Experts CornerTariq Ahmad Khan

Every State has a right to regulate its social, political and economic system however, the said right should not be exercised in such a manner that it affects the ease of doing business in that State. In other words, it is the duty of the State to provide its investors a comfortable business environment, predictable legal framework, fair and equitable treatment and a robust dispute resolution mechanism.

Why public interest?

All in all, the right to regulate must be exercised keeping in mind the principles of fair and equitable treatment of the investors. In some cases, we have seen that the foreign investors invested in a particular State keeping in mind the existing laws of that State. Later on, that contracting State made changes to its legal framework which had a direct impact on these investments hence, the investor was entitled to compensation as these were the changes not contemplated by the investor while investing in that State. For instance, during the pandemic, the Indian Government amended the Insolvency and Bankruptcy Code, 2016 for protecting businesses in the unprecedented times and increased the threshold for initiation of corporate insolvency resolution process to Rs 1 crore. Additionally, initiation of proceedings under Sections 7, 9 and 10 of the IBC was also suspended. In such cases, the investors may rely on the fair and equitable treatment (FET) clause in the bilateral investment treaty (BIT) and file a claim against India for bringing these amendments which restrict the investors from taking the benefit of the IBC and takes away their right to initiate proceedings under the aforementioned provisions. It is a settled position that a contracting State is under an obligation to adhere to the expectations of the investor that were taken into consideration by the foreign investor at the time of making the investment. On the other hand, the Government can always rely on exception clauses in the BIT and take the defence of necessity. The Government may contend that the suspension of IBC was in public interest as the companies were severely impacted by the pandemic and had the risk of being declared insolvent.

Indian context

India has seen an increase in the inbound FDI in the past few years however, it is equally true that there has been an increase in the number of disputes between foreign investors and the Government. Some of these disputes have been going on for more than a decade and have been handled by the Government in a manner which has projected India as a jurisdiction that is not an investment-friendly jurisdiction. Interestingly, public interest is often cited as the reason behind challenging arbitral awards which are passed by Arbitral Tribunals against the State. No doubt the BITs protect the interest of the investors however, in many BITs there exists a public interest exception clause which is often invoked to justify State regulation. Such clauses give the host State a right to regulate investment where public interest is involved. Though, presence of such a clause does not mean that the State has an absolute right to regulate foreign investments.

Investors context

Incidentally, any State that aspires to attract investments would not regulate investments as the global investor community keeps a close check on State activities and prefer to invest in States that do not interfere in the business and provide ease of doing business by least State regulation.

 

Needless to say, jurisdictions having stable and friendly legal system attract more investments. Afterall, an investor who is investing in a country expects business growth, profit making, least interference and most importantly a robust dispute resolution mechanism. Business certainty is extremely crucial for attracting investments and any State which interferes in business is unlikely to attract investments.

Need for fast-track mechanism

India has terminated more than 60 BITs in the past few years and as a result, many prospective investors will now be at the mercy of the courts in India for getting their disputes adjudicated as they will not enjoy the protection and comfort guaranteed by a BIT. The delay in adjudication of such disputes is another fear that the investors have in view of fact that the outcome of dispute may take years in the Indian courts. Therefore, the Government must take some measures and provide a fast-track dispute resolution mechanism to the foreign investors so that they do not spend years in the court to get their disputes resolved. Especially, the enforcement of foreign awards should be done expeditiously and number of appeals may be reduced in these cases so that the losing party does not file multiple appeals to resist the enforcement of the award. After all, a decree-holder should not be deprived of the fruits of the award.

 

Conclusion

For the foregoing reasons, the State must strike a balance between the investor interest and public interest. The Government should always look at the common interest rather than looking at investor or public interest. The State has a responsibility to ensure that its citizens are protected and public interest is taken care of. State also has a responsibility to extend all the support to the investors that are investing in the economy. There may be cases where there is a conflict between the public interest and the interest of investors in such cases the State must be careful while choosing a side and while bringing changes in the legal framework the obligations under the BIT must be kept in mind as it can cause great prejudice to the investors who have invested in the contracting State. Government must also keep in mind that it is for the greater good of the general public that more and more investors come and invest in our country so as to generate employment and create a business environment in the country. Investors also have a duty to be responsible while conducting business as the same is essential for claiming protection under the BIT as there are national legislations which protect the people. State interference and intervention would be justified in cases where the foreign investment transactions raise concern regarding the security of the State, health of its citizens, environment, etc.

 

* Principal Associate at Advani & Co.

Case BriefsHigh Courts

Kerala High Court: The Division Bench comprising of Hrishikesh Roy, C.J. and A.K. Jayasankaran Nambiar, J. dismissed a PIL for being frivolous in nature and further explaining the concept and seriousness of misuse of public interest litigations by citing two prominent Supreme Court Judgments, i.e. State of Uttaranchal v. Balwant Singh Chaufal, (2010) 3 SCC 402 and Tehseen Poonawalla v. Union of India, (2018) 6 SCC 72.

Now, coming onto the issue raised by the petitioner, the public interest litigation was based on a newspaper report which alleged that there was security lapse in the conduct of banking operation by SBI. The stated petition was filed against State Bank of India and their General Manager. Petitioner basing his allegation on the newspaper report further stated that “there are serious lapses by the Bank and this has resulted in customer data leakage and disruption of online services.” Petitioner sought investigation and further direction to General Manager, SBI to remit Rs 5 crores to Kerala State Legal Services Authority.

Respondents denied the allegations and asserted that customers details are fully secure in the servers maintained by SBI, and there are enough inbuilt safeguards in the conveyance of data, for the usual banking transactions.

Therefore, the High Court noted and further stated that the PIL mechanism is being misutilised by the litigant since the material has not been verified on the basis of which the public interest litigation was filed.

The Court cited the case of State of Uttaranchal v. Balwant Singh, (2010) 3 SCC 402, in which various guidelines were issued in order to preserve the purity and sanctity of the Public Interest Litigations. Another case cited was of Tehseen Poonawalla v. Union of India, (2018) 6 SCC 72, where the Supreme Court once again addressed the issue and stated that:

“Misuse of public interest litigation is a serious matter of concern for the judicial process. Frivolous or motivated petitions, ostensibly invoking the public interests detract from time and attention which courts must devote to genuine causes.”

High Court dismissed the petition with costs by explaining the severity of the time of the Court and seriousness of the judicial process. [Shaheer Ali v. SBI, 2019 SCC OnLine Ker 2048, decided on 25-06-2019]