Abstract
International Investment Agreements (IIAs) are treaties signed at the bilateral, regional or multilateral level by two or more countries to protect investments made by investors of both the countries. In this chapter, IIAs refer to standalone investment agreements such as bilateral investment treaties and also investment chapters in free trade agreements. IIAs protect investments by imposing conditions on the regulatory behaviour of the host state and thus, prevent undue interference with the rights of the foreign investor. These conditions include restricting the host state from expropriating investments, barring for public interest with adequate compensation; imposing restrictions on host states to discriminate against foreign investment, barring certain circumstances given in the IIA; allowing for repatriation of profits subject to conditions agreed to between the two countries; and most importantly allowing individual investors to bring cases against host states if the latter’s sovereign regulatory measures are not consistent with the IIA to be monetarily compensated. This is known as the investor-state dispute settlement system. In this chapter, the dispute settlement system along with the network of IIAs is referred as investment treaty arbitration (ITA).
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Notes
- 1.
For a general discussion on IIAs see Dolzer and Stevens (1995), Sornarajah (2004), McLachlan et al. (2007), Lowenfeld (2008, pp. 467–591), Dolzer and Schreuer (2008), Muchlinski et al. (2008), Newcombe and Paradell (2009), Muchlinski (2007), Subedi (2008), Salacuse (2010), Vandevelde (2010). India has terminated many of its IIAs though due to a grandfather clause these IIAs will continue to operate for next 10 to 15 years. For recent developments in India’s IIA programme including for a discussion on the 2016 Indian Model BIT see Ranjan, Prabhash (2019). India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash (1st edition) New Delhi: Oxford University Press.
- 2.
See Waibel (2009), Salacuse (2010), Kolo and Walde (2008, p. 205), Dolzer and Schreuer (2008), Gallagher (2010) G 24 Discussion Paper Series No. 58 (UNCTAD); Thrasher and Gallagher (2010), Anderson (2009), Turyn and Aznar (2010, pp. 51–78), Muchlinski (2009, pp. 35–61, Vandevelde (2010, pp. 316–33), Salacuse (2010, pp. 256–71).
- 3.
Vandevelde (2010, p. 317).
- 4.
Id.
- 5.
Vandevelde (2010, p. 319).
- 6.
See Model Text for Indian Bilateral Investment Treaty, Article 7.
- 7.
Dolzer and Schreuer (2008, p. 191).
- 8.
Salacuse (2010).
- 9.
- 10.
Krugman and Obstfeld (2009).
- 11.
- 12.
- 13.
Deutsche Bank Research (2009).
- 14.
Gallagher (2010), G 24 Discussion Paper Series No. 58 (UNCTAD) 4. URR is a type of capital control requiring a certain percentage of short term capital inflow to be kept in deposit in local currency for a certain period of time and hence it has the characteristic of both price and quantity based control.
- 15.
- 16.
‘Economists Urge US to Rethink Capital-Control Restrictions’ http://blogs.wsj.com/economics/2011/01/31/economists-urge-us-to-rethink-capital-control-restrictions/. Also see the open letter written by more than 100 economists on 28 February 2012 to the trade ministers of nine countries (USA, Australia, Brunei Darussalam, Malaysia, New Zealand, Peru, Singapore, Chile and Vietnam) to consider having provisions for imposition of capital controls in the Trans-Pacific Partnership Agreement http://www.ase.tufts.edu/gdae/policy_research/TPPAletter.html#statement.
- 17.
Ibid. Also see the open letter written by more than 100 economists on 28 February 2012 to the trade ministers of nine countries (USA, Australia, Brunei Darussalam, Malaysia, New Zealand, Peru, Singapore, Chile and Vietnam) to consider having provisions for imposition of capital controls in the Trans-Pacific Partnership Agreement http://www.ase.tufts.edu/gdae/policy_research/TPPAletter.html#statement. It is also important to note that there are many causes of massive and sudden inflow and outflow of capital. Activities of foreign investors, though important, constitute one of the many factors. Capital inflows and outflows also take place when citizens of the host country transfer money abroad or domestic companies raise money in the international market—also called external commercial borrowings or domestic companies invest abroad, etc. In other words, those capital controls that do not affect the activities of foreign investors will fall outside the purview of the IIA.
- 18.
This crisis started as a sub-prime mortgage crisis in the USA and then snowballed into a global financial crisis affecting not just developed but also developing countries—for a detailed analysis of the crisis see—Islam and Nallari (2010), Jones et al. (2008). According to economic historians this is not the first time that a financial crisis has occurred since the 17th century; the world has witnessed 10 major financial crises—Kindelberger and Aliber (2005).
- 19.
- 20.
Fisher (1998, p. 2).
- 21.
- 22.
Ocompo and Palma (2008, p. 170).
- 23.
Salacuse (2010, p. 256).
- 24.
See Footnote 24
- 25.
Rodrik (1998, pp. 55–65).
- 26.
Bhagwati (1998, pp. 7–12).
- 27.
- 28.
- 29.
Bhagwati (1998).
- 30.
- 31.
- 32.
- 33.
Ocompo and Palma (2008).
- 34.
- 35.
Gallagher (2011).
- 36.
- 37.
Le Fort and Lehmann (2003).
- 38.
Coelho and Gallagher (2010).
- 39.
- 40.
J Ostry, et al., ‘Capital Inflows—the Role of Controls’, (2010) IMF Staff Position Note SPN/10/04 For a discussion on this note see—Chandrashekar (2010), Subramaniam (2010). Also see ‘IMF Backs Capital Controls in Brazil, India’ The Deccan Herald (Washington 7 Jan 2011) http://www.deccanherald.com/content/127011/imf-backs-capital-controls-brazil.html. Other successful examples of capital controls on inflows are in Malaysia (in 1994); Colombia (in 1993) and Thailand—Magud and Reinhart (2006); IMF (2010). It has also been argued that the economic literature supports capital controls on inflows whereas the evidence of benefits on capital control on outflows is inconclusive—Magud and Reinhart (2006), Gallagher (2010) G 24 Discussion Paper Series No. 58 (UNCTAD).
- 41.
Lowenfeld (2008, p. 608).
- 42.
These provisions are—Articles of Agreement of International Monetary Fund, Article VIII 3(b) and Article XIV2. Also important to note that once a country notifies to the IMF its willingness to accept the obligations contained in Article VIII, there is no going back—Lowenfeld (2008, p. 607).
- 43.
- 44.
Articles of Agreement of International Monetary Fund, Article VIII 2.
- 45.
Fisher (1998, p. 9).
- 46.
Ibid.
- 47.
Qureshi and Ziegler (2011, p. 217) where it is argued that IMF encouraged capital liberalisation but there is no evidence to support the claim that IMF required capital liberalisation per se.
- 48.
- 49.
Rangrajan (2000, p. 4425).
- 50.
Joshi (2001, p. 317).
- 51.
- 52.
Report of the Committee on Capital Account Convertibility (1997).
- 53.
Ibid.
- 54.
Tarapore Committee Report (2007). Apart from this there have been two more committees in India that have discussed the issues of CAC—Report of Committee on Financial Sector Reforms (2007) and Report of High Powered Committee on Making Mumbai as International Financial Centre (2007). Both these committees have argued in favour of CAC. According to these committees unrestricted capital flow will unleash strong competitive forces and bring other benefits—for more on this see—Patil (2010).
- 55.
It has been pointed out that India’s controls on outflows as well as inflows, in wake of the global financial crisis of 2008, contributed to tide the slump—see Epstein (2012).
- 56.
- 57.
India cannot impose restrictions on current account transactions after it became an Article VIII member country in 1994—IMF (2011).
- 58.
India cannot impose restrictions on current account transactions after it became an Article VIII member country in 1994—IMF (2011).
- 59.
For more on this see Gururaj et al. (2009).
- 60.
Foreign Exchange Management Act 1999 (Ind), Section 6(2)(b).
- 61.
See Foreign Exchange Management Act 1999 (Ind) Section 6(3), (a) to (j) of the FEMA Act.
- 62.
In this regard also see Vandevelde (2010, p. 319).
- 63.
For example, in Continental Casualty v Argentina, ICSID Case No. ARB/03/9 the tribunal held that a transfer that is not ‘related to investment’ was outside the scope of Article V of the US-Argentina IIA. Article V of the US-Argentina IIA, like Article 7 of the India model IIA, is broad and covers all transfers related to investments—Continental Casualty v Argentina, Award, paras. 238–42.
- 64.
Salacuse (2010, p. 264).
- 65.
UNCTAD (2000), 33.
- 66.
For example, Article 94 (3) of the India-Japan IIA provides exceptions to the right of foreign investors to transfer funds in the following terms—‘Notwithstanding paragraphs 1 and 2, a Party may delay or prevent such transfers through the equitable, non-discriminatory and good faith application of its laws relating to:
-
(a)
bankruptcy, insolvency or the protection of the rights of creditors;
-
(b)
issuing, trading or dealing in securities or derivatives including futures and options;
-
(c)
criminal or penal offenses;
-
(d)
ensuring compliance with orders or judgments in judicial proceedings or administrative rulings; or
-
(e)
obligations of investors arising from social security, and public retirement or compulsory savings scheme’.
-
(a)
- 67.
‘Consolidated FDI Policy’, Department of Industrial Policy and Promotion, Ministry of Commerce http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf.
- 68.
Also see Dolzer and Schreuer (2008, p. 193).
- 69.
See India-Italy IIA, Article 7(1) of.
- 70.
For a discussion on what sorts of IIA violations can take place by imposing restrictions on repatriation of funds related to investments see Kolo and Walde (2008, pp. 227–36).
- 71.
The issue of compatibility between MTPs in IIAs (pre accession BITs) and other regulations (EU Treaty or the EC law) has also arisen in EU—see—Commission of EU v Republic of Austria, Case C—205/06 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62006J0205:EN:HTML (as on 2 October 2010); Commission of EU v Kingdom of Spain, Case C—249/06 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62006J0249:EN:HTML (as on 2 October 2010).
- 72.
Article XII of GATS allows countries to impose restriction on trade in services in the event of serious BOP problems or external financial difficulties.
- 73.
Turyn and Aznar (2010, p. 72).
- 74.
US-Argentina BIT, Article 5 (1) provides ‘Each Party shall permit all transfers related to an investment to be made freely and without delay into and out of its territory. Such transfers include: (a) returns; (b) compensation pursuant to Article IV; (c) payments arising out of an investment dispute; (d) payments made under a contract, including amortization of principal and accrued interest payments made pursuant to a loan agreement directly related to an investment; (e) proceeds from the sale or liquidation of all or any part of an investment; and (f) additional contributions to capital for the maintenance or development of an investment’.
- 75.
Argentina’s rejoinder in the Continental Casualty v Argentina, para 297.
- 76.
Continental Casualty v Argentina, Award, para 244.
- 77.
Ibid, paras 243–44.
- 78.
Interview with an official of the Ministry of External Affairs.?? August 2010, New Delhi (name withheld).
- 79.
Continental tribunal, para 244.
- 80.
Muchlinski (2009, p. 60).
- 81.
For more on the strict nature of Article 25 of the ILC Articles see the chapter 6 on NPM.
- 82.
Turyn and Aznar (2010, p. 74).
- 83.
- 84.
NPM provisions in an IIA means those measures, which a country is not prohibited from taking to achieve certain regulatory objectives, even if it means not honouring substantive obligations of investment protection. On this issue also see Kolo and Walde (2008, pp. 217–26); the NPM chapter.
- 85.
On this point also see Kolo and Walde (2008, p. 212).
- 86.
India-Malaysia BIT, Article 6(1).
- 87.
India-Slovakia BIT, Article 6.4.
- 88.
India-Iceland BIT, Article 7(4).
- 89.
See India-Mexico BIT, Article 8(3).
- 90.
See India-Mexico BIT, Article 8(4).
- 91.
Protocols amending the IIAs signed between India and the three countries.
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Ranjan, P. (2019). Capital Flows into India—Role of Monetary Transfer Provisions in India’s International Investment Agreements. In: Singh, M., Cremer, W., Kumar, N. (eds) Open Markets, Free Trade and Sustainable Development. Springer, Singapore. https://doi.org/10.1007/978-981-13-7426-5_15
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