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28 March 2017 Question Bank

 

28th MARCH 2017

QUESTION BANK

 (2 Questions)

Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.

 GS III: ECONOMY- TRADE

1.      India was one of the most sued countries in 2015. Will the country's new model bilateral investment treaty attract and safeguard foreign investment more effectively?

(Repeat Question from 14 Decemer 2016 Question  Bank)

http://www.thehindu.com/opinion/op-ed/turning-the-clock-back/article17684494.ece

http://www.thehindu.com/opinion/op-ed/More-than-a-BIT-of-protectionism/article16801222.ece

http://thewire.in/66558/deconstructing-indias-model-bilateral-investment-treaty/

India one of most sued in 2015:

  • India has so far signed BITs with 83 different countries.
  • According to UNCTAD, which keeps an account of the number of disputes, a total of 17 known investor-state dispute settlement (ISDS) cases were filed against India by the end of 2015.
  • Of these seven are pending, nine were settled and India lost one case (excluding the recent Devas ruling).
  • India was one of the top 15 most frequent respondent states in 2015 (sued most often).

Bilateral Investment Treaties (BITs) termination:

  • India's bilateral investment treaty (BIT) with the Netherlands expired on November 30, due to India unilaterally terminating the treaty.
  • India has also issued notices to around 50 countries to terminate BITs, which includes about 20 European Union (EU) member countries. These will come into force soon.
  • BITs involve a certain degree of trade-off between protecting foreign investment and preserving the host state's regulatory power.
  • These treaties play a critical role in protecting foreign investment by holding host states accountable for the exercise of their regulatory power through an independent international arbitration mechanism, thus furthering international rule of law.

History of BITs in India:

  • The narrative on BITs in India has oscillated from one extreme to the other.
  • From 1994 to 2011, India signed 70-odd BITs tilted heavily in favour of investment protection against the host state's regulatory power.
  • Instead of correcting this laissez-faire narrative by balancing investment protection and the state's regulatory power, the pendulum has now swung to the other extreme.
  • The recently adopted Indian model BIT tilts the balance towards the host state's regulatory power by severely limiting the substantive and procedural protection to foreign investment.
  • India's BIT loss to White Industries, an Australian investor, in 2011 and a slew of BIT cases slapped by many foreign corporations triggered this protectionist narrative.
  • The recent loss in the Devas multimedia case under the India-Mauritius BIT, which arose on account of the cancellation of the Antrix-Devas deal, has strengthened this narrative.

Protection of foreign investment in India

  • Termination of BITs by India will not impact existing foreign investment in India because most Indian BITs contain survival clauses ensuring availability of treaty protection for existing investment even after the expiration of the treaty for the next 10 to 15 years.
  • Termination of BITs will also not impact any of the 15-odd ongoing BIT disputes against India including Vodafone's challenge of retrospective taxation under the India-Netherlands BIT.
  • Nevertheless, termination of BITs means that new foreign investment, such as any new Dutch investment in India made after November 30 shall not enjoy treaty protection.
  • This shows India's reluctance to be held accountable for its regulation under international law, thus forcing foreign investors to rely entirely on domestic laws and domestic courts to safeguard their interest.

Post termination:

  • Subsequent to termination, India plans to launch new BIT negotiations with these 50-odd countries based on its 2015 model BIT.
  • For example, with respect to EU countries, India hopes to replace the cluster of European BITs with the India-EU Bilateral Trade and Investment Agreement (BTIA),
  • However, international treaty negotiations take time. The India-EU BTIA, despite 16 rounds of negotiations since 2007, has not been signed due to major differences.
  • Unilateral termination of BITs by India has not gone down well with the EU, which means even further delay in BTIA obligations. Brexit has complicated things even more.
  • India's rank in World Bank's ease of doing business is abysmal at 130 out of 190 nations. When it comes to specific factors that are critical for foreign investors, such as enforcing contracts, India's rank is even worse at 172.

Some of the more contentious provisions in the Model BIT: 

1.       Definition of investment',

  • In its new model treaty, India has adopted an ‘enterprise-based' definition of investment which essentially "equates investment, with an enterprise incorporated in the host state", according to a recent analysis on BITs.
  • "The purpose of having an enterprise-based approach is to narrow the scope of protected investments and reduce the potential liability of the state under ISDS claims."
  • India's earlier model treaty of 1993 had a more expansive ‘assets-based' definition for investments.
  • The problems with an asset-based definition of investment, which means that every kind of asset, moveable and immovable, could qualify as investment and enjoy protection under treaties, irrespective of whether such assets contribute to the development of host countries.

2.       Most favoured nation clause

  • One of the most contentious clauses in BITs has been the one concerning countries that are granted most favoured nation (MFN) status.
  • Originally, the MFN clause was meant to make sure that, for example, US investors in India are not discriminated as against, say, Chinese investors in India. But it has often been put to use to achieve other ends.
  • The MFN provision has allowed the linking of different investment treaties; it has allowed foreign investors to choose the provisions of those BITs that have given them the maximum benefits.
  • India's model treaty does not have the MFN clause.

3.       Fair and equitable treatment (FET)

  • This catch-all clause has been invoked by investors and accounts for majority of successful claims in investment arbitration - unsurprising - given that this broad standard includes governmental measures and actions that fall outside the scope of other provisions.
  • This absolute standard of protection risks overreach in its application, UNCTAD has said.
  • In the model BIT, Article 3.1 on FET says: "No Party shall subject investments made by investors of the other Party to measures which constitute a violation of customary international law through: (i) Denial of justice in any judicial or administrative proceedings; or (ii) fundamental breach of due process; or (iii) targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or (iv) manifestly abusive treatment, such as coercion, duress and harassment".
  • To counter a broad interpretation and risk misuse, the model treaty links FET to customary international law. Customary international law, rooted in state practice, provides a minimum standard of protection to investors. Every potential breach listed in the provision above (denial of justice, breach of due process etc), requires a violation of customary international law for a claim to be justified.

4.       First exhaust domestic remedies:

  • The model treaty makes is mandatory for foreign investors to first exhaust domestic remedies before pursuing international arbitration.
  • Approaching domestic courts (exhaustion of domestic remedies) is a requirement in several investment agreements. Arguably, the investor should not have to go through a futile process and should be allowed to proceed directly to an arbitral tribunal.

5.       Counter-claims

  • The model treaty has not only toned down investor obligations, it also abandoned the possibility of India to launch counter-claims against the investor, compared to earlier drafts of the treaty.

Not attractive for foreign investors:

  • First, if domestic laws are changed suddenly to the detriment of foreign investors, like it happened in the case of Vodafone where Parliament retrospectively amended the Income Tax Act to overrule the Supreme Court's decision in favour of Vodafone, it would leave the foreign investor without any remedy.
  • Second, the overstretched Indian judicial system does not inspire much confidence in foreign investors as a forum for speedy resolution of disputes.

Protection of Indian investment abroad

  • Today, India is not just an importer but also an exporter of capital.
  • India's overseas FDI has increased from less than $1 billion in 2000-01 to more than $21 billion in 2015-16.
  • Given the reciprocal nature of BITs, their termination followed by replacement with a protectionist treaty will also reduce the protection available to Indian companies abroad. The significance of BITs for Indian companies can be gauged from three recent instances.
  • First, a few months back, an Indian investor, Flemingo Dutyfree Shop Private Limited (FDF) successfully sued Poland under the India-Poland BIT, winning damages of €17.9 million.
  • Second, an Indian mining company, Indian Metals & Ferro Alloys Ltd. (IMFA), has sued Indonesia under the India-Indonesia BIT at the Permanent Court of Arbitration,
  • Third, in a newly surfaced challenge, an Indian investor has sued Macedonia under the India-Macedonia BIT for the alleged expropriation of mining concessions awarded to the Indian investor.

Conclusion:

  • Indian BITs should reconcile investment protection with the host state's regulatory power and shun laissez-faire and protectionist narratives.
  • For this, India needs to do three things:

1.       amend the protectionist 2015 model BIT so as to strike a balance between interests of investors and that of the host state,

2.       negotiate with existing BIT partners based on this balanced model, and

3.       withdraw the termination notices till the newly negotiated text is finalised for replacing the existing BIT.

  • This would help India resurrect its image globally of a market economy based on rule of law, not arbitrariness and cronyism.
  • The objective of an investment treaty is generally to encourage investment flows. The focus is on the mutual benefit of both countries as a result of investment flows. The investors of both countries have reciprocal protection.

 

GS III: S&T

2.      What are the concerns raised regarding the proposed India-based Neutrino Observatory (INO)? How far are they genuine? What steps need to be taken to address them?

http://www.thehindu.com/opinion/op-ed/distrusting-science/article17681958.ece

Environmental Concerns

  • The National Green Tribunal on March 20 placed in abeyance the environmental clearance given to the India-based Neutrino Observatory (INO) which was to come up in the West Bodi Hills in Theni district in Tamil Nadu.
  • This was in view of the objection raised by an environmentalist group regarding the distance of the project from a wildlife sanctuary.
  • Initially slated to come up near Masinagudi, the project was moved to Theni because of objections that it was close to an elephant corridor.
  • While environmental issues, if they do exist, must be tackled with utmost care, at the heart of these objections is also fear and mistrust of science and scientists.

Safety Concerns

  • Ever since the INO got approval from the Ministry of Science and Technology, it has been drawing flak from activists despite repeated assurances from scientists that it is unlikely to harm the environment or affect the livelihoods of the people around the site.
  • Doubts range from questions of safety to the questionable potential for application of neutrino physics. Are neutrinos likely to harm people when they strike them? Will the tunnels made for the observatory be used to store nuclear waste, given that the Department of Atomic Energy is funding the research?
  • These and other questions have been addressed and answered in the negative by scientists.
  • It is a fact that neutrinos from the sun are falling on us by the trillions every second. As for nuclear waste, storing radiating material will spoil all the chances of detecting neutrinos, which interact rarely.

Usefulness of scientific research

  • Basic science faces many questions today, and the hardest relates to its usefulness.
  • If Newton had pursued strictly utilitarian research, he may never have sat under that apple tree and discovered the laws of gravitation. This means mechanics as we know it would not have existed - no cars, artificial satellites, or elevators.
  • Srinivasa Ramanujan's equations are being used to study black holes today. Did he even envisage this when he wrote them?
  • We cannot say at the point of invention how useful a discovery will be. Yet, we can certainly imagine and speculate how useful the science may be.
  • Former President Abdul Kalam had written in this newspaper about how neutrinos could be used to sniff out signs of nuclear proliferation from a remote location.
  • Also, with respect to dark matter - a hitherto undetected form which, along with dark energy, is believed to constitute 95% of the universe - he guessed how neutrinos could help in this search.
  • Additionally, there is the growing field of neutrino astronomy. Just like we have optical and radio astronomy, which reveal to us certain zones and constituents of the universe, we can literally widen our horizons with neutrino astronomy. Like radio astronomy, neutrinos can reveal exotic facets of the universe.
  • The INO project is good old science; rather than shying away from it, we must embrace it and assert our stake in it.
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