Protecting Indian Capital in Bangladesh

Context:

The recent dramatic events in Bangladesh, which led to the resignation and departure of former Prime Minister Sheikh Hasina, have created a political vacuum and introduced uncertainty in India’s eastern neighbor. Beyond the political and diplomatic implications of this crisis for India, a significant concern is how it will affect Indian companies operating in Bangladesh.

Relevance:

GS2-

• India and its Neighbourhood- Relations
• Effect of Policies and Politics of Developed and Developing Countries on India’s interests
• Indian Diaspora

Mains Question:

Examine the consequence that recent incidents in Bangladesh can have on Indian investments in the country. What can be done to minimise the impact of this crisis on the Indian capital? (15 Marks, 250 Words).

Indian Investments in Bangladesh:

• Indian firms have invested in various sectors in Bangladesh, including edible oil, power, infrastructure, fast-moving consumer goods, automobiles, and pharmaceuticals.
• Despite political opposition, the Sheikh Hasina government welcomed Indian investors, implementing measures such as the establishment of designated special economic zones to attract them.
• However, her opponents, displeased with India’s perceived support of Hasina’s regime, initiated an “India Out” boycott movement targeting Indian products.
•  Now that Ms. Hasina is no longer in power, the interim or new government might adopt a hostile stance toward Indian companies, potentially altering existing laws or introducing new regulations that could negatively impact Indian investments.

What Strategies can Indian Businesses Pursue in such a Scenario?

Legal Protection for Indian Investors:

• Jeswald Salacuse outlines three primary legal frameworks that generally govern foreign investment.
• First, the domestic laws of the country where the investment is made.
• Second, contracts between the foreign investor and the host state’s government or between foreign investors and companies within the host state.
• Third, international law, which includes applicable treaties, customs, and general legal principles that have gained recognition as international law.
• Indian companies with investments in Bangladesh can rely on the first two legal frameworks to safeguard their investments against regulatory risks. For example, they can invoke Bangladesh’s Foreign Private Investment (Promotion and Protection) Act.
• However, relying on the host state’s domestic law has its limitations, as the state can unilaterally change these laws to the detriment of the investor at any time.
• Similarly, contracts may offer limited protection when challenging sovereign actions by the state that adversely affect foreign investments.
• Consequently, the third legal framework, international law, becomes particularly important in such situations.

The India-Bangladesh BIT:

• International law cannot be unilaterally altered and serves as a mechanism to hold states accountable for their sovereign actions.
• In the realm of foreign investment protection, the most critical tool in international law is the bilateral investment treaty (BIT).
• A BIT is an agreement between two countries designed to safeguard investments made by investors from both nations.
• These treaties protect investments by setting conditions on the regulatory actions of the host state, thus preventing undue interference with the rights of foreign investors.
• Key provisions in BITs include restrictions on unlawful expropriation, obligations for the host state to provide fair and equitable treatment (FET) to foreign investments, and non-discrimination against foreign investors.
• BITs also grant foreign investors the right to directly sue the host state before an international tribunal if they believe the host state has violated its treaty obligations, a process known as investor-state dispute settlement (ISDS).
• According to the United Nations Conference on Trade and Development (UNCTAD), by the end of 2023, 1,332 known ISDS claims had been brought.
• In the event of adverse regulatory actions by the Bangladeshi government, Indian companies can rely on the India-Bangladesh BIT, which was signed in 2009.
• Although India has unilaterally terminated most of its BITs, the one with Bangladesh remains in effect.
• This treaty includes comprehensive investment protection measures, such as an unqualified FET provision, which could be beneficial for Indian companies challenging Bangladesh’s sovereign regulatory actions.

The Complication- Joint Interpretative Notes (JIN):

• However, there is a complication: the Joint Interpretative Notes (JIN) that India and Bangladesh adopted in 2017 to clarify the meaning of various terms in the 2009 treaty.
• This JIN, now part of the BIT, was introduced at India’s insistence as part of its broader effort to revise its investment treaty practices to protect its regulatory authority.
• India proposed similar JINs to several other countries, without fully considering whether it had a defensive or offensive interest in relation to each specific country. The JIN has diluted the investment protection features of the BIT.
• For example, taxation measures are excluded from the treaty’s scope. Similarly, the FET provision is tied to customary international law, which imposes a higher standard for proving a treaty violation.
• The JIN was crafted from the perspective of a capital-importing country to protect its regulatory actions from ISDS claims.
• In the case of India and Bangladesh, however, India is the capital exporter and Bangladesh the importer.
• Ironically, the JIN that India developed could end up benefiting Bangladesh rather than the Indian companies operating there.

Conclusion:

While Bangladesh is the immediate focus, the issue extends beyond India’s eastern neighbor. India’s outbound investments have significantly increased, with outward foreign direct investment reaching approximately $13.5 billion in 2023, according to UNCTAD. India is now among the top 20 capital-exporting countries. This growth underscores the importance of legal protection for Indian companies operating abroad. Consequently, India needs to develop its investment treaty practices by considering both its role as a host and as a home country, rather than focusing solely on the former.