Effective remedies provided to investments and trade abroad

Effective Remedies for Investments and Trade Abroad

Investing in emerging markets can be unpredictable, even for the most sophisticated investors. While developing markets offer great opportunities, they also present various political risks beyond an investor’s control. These risks include:

1. War, Civil Strife, and Political Violence
2. Expropriation, including the abrogation, repudiation, or impairment of contracts, and other forms of improper government interference
3. Restrictions on Currency Conversion and Transfer of local-currency earnings

Bilateral Investment Treaty (BIT)

The network of Bilateral Investment Treaties (BITs) has been expanding continuously. As part of India’s Economic Reforms Programme initiated in 1991, the Government of India liberalized its foreign investment policy and began negotiating Bilateral Investment Promotion & Protection Agreements (BIPAs) with several countries. These treaties aim to provide favorable conditions and protection for foreign investors.

The objective of a BIT is to develop and safeguard the interests of investors from each country in the other country’s territory. To date, India has signed BIPAs with 82 countries, with 72 of them already in force. The remaining agreements are being finalized.

BITs offer additional protection to investors. For example, when investing in a country that does not have a BIT with India, investors can structure their investments through third countries that have BITs with the host country. This strategy allows investors to benefit from treaties negotiated by other countries.

Although BITs may share similarities, each treaty has unique provisions. One noticeable feature of Indian BITs is that they do not guarantee a “right to make investments” in India. Instead, they ensure that rights can only be exercised after investments are made in the country, subject to Indian national laws.

Indian BITs include provisions such as:

• Fair and Equitable Treatment (FET): This principle sets minimum standards of treatment that must be met by the host state. Key pillars of FET include protecting the legitimate expectations of investors, ensuring transparency and stability, and prohibiting coercion and harassment.
• Full Protection and Security (FPS): This ensures protection against physical violence and safeguards the assets of investments.

A legal deprivation of assets must meet the following conditions:

1. It must serve a public purpose.
2. It must not be discriminatory or arbitrary.
3. It must follow due process.
4. It must be accompanied by adequate compensation.

Deprivation can be classified into two types:

• Direct Expropriation: Seizure or nationalization of assets.
• Indirect Expropriation: Measures that significantly impact the value of an investment without formally taking control.

Dispute Resolution in BITs

BITs allow investors to initiate arbitration directly against a state without needing to go through their own government. In Indian BITs, investors can seek arbitration under the International Centre for Settlement of Investment Disputes (ICSID) or under the United Nations Commission on International Trade Law (UNCITRAL) rules.

However, a challenge with BIT arbitration is that India is not a party to the ICSID Convention, although arbitration under ICSID’s Additional Facility Rules is possible. The enforcement of awards will then be governed by the New York Convention.

Notable Cases:

• In the Vodafone case, Vodafone invoked the Indo-Netherlands BIT to protect its investment in India, despite its shares being held indirectly through a subsidiary in the Cayman Islands. The Indian Supreme Court ruled that Vodafone’s interests were outside India’s tax jurisdiction under the Income Tax Act, 1961.

Political Risk Insurance (PRI)

Political Risk refers to the risks associated with government actions that deny or restrict an investor’s right to benefit from their assets, or that reduce the value of the investment. These risks include:

• War and revolutions
• Government seizure of property
• Restrictions on profit movement (capital controls)

Political Risk Insurance protects investors against the loss of assets due to political events. This may include:

• Currency Convertibility and Transfer Risks
• Expropriation of Assets
• Political Violence
• Breach of Contract by the Host Government

According to the Multilateral Investment Guarantee Agency (MIGA), political risk is defined as the probability of disruption in operations due to political forces or events in host countries or in home countries, as well as changes in the international environment.

Political risk insurance (PRI) is particularly relevant for industries in high-risk environments, such as extractive industries and power projects, which are often highly politicized and at risk from government interference.

Types of Political Risk Insurance:

1. Expropriation of Assets: Protects against government actions that deprive investors of their property rights or control of assets.
2. Political Violence: Covers losses resulting from civil unrest, terrorism, or armed conflict.
3. License Cancellation: Protects against the cancellation or revocation of business licenses by host governments.
4. Non-Transfer of Funds: Ensures that foreign investors can transfer profits, dividends, or other funds from a country without restrictions.

Political risk is no longer limited to national governments; local governments, NGOs, and community groups can also contribute to the risk. As political dynamics evolve, especially in resource-rich regions, political risk insurance provides a safeguard for investors. By ensuring financial stability in the face of political uncertainty, PRI enables foreign investments to proceed in environments that might otherwise be deemed too risky.

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