Exclusive: India may liberalize foreign investment in non-services sector through ‘pre-establishment’ protection

To boost foreign inflows into India’s manufacturing and industrial sectors, New Delhi plans to liberalize foreign investments in the ‘non-services sector’ by offering safeguards against future political and economic risks to potential investors on their pre-investment activities.

Sources said the Department for Promotion of Industry and Internal Trade (DPIIT) could soon be deployed to negotiate a chapter on investment liberalisation in the ‘non-services sector’ in the ongoing Free Trade Agreement (FTA) discussions.

The chapter could include ‘pre-establishment’ protection in ‘non-services sector’ whereby investors would get bilateral treaty protection through State-State Dispute Settlement (SSDS) on their pre-investment activities before the venture is established in the territory of either country, they said.

This is a major turnaround from India’s stand since 2015 when New Delhi decided to shun ‘pre-establishment’ obligations to investments in the non-services sector as it risked limiting the country’s policy space, and it revised the Model Bilateral Investment Treaty (BIT) to allow treaty protection to investments only after the ventures were established.

Model BIT 2015 says: "…nothing in this Treaty shall extend to any pre-investment activity related to establishment, acquisition or expansion of any investment, or to any measure related to such pre-investment activities, including terms and conditions under such measure which continue to apply post-investment to the management, conduct, operation, sale or other disposition of such investments”.

Presently, India provides liberalization commitments in the pre-establishment phase only in the ‘services sector’ while its post-establishment protection is covered in the BIT.

Traditionally, investment treaties have been protective (post-establishment) but as the global trade evolved, these treaties came to encompass liberalization (pre-establishment) elements as well such as the North American Free Trade Agreement (NAFTA) in 1994.

Development of new consumption trends, altered patterns of international production, emergence of global value chains, more and easier access to market information, and a tougher international competitive environment have affected the way nations negotiate investment treaties.

Sources said India’s thinking is to replace the present Investor-State Dispute Settlement Mechanism which has been the major cause for the country’s cautious 2015 BIT due to adverse arbitration awards against it. Instead, dispute resolutions would be through State-State Dispute Settlement Mechanism.

They said the bilateral treaties would explicitly list the specific sectors where investment commitments would be protected, rather than issue a negative list where each side is considered to have liberalized all sectors, except those highlighted as ‘No Go’ areas.

India’s attempts to conclude international investment agreements (IIAs) have yielded limited success as FTAs with Australia, Mauritius, and the United Arab Emirates (UAE) do not contain provisions for overall protection and the standalone BITs with Brazil, Belarus and Kyrgyzstan are not yet in force. FTA negotiations with the United Kingdom, the European Union (EU) and Canada, including for an investment chapter, are ongoing.

The Parliamentary Consultative Committee of the Ministry of Commerce & Industry on ‘New Foreign Trade Policy 2021-26’ found “the number of BITs/Investment Agreements signed post 2015 and the number under negotiations as inadequate and not commensurate with the growth of India’s interest in this domain and her rising stature in global affairs”.