SAYING trade and investment go hand in hand in today’s global investment scenario, India’s leading businessman Rahul Bajaj has proposed a bilateral investment treaty between India and Pakistan to fully facilitate the two-way flow of foreign direct investment.

Addressing a session on investment on May 8 at the Indo-Pakistan economic conference in Lahore, Bajaj said both governments had a role in facilitating business in order to create an investment-friendly environment. The proposal coming at a time when the two countries are still engaged in removing hurdles in the way of trade and win each other’s confidence is seen as an idea whose time has not come.

Currently, there is no investment at all between the two countries. This is despite the fact Pakistan had no apparent formal restrictions on Indian investment, although India had banned Pakistan’s investment but is now lifting it.

Since India is a much bigger and stronger economy, there are fears among Pakistani businessmen, not all unjustified, that opening up to India would be against their interests. To dispel these fears, Bajaj used the oft-repeated argument that when Pakistan can open up to China and suffer no harm to their economy there is no reason to believe that Indian products and investment would do so.

The BIT is an agreement between the two countries setting out the terms and conditions for private investment by nationals and companies of one state in another. The terms usually include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security of investments. The BIT is the modern-day equivalent to the 19th century friendship, commerce, and navigation treaty (FCN).

The world’s first BIT, it is interesting to note, was signed on November 25, 1959 between Pakistan and Germany. There are currently more than 3,000 BITs in force, India having over 80, Pakistan about 50 and the United States only 40.

Like Pakistan, India has been entering into BITs, or doing ‘treaty-shopping’, without fully understanding their implications. The Indian establishment’s belief that its BITs adequately balance investment protection with its ability to exercise sovereign powers remained strong until it was shattered in November 2011 when a tribunal of arbitration found India guilty of violating the India-Australia BIT - the first setback of its kind for the country.

Confused and demoralised, Indians kept the award confidential until February 2012. The verdict is, in fact, an indictment of India’s sovereign function and has ramifications for both the executive and the judiciary. The Australian firm, White Industries, had taken the matter to arbitration in 2010 saying the extraordinary delay in Indian courts to enforce the arbitration award had violated the BIT provisions on fair and equitable treatment (FET), expropriation, MFN treatment, and free transfer of funds.

The tribunal ordered India to pay damages to the firm to the tune of $4.1 million plus A$84,400 for the fees and expenses of arbitrators and $0.5 million for arbitral expenses. All these payments have to be made with an interest of eight per cent per annum from March 24, 1998, until the date of payment.

Writing in The Hindu on April 27, Kavaljit Singh, a prominent trade analyst, observed that the bilateral investment treaties that India signed a few years ago are now “coming back to haunt it.”

On April 17, British telecom giant Vodafone issued a notice of dispute to the Indian government, through its Dutch subsidiary, under the India-Netherlands BIT signed in 1995. Vodafone’s notice is the latest in the growing line of cases against India under the framework of BITs.

On February 28, Russian conglomerate Sistema sent a legal notice to New Delhi threatening arbitration proceedings under the India-Russia BIT signed in 1994 if the government failed to settle the dispute related to revocation of its 21 telecom licences in an amicable way by August 28, 2012. What had happened was that on February 2, the Indian Supreme Court had ordered the cancellation of all 122 spectrum licences issued in January 2008 by the then Telecom Minister A. Raja, saying the latter “wanted to favour some companies at the cost of the public exchequer.”

Following in the footsteps of Sistema, Norwegian telecom company Telenor also threatened to invoke the India-Singapore Comprehensive Economic Cooperation Agreement to protect its investments.

The BITs India has signed may open the floodgates for similar claims by foreign investors and the Indian government may end up paying full compensation.

Kavaljit Singh, in his essay, advises the Indian government to undertake certain measures to escape foreign investors’ litigations in future.

These suggestions must also be taken note of by Pakistani officials for they may be relevant while negotiating the terms for the proposed Pakistan-India BIT.

First, he says, India should initiate a comprehensive review of its existing investment treaties since recent cases have shattered the myth that its treaties maintain a fine balance between investor rights, investor responsibilities and regulatory space.

Second, policymakers should not allow investor-state dispute settlement mechanisms under which a foreign investor can initiate an international arbitration against India. Third, to prevent “treaty shopping” by investors, policymakers could altogether remove the MFN clauses in future treaties.

Fourth, for a more balanced outcome, policymakers should avoid using words such as “creating favourable conditions for investments” in the preamble since it could be interpreted by arbitral tribunals as removing all restrictions in favour of foreign investors. Fifth, the main objective of treaties should not be investment protection alone.

Meanwhile, the US Trade Representative’s office released on April 20 its new model BIT. It maintains the same language used in the 2004 model BIT, in particular its carefully calibrated balance between providing strong investor protections and preserving the government’s ability to regulate in the public interest, but there are some important changes regarding improved protection for American firms, promoting transparency, and strengthening the protection of labour rights and the environment.

The new terms include demands that foreign governments should not relax environmental or labour laws merely to seek investment by US companies. A leading US business group is of the view that stronger US labour and environment demands “could be counterproductive” because they go further than what other developed countries demand. These demands, it says, could inhibit countries like China, Brazil and India from concluding BITs with the US. Lori Wallach, director of Public Citizen’s Global Trade Watch, said the new model BIT was basically the same as “the deeply flawed ‘old’ model.”