As part of reviving its fragile and debt-ridden economy, Sri Lanka has decided to bite the bullet of hard economic reforms, including divesting
ownership in several public sector undertakings. This includes State companies in sectors like airlines, hotels, and hospitals. Sri Lanka is quite keen to attract
Indian investment as part of its exercise to restructure State-owned enterprises. Reportedly, the Tata Group is being considered as a possible investor
in Sri Lankan Airlines.
While Sri Lanka’s decision to restructure its State-owned companies surely opens the possibility for Indian companies to invest in Sri Lanka, one major worry is the safety and protection of Indian investment. Sri Lanka is not out of the woods yet, making it risky to do business there. The best example to understand high regulatory risk in Sri Lanka is the island nation’s abrupt decision in 2021
to renege on a trilateral agreement involving India, Japan, and the Sri Lanka Port Authority that aimed to jointly develop the strategic Eastern Container Terminal (ECT) at the Colombo port. Later, the work to develop the Eastern terminal of the Colombo port was given to a Chinese
While Sri Lanka’s decision to restructure its State-owned companies surely opens the possibility for Indian companies to invest in Sri Lanka, one major worry is the safety and protection of Indian investment.
While Sri Lanka provides the immediate reference point, the issue is not restricted to the island nation alone. The larger question is what legal protection is available to Indian companies when they invest abroad braving high regulatory risks. Given the growth in India’s outbound investments and the emphasis on connectivity and infrastructure investment, the issue of legal protection for Indian companies abroad assumes salience. The piece first looks at this issue from the perspective of the legal protection of Indian investment in Sri Lanka followed by a global outlook.
Legal Protection for Indian Investors
As Jeswald Salacuse, one of the foremost international investment lawyers argues
, broadly, there are three basic legal frameworks that apply to foreign investment. First are the host’s national laws (where the investment is made) and the home State (the investor’s home country). Second, contracts signed between the foreign investor and the government of the host State or among foreign investors and companies of the host State. Third, the international law contained in applicable treaties, customs, and general legal principles that have attained the status of international law.
The Indian companies investing in Sri Lanka can use the first two legal frameworks to protect their investments from regulatory risks. For instance, the proposed Budget
Act in Sri Lanka promises that projects and policies of national importance shall continue to operate despite changes in government. However, there are limitations to relying on the domestic law of the host State because it can be changed to the detriment of the investor unilaterally by the State anytime. Likewise, contracts may be of limited value when it comes to challenging the sovereign actions of the State that adversely affect foreign investment. Therefore, the third legal framework, that is, international law, assumes importance.
BITs protect investments by imposing conditions on the regulatory behaviour of the host state, thus, preventing undue interference with the rights of the foreign investor.
International law cannot be changed unilaterally, and it can be used to hold States accountable for their sovereign actions. When it comes to protecting foreign investment, the most important instrument in international law is a bilateral investment treaty (BIT). A BIT is a treaty between two countries aimed at protecting investments made by investors of both countries. BITs protect investments by imposing conditions on the regulatory behaviour of the host state, thus, preventing undue interference with the rights of the foreign investor. These conditions include restricting host States from expropriating investments, barring for public interest with adequate compensation and following due process; imposing obligations on host states to accord fair and equitable treatment (FET) to foreign investment and not to discriminate against foreign investment; allowing for repatriation of profits, etc. BITs also empower individual foreign investors to directly sue the host State before an international tribunal if the investor believes that the host State has breached its treaty obligations. This is known as investor-State dispute settlement (ISDS). According to the United Nations Conference on Trade and Development (UNCTAD), by the end of 2022, the total number of known
ISDS claims that have been brought stands at 1257.
Termination of the India-Sri Lanka BIT
However, for Indian businesses investing in Sri Lanka, the international legal framework is missing because India unilaterally terminated
the India-Sri Lanka BIT, signed in 1997, on 22 March 2017. This termination was part of the mass repudiation of BITs that India undertook in 2017 because of several ISDS claims being brought against India. Consequently, if the Tata Group makes an investment in Sri Lankan airlines in the near future or if any other Indian company in Sri Lanka gets into regulatory trouble, they will not be able to employ the BIT or threaten the use of the BIT to bring an ISDS claim against Sri Lanka to safeguard their investment.
A South Asian Investment Treaty could have proved handy for Indian companies to seek protection under international law, not just in Sri Lanka but in the entirety of South Asia.
The India-Sri Lanka BIT does contain a survival clause, according to which, in case of a unilateral termination of the treaty, the treaty shall continue to be effective for a further period of 15 years from the date of its termination. However, this protection is only for investments made on or before 2017. This survival clause will be of no avail for new Indian investments that may go to Sri Lanka in the future. To complicate matters further, the South Asian Investment Treaty, which was being negotiated under the aegis of the South Asian Association for Regional Cooperation, has also not become a reality. In the absence of an India-Sri Lanka BIT, a South Asian Investment Treaty could have proved handy for Indian companies to seek protection under international law, not just in Sri Lanka but in the entirety of South Asia.
Not just about Sri Lanka
As already mentioned, this issue is not restricted to Indian companies in Sri Lanka. Over the years, India’s outbound investments have expanded
conspicuously both in terms of volume and geographical distribution. According to India’s Finance Ministry, the actual
overseas direct investment (ODI) in 2021-22 stood at US$17,858 million, up from US$15,696 million in 2020-21. Moreover, the Finance Ministry data also tells us that from April 2000 to March 2023, Indian investment has gone to more than 150 countries.
Given this wide spread of Indian investment abroad, there have been several cases of Indian companies facing regulatory troubles, especially in jurisdictions that are not considered business friendly. The following examples substantiate the point: The Tata Group, in 2008, had to pull out
their power project in Bangladesh because of the failure of the government to supply natural gas; Lupin, the Indian drug major had to exit
the Japanese medicines market because of a complex regulatory system and pricing process; Jindal Steel and Power Company was forced to walk out
of an iron ore and steel project in Bolivia due to the Bolivian government’s failure to fulfil its contractual commitments; GMR’s investment in the Maldives faced a rude shock when the Maldivian government abruptly terminated its agreement with GMR for developing the airport in Male; State-owned Oil and Natural Gas Corporation has flagged high risks
of operating in countries like Venezuela.
BITs do not empower merely foreign investors to sue India but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
While these corporations did not make use of the BIT to safeguard their investment, several other small Indian companies have made use of investment treaties to challenge the sovereign measures of host States. According to UNCTAD, from 2000 to 2020, there have been as many as 11 instances
of Indian companies bringing ISDS claims. Out of these 11, nine ISDS claims were brought from 2014 to 2020. These claims have been brought against countries like North Macedonia, Libya, Bosnia and Herzegovina, Mozambique, Saudi Arabia, Indonesia, Mauritius, Poland and also against developed countries like Germany and the United Kingdom. These numbers reveal the significance that Indian companies, especially small investors, attach to the BIT as an indispensable instrument to protect against capricious behaviour of host States.
However, India has unilaterally terminated
more than 70 of its BITs out of the 80 odd it had signed. Consequently, India has dismantled the international law framework that could save Indian capitalism abroad from arbitrary State behaviour. As pointed out earlier, due to the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs. The motivation appears to be to eliminate or at least minimise future ISDS cases against India. However, an important attribute that, perhaps, hasn't received much attention is that BITs are reciprocal. Thus, BITs do not empower merely foreign investors to sue India but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
In the post-Covid world, regulatory risks have further exacerbated, thus, subjecting foreign investment to the arbitrary and whimsical behaviour of States. Accordingly, given India’s emergence as an exporter, not just an importer, of capital, there is a need to revisit the stand on BITs. India needs to adopt a balanced approach towards BITs with an effective ISDS provision. This will facilitate the creation of an international legal code for the protection and encouragement of Indian capitalism.
Prabhash Ranjan is Professor and Vice Dean, Jindal Global Law School, O P Jindal Global University.
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