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26 November 2015, Gateway House

TPP & ISDS: new tests for India

The U.S.-driven Trans Pacific Partnership agreement between 12 countries, which is aiming to become the new standard of world trade, impacts domestic systems globally. For India, it will skew investment and intellectual property rights, and especially the debate over the Investor State Dispute System which allows companies to challenge sovereign rights and public policy.

Former Senior Fellow, Geoeconomics Studies

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The closely-guarded Trans Pacific Partnership (TPP) agreement, which will up-end existing global trade standards, is now public[1]. The 30 chapters comprising 6,000 pages, will undoubtedly influence all future world trade talks — bilateral, plurilateral and multilateral. TPP aspires to become the “gold standard” for global trade – ‘WTO-plus’ standards. The clock has started ticking for the agreement, as legislators of the 12 signatory countries will be under pressure to ratify the agreement before President Barak Obama demits office a year from now.

This has multiple implications for India. In addition to potentially limiting India’s concessions to public sector units, is the issue of intellectual and property rights (IPR) contained with a  controversial chapter on bilateral investment treaties (BITS) and the treatment of “investor-state dispute system” (ISDS) mechanism. Under this, foreign investors can sue sovereign countries in a third country through international arbitration.

ISDS was already a contentious issue, with many governments reviewing their ISDS mechanisms over the years in reaction to a growing trend of MNCs filing arbitration cases against host countries, seeking compensation for loss of potential revenue from changes inpublic policy. One of the most quoted cases is that of cigarette manufacturer Philip Morris Asia Ltd. finding the Australian government’s directive on health warnings prejudicial to its future revenues and seeking redressal in overseas arbitration. The arbitration of 2011 is still pending. India has faced its fair share[2] of arbitration cases on similar grounds, involving foreign companies such as — Cairn India, Vodafone, Bechtel and GE Structured Finance BNP Paribas, Deutsche Telekom.

Governments view such arbitration with skepticism. Many claim the system is being gamed, given the opacity of arbitration processes, its non-appellant provisions, its appointment of mostly private sector lawyers as arbitrators (thereby inducing an inherent bias in the judicial process) and its predilection for granting awards to private companies over governments[3].

Many experts also feel that ISDS mechanism creates economic distortions by reducing policy space for government and for the protection offered to investors. Prominent economists like Nobel laureate Joseph Stiglitz, oppose[4] the concept of ISDS as being unfair[5].

The public backlash probably has had a sobering effect. The preamble[6] to the TPP agreement   acknowledges government’s rights: “Recognise their inherent right to regulate and resolve to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals.”

But this self-correcting move seems only partial when viewed against the Investment chapter[7], which lists conditions to be followed by TPP signatory countries when soliciting foreign investment. Breach of these can result in ISDS being invoked. These are: offering foreign investors treatment equivalent to national companies (including state-owned enterprises), treatment equivalent to what’s accorded to companies from most favoured nations, minimum standard of treatment (which includes “fair and equitable treatment” and “full protection and security”), prohibiting expropriation or nationalisation (and, if in an extreme case it becomes necessary, then ‘fair value of compensation’ has to be paid which has been left undefined), free transfer of capital, no performance standards (such as minimum export commitment or minimum local content requirement), no restriction on nationality of senior staff or directors.

Other pernicious additions include a stretched definition of investment to include even IPR. This has opened up a rabbit hole of hidden clauses and tripwires. Contradictions abound between the chapters on Investment and Intellectual Property. For example, Article 9.7.5 exempts issuance of compulsory licenses (under the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, host countries can permit a non-patent holder to produce a patented drug) from eexpropriation provisions. But it comes with an escape hatch: issuance of such license must be consistent with TRIPS or with the TPP’s chapter on Intellectual Property. Another insidious addition is that ISDS can also be initiated in cases of “indirect expropriation”, or if the corporation deems that a specific government action “interferes with distinct, reasonable investment-backed expectations…”[8] But here’s the catch: determining what indirect expropriation is will be decided on a case-by-case basis.

This open-ended definition gives arbitration tribunals a free hand to interpret TPP provisions. For example, any regulatory action that could, hypothetically, diminish the value of property/investment, without the government taking ownership of the property[9], could also be deemed to be “indirect”expropriation and invite action under ISDS.

These clauses will undoubtedly affect India’s quest for increased foreign direct investment as part of Make in India. India’s home-grown BITs version — called Bilateral Investment Promotion and Protection Agreement (BIPPA) — has been revised to allow foreign investors to opt for international arbitration only after exhausting all domestic legal options. The draft model agreement is awaiting finalisation.  India’s draft BIT and its ISDS treatment is now being pulled in different directions by varied influences — TPP, the work-in-progress Trans-Atlantic Trade and Investment Partnership (TTIP) agreement being discussed between USA and European Union (EU) and the India-EU bilateral investment trade and investment agreement under negotiation. Contradictions are aplenty: While the EU has rejected[10] inclusion of ISDS in TTIP with the U.S., in its negotiations with India in the past, it has insisted on including ISDS[11]. In addition, India’s draft model text drops any reference to most-favoured nation treatment, while TPP includes it.

Clearly, internal and external pressure will be brought on the Indian government to amend its draft model agreement. Some U.S.-based think tanks[12] and administration-friendly publications[13] have already started the drumroll. As India’s Ministry of Finance prepares to finalise its draft agreement, two issues — moral and transactional — must be kept in mind.

The moral issue first. Allowing foreign investors to bypass local legal processes through ISDS creates a discriminatory structure. A transactional solution exists, one borrowed from the securities markets. Many companies offer different kinds of shares and each category is endowed with differentiated rights. For instance, preference shares are entitled to a fixed dividend every year, irrespective of the company’s performance, but forego the right to vote. Therefore, foreign companies wishing to appropriate special privileges over other investors should be willing to forego some rights.

As a test case, this should form the basis of the next round of BIT talks between India and the U.S.

Rajrishi Singhal is Senior Geoeconomics Fellow, Gateway House. He has been a senior business journalist, and Executive Editor, The Economic Times, and served as Head, Policy and Research, at a private sector bank, before shifting to consultancy and policy analysis.

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[1] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership, 5 November 2015, <>

[2] United Nations Conference for Trade and Development, Database of Investor-State Dispute Settlement (ISDS) (reduced version); <>

[3] Singhal, Rajrishi, ‘India-U.S. BIT: not a done deal yet’, Gateway House, 23 January, 2015; <>

[4] Stiglitz, Joseph, ‘South Africa Breaks Out’, Project Syndicate, 5 November, 2015 <–stiglitz-on-the-dangers-of-bilateral-investment-agreements>

[5] Lise Johnson, Lisa Sachs and Jeffrey Sachs, Investor State Dispute Settlement, Public Interest & U.S. Domestic Law, CCSI Policy Paper, May 2015,  <

[6] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Preamble, 5 November 2015,

[7] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Investment, 5 November 2015, <>

[8] Trans Pacific Partnership, Annex 9-B, Expropriation

[9] Intellectual Property Watch, ‘How The Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions’, 26 March, 2015 <>

[10] Robert, Aline; translated from French by Samuel White; ‘European Parliament Backs TTIP, Rejects ISDS’, Euractiv, 9 July, 2015, <>

[11] Mishra, Asit Ranjan, India Rejects Clause on Litigation, Live Mint, 4 July, 2011, <>

[12] Rossow, Richard M, ‘Going To Bat For The BIT’ U.S.-India Insight, Volume 5, Issue 9, September 2015, <>

[13] Worstall, Tim, ‘Cairn Energy’s Indian Tax Dispute Shows The Value Of ISDS Provisions In Trade Treaties, Forbes, June 28, 2015, <>