India-EU investment treaty: Remove hurdles

During the recent visit of the European Commission president Ursula von der Leyen to India, the European Union (EU) and India decided to relaunch negotiations for long-pending economic agreements between the two sides. Both wish to enter into three economic treaties — a trade agreement, an investment protection treaty, and an agreement on geographical indications. These three treaties will create an overarching regulatory framework under international law, overseeing the deepening of the India-EU bilateral economic relationship.

While the India-EU trade agreement attracted considerable attention, the same cannot be said about the investment treaty negotiations. The EU is one of the largest foreign direct investors in India, having invested $88.32 billion from April 2000 to March 2021. India’s bilateral investment treaties (BITs) with several European countries signed in the 1990s played an important role in attracting European investment to India.

However, in 2017, India unilaterally terminated its BITs with several European countries. Consequently, European investment in India made after the repudiation of these treaties does not enjoy protection under international treaty law. This has understandably made European investors jittery about their investments in India, given the capriciousness of India’s regulatory ecosystem. The absence of an investment treaty also means negligible protection under international law for Indian investment flowing to Europe. Therefore, an investment treaty between the two sides assumes importance.

However, there are certain challenges due to the difference in the stated positions of the two sides on several issues related to investment protection under international law. First, the EU investment treaty practice illustrates its keenness to include the most favoured nation (MFN) provision — a key non-discriminatory standard — in its investment treaties.

However, India is averse to including the MFN provision in investment treaties. India’s antagonism towards the MFN rule is evident from the fact that India’s Model BIT and the recently signed investment treaties do not contain the MFN provision. India believes that the MFN provision can be abused by foreign investors to borrow beneficial treaty provisions from third-country BITs. However, not having the MFN provision makes foreign investment vulnerable to discriminatory treatment.

Second, the EU’s practice is to include in its investment treaties the fair and equitable treatment (FET) provision — an important substantive protection feature that enables foreign investors to hold States accountable for arbitrary behaviour. The FET provision is missing in India’s Model BIT and the recent investment treaties that India has signed.

Third, the EU has been batting for a multilateral investment court (MIC) to reform the existing arbitration-based investor-State dispute settlement (ISDS) system. The ISDS system is plagued with concerns such as lack of transparency, systemic bias in favour of investors, and lack of an appellate mechanism. MIC, which will have tenured judges, can arguably overcome these problems. Yet, India’s official position on MIC is unknown. India hasn’t contributed to the ongoing negotiations towards establishing a MIC, which is perplexing for a country that champions a rules-based global order. The EU, in all likelihood, will insist on including an investment court system in the treaty, which might not be acceptable to India.

Overall, India’s new investment treaty practice gives primacy to the State’s rights over the rights of the foreign investors, whereas the EU treaty practice is more balanced. This difference in perspective will be a bone of contention between the two sides.

Notwithstanding these differences, the silver lining is that the treaty practice of both India and the EU validates the desire to design an investment treaty that safeguards the regulatory space of the host State.

But preserving the regulatory space should not be at the cost of protecting foreign investors under international law. India should dilute its rigid position and align with the EU’s balanced investment treaty practice to make an agreement possible. An India-EU investment treaty will not only bring benefits to both sides but also demonstrate the combined will towards strengthening a rules-based international order.