Legal Regime of International Investment Law

This blog is inscribed by Rainy Jain.

Introduction

International investment is a kind of investment which is done outside their own country. International agreement means holding securities or investing in other countries. It diversifies the portfolio. International investment is a wide concept as it involves countries all over the globe. Under international investment, investors are provided with a number of options and a wide range of choices for investing. It provides portfolio diversification. Investors are provided with a wide combination of debt and equity to invest for. The investors can look to invest in the same securities internationally as they were investing in domestic countries.

International investment can have both advantages and disadvantages but we can definitely say that international investment includes greater risk as compared to domestic investment. Investment can be in the form of shares, debentures, mutual funds, intellectual property rights.

When an individual or a corporation purchases the shares of a US company it is said to be an international investment. So, imagine a scenario where India invests in a US company and an Indian company. What can be the drawbacks or the risk one has to face in both situations? The domestic government of a developing country will in favourable circumstances support foreign investment as it results in GDP growth, ultimately affecting economic development.

Advantages of International Investment

  • GDP growth.
  • Strengthening the economy.
  • Infrastructural Development.
  • Negates the currency exchange rate.
  • Provides growth opportunities i.e. growth trends.
  • Diversification of funds.
  • Skill development of the labour force.

Disadvantages of International Investment

  • Danger to domestic investment.
  • It can be more expensive.
  • It can lead to exploitation.
  • It involves a higher risk.

There are various rules and regulations that one has to follow to invest internationally. Without the presence of a legal framework, it would be very difficult to invest in other countries and a lot of chaos will be created regarding the rules of which country is to be followed. Hence, there are various laws that govern international investment. A proper legal regime has to be developed. Though investment is not an archaic concept all the rules and laws regarding the development of international investment are still in the process.

The legal regime of international investment can be bifurcated into two aspects:

  1. International aspect
  2. Domestic aspect

These aspects deal separately with international and domestic transactions respectively. The international legal regime is mostly substantive as it only provides the basic guidelines but does not give a detailed procedure on how to apply the laws.

International Legal Regime

The international legal regime includes:

  1. ICSID (International Centre for The Settlement Of Investment Disputes)
  2. International investment treaties (IIA)
  3. Bilateral treaties (BITs)
  4. Regional trade agreements
  5. TRIMS

The International Centre for The Settlement of Investment Disputes (ICSID)

ICSID is one of the leading entities working for international investment. It was founded by the World Bank in the year 1965. It currently has 161 members. The main function of ICSID is to provide a medium for dispute resolution between the investor and the state. The main function of the ICSID is to protect the interests of the investors. ICSID solves disputes through arbitration between the parties and passes the order. All the evidence, expert opinions are taken into consideration and the final order is passed. More than 600 cases have been dealt with by the ICSID. Article 53 of ICSID states that the order passed by the ICSID is final and binding over the parties. But there are some exceptions present. The issue regarding the transparency of the ICSID has been raised time and again but no necessary steps have been taken to answer such issues. It is still a widely accepted entity for the resolution of disputes.

International Investment Treaties/Agreements (IIA)

International investment treaties are the modern concept. In today’s time treaties are the safest way to invest in the international level. Treaties are formed to protect the interests of the investors. The treaties and agreements are a framework that lays down the terms and conditions of their investment contract. The parties are required to be bound by that contract and the breach of the contract would be against the treaty.

Some of the IIAs are:

  • BITs (Bilateral treaties)
  • RTAs (Regional Trade Agreement)
  • TRIMS (Trade-Related Investment Measure)

A.     Bilateral treaties (BITs)

Bilateral treaties are the terms and conditions between two private parties and individuals of two different countries. Bilateral treaties are one of the safest ways to form rules regarding international investment. This is a modern concept and investors are preferring the way of Bilateral treaties to form the terms and conditions of the investment.

BITs grant investors from a contracting state, certain guarantees, including “fair and equitable treatment,” protection from expropriation, and the free transfer of funds. In addition, they provide investors recourse to arbitration, often under the auspices of ICSID, to resolve disputes with the host state.

A bilateral treaty is generally drafted in the official language of both the countries.

There are various substantive protections that are given to the parties of the Bilateral treaty and they are as follows:

  1. Full protection and security of the investment.
  2. Fair and equitable treatment to the investors.
  3. Provisions against unfair expropriation.

Some BITs signed by India in recent times are:

  • Brazil – India BIT, 2020[1]
  • India- Kyrgyzstan BIT, 2019[2]
  • Belarus – India BIT, 2018[3]
  • ASEAN – Indian Investment Agreement, 2014[4]
  • India – United Arab Emirates BIT, 2013

B.     Regional Trade Agreements (RTAs)

Regional trade agreements are trade agreements between two or more governments for the purpose of trade and investment. The parties in RTAs are given preferential treatment. The preference can be provided by reducing the tariffs between the countries and creating a free trade environment. Preferential trade arrangements refer to unilateral trade privileges such as General System of Preferences schemes and also includes non-reciprocal preferential programmes. Some WTO members have taken such initiatives for the products which are being imported from developing and least-developed countries. [5]

Till 17 January 2020, 303 RTAs were in force. There are almost 483 notifications from WTO members including counting goods and services and accessions separately.[6]

The rules regarding RTAs can be seen under Art XXIV of GATT which states about custom unions and free trade areas.

Some notable examples of regional trade agreements are

  • NAFTA (North American Free Trade Agreement)
  • TPP (Trans-Pacific Partnership)
  • Comprehensive and Progressive Agreement for Trans-Pacific Partnership
  • UMCA (United States–Mexico–Canada Agreement)

C.     TRIMs (Trade-Related Investment Measures)

TRIMS are certain kinds of rules that are applied by the host country over the foreign investor to protect its interest. The host country, by applying these rules makes sure that the domestic country does not get any preferential treatment. TRIMs is one of the four pillars of the WTO. It was adopted in the Uruguay Round Negotiations.

Domestic Legal Regime

If we look at the domestic legal regime of India, we will find that there is one statutory body that has been playing a key role in encouraging the investment trends in India and that is the Securities and Exchange Board of India (SEBI).

SEBI is a body corporate that came into force in the year 1992, even though it was established in 1988. SEBI also performs the functions of formulating rules and regulations for investment purposes such as SEBI (Underwriters) Rules, SEBI (Merchant Bankers) Rules. Hence, it is also known as a Quasi-Judicial body. It works based on a set of rules. SEBI acts as a watchdog for domestic investors. It also functions as a dispute redressal body. SEBI also lays down the procedural rules for investment.

Conclusion

As investments have become one of the major focal points in today’s world, it is important that proper rules and regulations be laid down on domestic as well as international levels. If we look at the international platform, we will find out that only substantive rules are provided. Whereas at the domestic level, procedural laws have been formulated properly. A uniform system for investment is the basic need for an easy investment process that everyone can follow. The uniform system should be applicable all over the globe to provide investors a larger surface for investment.


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