transfer of technology. As discussed further below, many countries around the world, including India, have agreed to specific disciplines in investment instruments that prohibit several of these types of requirements as a condition or incentive for investment. Coverage of Pre-Establishment and Established Investments. Very important to attract new investment is the coverage of BIT provision to both pre-establishment and already established investment. The U.S. Model BIT provides full preestablishment and post-establishment market access, subject only to a limited negative list of exceptions. This type of coverage has increasingly been included in the investment instruments of many other countries, including in India s agreement with the Association of South East Asian Nations (ASEAN) countries signed last November. In U.S.-Chinese BIT negotiations, the Chinese Government has already agreed to accord protections on a pre-establishment and negative list basis. Article 2 of the draft Model Indian BIT, however, excludes any type of pre-operational expenditure from constituting an investment including pre-establishment operations. It also provides that the BIT s obligations do not apply to pre-investment activity. From the NAM s perspective, pre-establishment investments are highly important. If the Indian government is interested in attracting new investment, it should accord non-discriminatory treatment to pre-establishment activities and established investments both, except for a limited set of specifically excluded investments. Coverage of Intellectual Property. Given the increasing use of technology and advanced manufacturing, as well as complex investment structures, it is critical that investment in, and development of, intellectual property and other intangible assets and related concessions or other contracts and agreements, receive the same levels of protection as more tangible forms of property. Article 2 of the draft Model Indian BIT, however, also seeks to exclude the issuance of compulsory licenses granted in relation to intellectual property rights from any of the BITs obligations. Such a provision is inappropriate and should be dropped. Exemptions for compulsory licenses should be limited to those issued in accordance with the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs); a blanket exception for any compulsory license undermines the intention of the BIT to help attract high-quality, innovation-based investment. 3

Coverage of Ownership Structures. Also important to manufacturers is to ensure that the wide-ranging types of ownership structure in foreign investments be accorded full protection. Investment may be wholly or partially owned or controlled, and that ownership may be direct or indirect. As in the 2012 U.S. Model BIT, each of these forms of ownership structure should contain strong provisions preventing misuse or abuse of these rights. In particular, Article 17 of the U.S. instrument authorizes the non-application of the BIT s provisions to an enterprise that has no substantial business activities in the territory of the host government and the enterprise is owned by persons of a non-party. This provision represents an appropriate example of preventing non-investors from taking advantage of the investment provisions provided. Contractual Disputes. Article 2 of the draft Model Indian BIT excludes contractual disputes between an investor and the host government entirely from the scope of the BIT. This exclusion is also inappropriate, especially given that there are significant investments sought by the government that entail such contracts or investment agreements, as in the case of infrastructure development, a top priority of the Indian government. The NAM strongly urges the Indian government to consider using the Model U.S. BIT provision on investment agreements as an appropriate model that applies to certain types of investment agreements, but not every commercial contract. Carve-outs. The draft Model Indian BIT carves out completely subsidies, taxation measures and government procurement from its scope. Such an all-encompassing exception is not necessary or appropriate. As seen in the Model U.S. BIT, there are protections in these areas that can be included in the BIT without undermining other aspects of government action. We urge that India review these provisions and seek to include similar levels of protection as contained in the Model U.S. BIT. Standard of Treatment. Fair and equitable treatment (FET) is an essential and indispensable provision in investment instruments worldwide and should be included as a strong feature of Indian Model BIT. Among scholars, the FET standard is regarded as the most common general absolute standard of treatment in the BITs 1 and it has long been noted that "[n]early all recent BITs require that investments and investors covered under the treaty receive 'fair and equitable treatment. 2 The widespread use of the FET standard reflects the fact that it is viewed as a longstanding and basic principle of government behavior towards property and property-owners. This basic principle is widely reflected in the domestic legal regimes of most countries. Unfortunately, the draft Model Indian BIT eliminates the terminology of fair and equitable treatment completely, substituting in Article 3 a very limited standard of treatment that encompasses only denial of justice, unremedied and egregious violations of due process, and manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment. 1 Kenneth J. Vandevelde, Bilateral Investment Treaties: History, Policy, and Interpretation (2010) at Sec. 5.2. 2 Rudolf Dolzer & Margrete Stevens, Bilateral Investment Treaties 58 (1995). 4

This approach is far too limited to accord important and basic guarantees of fair treatment to investors. Limiting the FET obligation in new BITs would provide U.S. investors with a lower standard than other investors from other countries already enjoy through pre-existing investment agreements. Non-Discrimination. Core to investment treaties around the world is the basic requirement that governments not discriminate against foreign investors either compared to domestic investors or investors from third countries. These provisions have been regularly memorialized in U.S., Indian and other countries investment instruments through national treatment and most-favored-nation (MFN) provisions. Article 4 of the draft Model Indian BIT provides, however, only a national treatment protection, and fails to include the highly common most-favored nation protection that is also considered a core anti-discrimination provision. As a result, foreign investors could be discriminated against without recourse as compared to other foreign investors, which is in appropriate if India is seeking to attract new levels of investment. Furthermore, the national treatment protection is far too limited applying only to intentional and unlawful discrimination. Again, this low-level of protection does not create confidence in India s market as a positive destination for foreign investment that will be accorded generally recognized levels of protection against discrimination. The draft Indian model also carves out all sub-central (state and local measures from the basic national treatment. Expropriation. Like non-discrimination and fair and equitable treatment, compensation for expropriation is a fundamental protection accorded by national governments and long included in international investment instruments. In United States, such protections apply to both direct (physical) and indirect (regulatory) expropriations for a public purpose and require prompt, adequate, and effective process. Article 5 of the draft Model Indian BIT on compensation for expropriation is, however, a very limited provision that seeks only to ensure compensation in cases where there is a complete or near deprivation of property as well as other requirements. This standard is far below international standards and does not provide an adequate level of protection. Furthermore, India s inclusion of mitigating factors and other explanations to reduce the payment of compensation is inappropriate and also deviates from this basic protection. Transfers. Also vital to investors is the guarantee to transfer funds in and out of a country without undue restrictions. Such free-transfer provisions are included in most of the world s 2,600 BITs and are important not only for the investor and the investor s home country, but also to promote economic development and fair treatment by the country receiving the foreign-investment inflows. In contrast, capital controls are harmful to the country imposing the controls itself by weakening investor confidence, lowering investment flows and artificially reducing pressure for countries to make other needed economic reforms. Several studies have also found that the use of capital controls by developing countries tends to hurt the poorest and least 5

politically connected in those societies. 3 Article 6 of the draft Model Indian BIT provides some guarantees in this area, but then provides the government the ability to take broad balance of payment measures in certain circumstances. Such a broad provision is unnecessary and should be more limited as the United States has done with the prudential measures included in Model BIT to address financial emergencies. Also highly problematic is that this article is wholly dependent on Chapter III as discussed below. Key Protections Missing from the Draft Model Indian BIT. India s draft model fails to include several key protections found in U.S. and other countries BITs. Three of the most important are (1) restrictions on the use of performance requirements; (2) disciplines on limits on the management of an investment; and (3) transparency in rulemaking. o Performance requirements such as requirements to use local inputs or technology or export at certain levels or hire a specified percentage of domestic employees are highly distortive of trade and investment flows, undermine the investment climate of the country imposing the measures and place costly and inappropriate burdens on foreign investors. Over the last two decades, the United States has consistently included provisions in its investment instruments and trade and investment agreements that prohibit the imposition of performance requirements on investment. Many major OECD and non-oecd countries also discipline performance requirements in their investment agreements, as India did most recently in the India-Japan CEPA. Strong performance requirement provisions are critical to high-quality. o The United States and other countries have also long included provisions that prohibit requirements on the nationality of individuals serving in senior management position for covered investments. This is an important provision to ensure that the management of the investment is based on strong commercial considerations and can be successfully operated. o Recent U.S. investment instruments have also included provisions to ensure the transparency and publication of laws, regulations, procedures, administrative rulings and adjudicatory decisions related to foreign investment. As well, provisions are also included to ensure that foreign investors have input into such laws and rulings as would domestic entities. These provisions are vitally 3 See, e.g., "Capital Flows to Emerging Markets: The Myths and Realities," by Bill Block and Kristen Forbes, Council of Economic Advisers, paper prepared for the Conference on "Myths and Realities of Globalization," Federal Reserve Bank of Dallas, November 4, 2004; "Cronyism and Capital Controls: Evidence from Malaysia" by Simon Johnson and Todd Mitton, Working Paper 8521, National Bureau of Economic Research (NBER), 2001; "International Financial Integration and Developing Countries," Chapter IV, World Economic Outlook, International Monetary Fund, 2001; "International Monetary Reform and Capital Freedom," remarks by Ben S. Bernanke, Governor, Board of Governors of the Federal Reserve System at the Cato Institute, Washington, D.C., October 14, 2004; "Effects of Financial Globalization and Developing Countries: Some Empirical Evidence," by Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei and M. Ayhan Kose, March 17, 2003; "The Case for Open Global Capital Markets," by Robert Krol, Cato Institute, March 15, 2001; "One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Trade Firms," Kristin J. Forbes, NBER Working Paper #9777, June 2003. 6

important to investors so that they have confidence in the transparency of the rules that apply to them in foreign markets. The NAM strongly urges that each of these provisions be included in the final Indian Model BIT. Investor Obligations. Chapter III of India s draft Model BIT includes provisions not generally contained in other investment instruments worldwide that would deny the entire protections of the BIT itself. When a foreign investor enters a country, it is subject to and must abide by laws, rules and adjudicatory decisions of that country, which is why it is so important that those rules are transparent and published and provide for input by foreign investors as well as domestic entities as noted above. As well, U.S.-based companies are already subject to the strongest anti-corruption provisions worldwide as a result of the Foreign Corrupt Practices Act. There are strict penalties in the United States and India for violations of domestic laws in all the areas identified by India, as well as very strict anti-corruption penalties. The proposed denial of BIT protections for any inconsistent action by an investor would be an additional and unnecessary penalty that undermines the entire usefulness of the BIT. The NAM strongly urges this chapter to be dropped in the final Indian Model BIT. Investor-State Dispute Settlement Provisions. Strong investor-state dispute settlement (ISDS) provisions are critical to the operation of a successful BIT. They provide both governments and investors the assurance of a neutral, non-politicized avenue to resolve investment dispute. The U.S. Model BIT provides extremely strong provisions in this regard that provide for full ISDS coverage for treaty and major investment agreement breaches, as well transparency and strong process provisions. There are many deviations from this strong practice in Chapter IV of the draft Indian Model BIT, of which the most concerning are: o the failure to cover breaches of investment agreements between the foreign investor and the host government as the subject of a dispute; o the requirement to first exhaust local remedies, including through domestic courts and administrative bodies before pursuing ISDS; o the requirement that an investor cannot challenge any decision of a judicial authority (which when tied with the exhaustion requirement fully forecloses any ISDS cases in areas that might be covered by judicial action, including the very important area of intellectual property protection); o the failure to cover any review of the government s use of the exceptions to the BIT; o the inclusion of counterclaim provisions that are inappropriate in a BIT. o the inclusion of multiple arbitration provisions. Each of these provisions is highly problematic and in many cases would effectively eviscerate the ability of investors to use the ISDS mechanism and should be rejected. 7

General Exception. Exemptions from these core BIT access and protections should be limited. To that end, India should eliminate the inclusion of Article 16 that provides a wide-ranging and self-judging general exception. Those types of exceptions have long been excluded from modern investment instruments, including those of the United States and EU member states given such exceptions are too easily abused and vitiate the underlying obligation. In regulating in the public interest, there is no justification for discrimination on the basis of the nationality of the investment, unfair treatment or the refusal to provide compensation for an expropriation (which must be in the public interest). Where it may not, India could take a tailored non-conforming measure. Notably, India s general exception is selfjudging, which is a substantial deviation of the use of general exceptions more generally in trade agreements. The overall strength of a country s investment instruments are important markers of its embrace of the rule of law, basic rules of fairness and nondiscrimination and strong enforcement. Investment instruments help promote not only good government, but investment, economic growth and jobs. India s interest in promoting foreign investment will not be aided by the draft Model BIT it has proposed. To the contrary, the BIT is far weaker than other major instruments worldwide, including other BITs and investment instruments that India itself has adopted, and would not provide even a basic level of protections, access or enforceability for existing or future investors. In a world where there is substantial competition for investment flows to promote economic growth, India s proposed movement backwards in investment treaty practice sends precisely the wrong signal to manufacturers in the United States and other investors. Rather than seeking out India, investors should be wary that India is not even willing to maintain basic rule of law standards from its earlier investment treaty practice. The NAM strongly urges the Government of India to reconsider and substantially modify its Model BIT given that the draft proposal deviates substantially from international practice and would not form an acceptable basis on with the United States should continue BIT negotiations with India. The NAM appreciates the opportunity to provide these comments and looks forward to providing further information. * * * The NAM is the largest manufacturing association in the United States, representing over 14,000 manufacturers small and large in every industrial sector and in all 50 states. Manufacturing employs nearly 12 million women and men across the country, contributing more than $2.08 trillion to the U.S. economy in 2013 alone. NAM members include many companies that trade with and invest in Europe, as well as European companies that manufacture in the United States. 8