A domestic law may not protect foreign investments in India
India should not shy away from being held accountable under international law for its sovereign actions
The central government is reportedly working on a new law to safeguard foreign investment. Although the budget speech of the finance minister, Nirmala Sitharaman, was silent on this, it is widely believed that the purpose of the proposed law is two-fold. First, offering legal protection to foreign investors from abrupt policy changes. Second, keeping in mind the slowness of the Indian legal system, to provide speedier dispute resolution. Overall, the expectation is that the new law will help in attracting more foreign capital to boost the stuttering economic growth.
The fact that a law of this nature is being contemplated is an admission that foreign investors in India are subjected to abrupt policy changes, which exposes them to high regulatory risks and sours the overall investment climate. For instance, the sudden changes in the foreign direct investment (FDI) rules in 2019 pertaining to e-commerce adversely impacted Amazon and Walmart-owned Flipkart. Such hasty policy changes are common in the states. After sweeping to power in Andhra Pradesh last year, Jaganmohan Reddy government cancelling or putting on hold several projects involving foreign investors is a case in point.
The roots of this proposed law lie 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 provides foreign investors the right to directly bring claims challenging the host State’s sovereign action that breach treaty obligations before international arbitration tribunals. This is known as investor-State dispute settlement (ISDS). In the last few years, more than 20 ISDS claims have been brought against India by different foreign investors challenging a wide gamut of actions such as the imposition of taxes retrospectively, cancellation of spectrum licences and withdrawing tax concessions. Flustered by these claims, in disregard to international law, India started unilaterally terminating BITs and viewing ISDS with scepticism.
Against this backdrop, it is believed that the new proposed law, by offering an expeditious remedy to foreign investors domestically, would make ISDS redundant. However, this argument is flawed for various reasons. First, domestic laws and domestic remedies cannot substitute remedies under international law. A sovereign Act may be legal under domestic law and yet illegal under international law. For example, a law passed by the Indian Parliament imposing taxes retrospectively may be constitutionally valid domestically, and still breach India’s obligations under BITs as part of international law. Moreover, a domestic law can be changed whenever the State wishes. Thus it can never provide the kind of security to foreign investment that international law can do.
Second, it is unclear whether the law will allow foreign investors to challenge all sovereign acts of the State, as it happens under ISDS, or will it be limited to disputes pertaining to contracts, licences or such private law matters. If it were the latter, it would restrict the kind of disputes for which foreign investors can get remedy.
Third, the objective of speedy resolution of disputes to boost investor sentiment, while accomplishing political optics, does not cut much ice. A similar justification was offered when the Commercial Courts Act was enacted in 2015. However, the implementation of the law has been erratic, adversely impacting its effectiveness.
Fourth, while the judiciary in India is independent, a disturbing trend discernible is that when confronted by a powerful executive displaying autocratic tendencies, the judiciary tends not to assert. One witnessed this during Indira Gandhi’s Emergency rule and traces of the same are evident in the last few years. Thus, 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 cancelling licences without following due process or arbitrarily putting projects on hold. Thus, the need is to improve overall levels of governance, and to invest massively in capacity-building of different organs of the State to enable them internalise India’s obligations under BITs.
India is a dualist nation when it comes to international law i.e. treaties are not binding domestically (on courts, state governments etc) till the treaty is incorporated into domestic law usually through enabling legislation. If the proposed law aims to incorporate India’s BIT obligations under domestic law, it would be a welcome development. However, if the proposed law intends to replace protection to foreign investors under BITs and ISDS, it would be a regressive step. India should not shy away from being held accountable under international law for its sovereign actions. Instead, it should work with other countries to reform and improve the ISDS system globally.