India's New Bilateral Investment Promotion and Protection Treaty with Nepal: A New Trend in State Practice

ICSID Review, Vol. 28, No. 2 (2013), pp. 384–404doi:10.1093/icsidreview/sit027

ARTICLE

India’s New Bilateral Investment Promotion

and Protection Treaty with Nepal:

A New Trend in State Practice

Surya P. Subedi1

Abstract—India is the largest source of foreign investment in Nepal and its largesttrading partner. Owing to the internal political problems in Nepal and harassment ofsome Indian businesses by the Maoist rebels during the Maoist insurgency in 1996–2006, India sought to conclude a bilateral investment protection treaty with Nepal inorder to ensure a higher level of protection for Indian investors in Nepal than currentlyexisted. For its part, Nepal also realized that such a treaty would instil confidence inIndian businesses and thus encourage more to invest in Nepal. With this mutuality ofinterests in mind, India and Nepal signed a new Bilateral Investment Promotion andProtection Agreement in 2011. Many of its provisions represent a new trend in Statepractice with regard to the conclusion of bilateral investment treaties, including aflexible and innovative international mechanism for resolution of investment disputes.Therefore, the India-Nepal treaty is of significance in the evolution of internationalinvestment law. The author concludes that it would be helpful in instilling confidencein foreign investors to invest in a least-developed country with its internal politicalproblems, and in assuring that their investment will be safe regardless of the internalpolitics or public posturing by politicians to win votes.

I. INTRODUCTION

India is the largest trading partner and source of foreign investment in Nepal.

During the Maoist insurgency2 in 1996–2006, India sought to conclude a bilateral

investment protection treaty with Nepal to ensure a higher level of protection for

Indian investors due to the internal political problems and harassment of some

Indian businesses.

Following the conclusion of a Comprehensive Peace Agreement in 2006, Nepal

was a country emerging from a decade of Maoist insurgency and seeking to

accelerate its economic growth. Thus, it realized that such a treaty would instil

confidence in Indian businesses and encourage more investment in Nepal. With

1 Professor of International Law, University of Leeds, England. Vice-President of the Asian Society ofInternational Law and Associate Member of the Institut de Droit International. E-mail: [email protected].

2 Michael Hutt (ed), Himalayan ‘People’s War’: Nepal’s Maoist Rebellion (Christopher Hurst and Co 2004), 10–15,23–27.

� The Author 2013. Published by Oxford University Press on behalf of ICSID. All rights reserved.For permissions, please email: [email protected]

mutuality of interests in mind, India and Nepal signed a new Bilateral Investment

Promotion and Protection Agreement (BIPPA) on 21 October 2011. From an

international legal perspective, this Treaty is an interesting instrument as it

represents a new trend in bilateral investment treaty (BIT) making by India, and

contains a flexible and innovative international mechanism for resolution of

investment disputes and a number of new elements not seen in older generation of

BITs.3 The 2011 India-Nepal BIT will interchangeably be referred to either as

BIPPA or the BIT or simply as the Treaty throughout this study.

The 2011 Treaty is not meant to regulate only one-way traffic, that is, Indian

investment in Nepal; there are now a number of business houses in Nepal that

have invested and are able and willing to further invest in India. For instance, a

Nepali businessman, Binod Chaudhury, the first man from the Himalayan nation

to be named to the Forbes’ billionaire list, is the owner of: Cinnovation/

Chaudhary Group, popular instant noodle brand Wai Wai, a controlling stake in

Nabil Bank and a string of luxury hotels with India’s Taj hotel chain.4 Like

Chaudhury, many Nepalese business men and women of Indian origin may decide

to invest in India as Nepalese investors to benefit from the protection available

under the treaty. Given the nature of Nepal’s open society, favourable climatic

conditions and its traditional image as a neutral country, it is also conceivable that

some investors would acquire juridical personality in Nepal with a view to

investing in India as Nepalese investors. It is also possible that Nepal may develop

into a sub-regional financial services centre similar to smaller, strategically located

States such as Switzerland, Singapore or Luxembourg.5 Thus, Nepalese investors

in India, too, would benefit from this new BIT, as the Indian judiciary is notorious

for being slow and inefficient in dispensing speedy and effective legal remedy.

This BIT was the sixth concluded by Nepal and the eightieth concluded by

India.6 India has concluded BITs not only with developed countries, but also with

neighbouring developing countries such as China and two other South Asian

countries, Sri Lanka and Bangladesh.7 The treaties concluded by India with China

in 2006 and with Bangladesh in 2009 are similar in many respects to the BIPPA

concluded with Nepal. Most of the recent generation of Indian BITs seem to

follow the same model. This is because India adopted its Model BIT in 2004, and

most of the BITs or BIPPAs concluded since then are modelled on this Model

BIT.8 Similar to other such treaties, the India-Nepal BIT is designed to establish

specific rights and obligations to meet the primary purpose of protecting foreign

3 Agreement between the Government of India and the Government of Nepal on the Bilateral InvestmentPromotion and Protection Agreements (signed 21 October 2011, not yet entered into force) (‘India-Nepal BIPPA’)<http://www.unctadxi.org/templates/DocSearch.aspx?id=779> accessed 14 April 2013.

4 ‘Impoverished Nepal produces first billionaire’, The Economic Times (India) (5 March 2013).5 See Surya P Subedi, ‘The Problems and Prospects of Offshore Banking in Nepal’ (2004) 34(141) Nyaydoot [a

bi-monthly J of Nepal Bar Association] (Special English Issue) 1–8.6 Agreement between the Government of Nepal and the Government of the Republic of France on the Reciprocal

Promotion and Protection of Investments (signed 2 May 1983); Agreement between the Federal Republic of Germanyand the Kingdom of Nepal concerning the Encouragement and Reciprocal Protection of Investments (signed 20October 1986); Agreement between the Government of Nepal and the Government of the United Kingdom of GreatBritain and Northern Ireland for the Promotion and Protection of Investments (signed 2 March 1993); Agreementbetween the Government of Mauritus and the Government of Nepal for the Promotion and Reciprocal Protection ofInvestments (signed 3 August 1999); and the Agreement between the Government of the Republic of Finland and theGovernment of Nepal on the Promotion and Protection of Investments (signed 3 February 2009).

7 See a brief account of India’s policy on concluding BITs and the list of countries with whom the country hasconcluded BITs or BIPPAs <http://finmin.nic.in/bipa/bipa_index.asp> accessed 14 April 2013.

8 See for text of the Indian Model BIT of 2004 <http://finmin.nic.in/the_ministry/dept_eco_affairs/icsection/Indian%20Model%20Text%20BIPA.asp?pageid=1> accessed 15 May 2013.

FALL 2013 India’s New BIT with Nepal 385

investments against discriminatory measures by the host State and to ensure the

reciprocal encouragement, promotion and protection of investments, thereby

enabling conditions conducive to increasing investment.

The India-Nepal Treaty guarantees the rights of foreign investors, ensures them

fair and equitable treatment and security and provides for a dispute resolution

mechanism. The principles of most-favoured-nation (MFN) treatment and

national treatment constitute the foundation of the treaty. It obliges the

contracting parties to treat investments at least as favourably as they do domestic

and third-party foreign investments, and to accord non-discriminatory compen-

sation in case of nationalization or expropriation of investment.9

While a majority of the provisions in the India-Nepal BIT are similar to other

BITs concluded by India, the new BIT has attracted a great deal of political

controversy in Nepal, and has not yet been ratified by Nepal. There are unique

relations between these two countries which share a long, porous, open border.

The existence of the 1950 peace and friendship treaty10 already provides

for national treatment of each other’s citizens in matters of commerce, yet the

new BIT has been regarded by many political parties in opposition as being

‘anti-national’. Ironically, the BIT was concluded by a government led by a Maoist

leader, Baburam Bhattarai, who began his political career opposing the ‘lopsided’

treaties with India, including the 1950 treaty, by terming it an ‘unequal’ treaty.

Bhattarai was criticized by a breakaway faction of his own Maoist party and some

other major political parties for being pro-India in concluding this BIT—so much

so that the Foreign Minister of his own political party expressed doubts about the

need for such a treaty with India and called for renegotiation of the provisions of

the treaty.

In recent times, Nepal has suffered huge political upheavals, including the royal

massacre in 2001, the Maoist insurgency, the abolition of a 240-year-old

monarchy, and the rise to power of the Maoists.11 As a result of these political

upheavals, the economy has suffered equally badly. While some degree of political

normalcy has returned to the country after the Maoists agreed to work within a

democratic framework, and the peace process and political transition are nearing

completion, Nepal is badly in need of substantial foreign investment to jump-start

the economy. Nepal is strategically located between the two giants of Asia, China

and India, which are rapidly growing economies and aspire to become global

powers. Nepal is also a gateway to the Tibet autonomous region of China. The

country best placed to invest in Nepal is India. Nepal has to offer assurances and

incentives to attract significant investment from India and a BIT is certainly a

useful tool to this end.

If Nepal sorts out its political instability and instigates a sensible foreign

investment policy, it stands to attract serious investment from both of its

immediate neighbours and beyond. For this, Nepal needs to address the factors

restraining investment. The country has a great deal of work to do to increase its

9 See TNN, ‘India, Nepal Sign Pact to Boost Investment’ The Times of India (22 October 2011) <http://articles.timesofindia.indiatimes.com/2011-10-22/india/30310494_1_national-treatment-investment-promotion-and-protection-bilateral-investment> accessed 12 July 2013.

10 Treaty of Peace and Friendship between the Government of India and the Government of Nepal (signed 31 July1950, entered into force 31 July 1950 upon signature).

11 See, generally, Surya P Subedi, ‘Nepal’ in Rudiger Wolfrum (ed), The Max Planck Encyclopaedia of PublicInternational Law vol 7, (OUP 2012) 606–12.

386 ICSID Review VOL. 28

foreign direct investemnt from the existing meagre level of US$39 million.

Therefore, the new BIPPA was welcomed both by prospective investors from India

and by the Nepalese business community. However, this BIT has been embroiled

in political controversy as were other treaties concluded by Nepal with India such

as the Tanakpur and Mahakali River treaties. There is a wider historical and

political context to this unfortunate controversy.12

It is within this context that this article aims to analyse the characteristics of

this new BIT, whether it sets a new trend in the conclusion of BITs by both

Nepal and India, and its significance in the evolution of international investment

law13 and in uplifting the standards of living of the people in South Asia, one of

the poorer regions of the World. In doing so, the article aims to examine the new

India-Nepal BIT in a wider bilateral political and economic context. Accordingly,

it begins by providing a brief account of recent political developments in Nepal

and the historical context of India-Nepal relations. Next, the new India-Nepal BIT

is analysed. Finally, some concluding observations will be offered on how to

advance India-Nepal relations for the greater good of the peoples of both

countries.

II. HISTORICAL BACKGROUND

Nepal is an ancient State that has existed in various forms for more than

2500 years. It was the only Hindu Kingdom in the world until 2008 when it

became a secular State. It has gone through major political upheavals in the recent

past. The fall of the Berlin Wall, the end of the Cold War and the collapse of

Communism around the same time had a tremendous impact on the people of

Nepal.14 Consequently, the King of Nepal restored parliamentary democracy in

1990 and agreed to become a constitutional monarch. While the new democratic

system was still in its infancy, the Maoists challenged democracy. They walked out

of parliament and began an armed struggle in 1996 to overthrow the monarchy and

the parliamentary system of government.15 At the end of the second phase of the

people’s movement, the Maoists agreed to work within a democratic framework by

signing a comprehensive peace agreement with other major political parties.

The promulgation of the Interim Constitution in January 2007 officially

stripped the King of all of his powers, and formally ended the Maoist War. In

December 2007, the third amendment to the Interim Constitution declared that

Nepal would be a republic and suspended the institution of monarchy.16 After

witnessing years of violence waged by Maoists under the auspices of a ‘people’s

war’, which resulted in the death of more than 13,000 people; the disappearance

of between 1000 and 5000 people and the displacement of about 100,000 others,

12 See Surya P Subedi, Dynamics of Foreign Policy and Law: A Study of Indo-Nepal Relations (OUP 2005), Chapter 8,pp. 153–161.

13 See, generally, Surya P Subedi, International Investment Law: Reconciling Policy and Principle (2nd edn, HartPublishing 2012); Campbell McLachlan et al, International Investment Arbitration: Substantive Principles (OUP 2007);Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (OUP 2008) 600; Peter Muchlinskiet al, The Oxford Handbook of International Investment Law (OUP 2008); Shyami Fernando Puvimanasinghe, ForeignInvestment, Human Rights and the Environment: A Perspective from South Asia on the Role of Public International Law(Martinus Nijhoff 2007).

14 Michael Hutt (ed), Nepal in the Nineties: Versions of the Past, Visions of the Future (2nd edn, OUP 2001).15 Surya P Subedi, ‘The Journey from an Oligarchy to a Parliamentary Democracy: A Case Study of Parliament in

Nepal’ (1998) 4 J Legislative Stud (London) 163–82.16 The Interim Constitution of Nepal, 2063 (2007) <nic.gov.np/files/download/109> accessed 6 January 2013.

FALL 2013 India’s New BIT with Nepal 387

the guns finally fell silent in the Himalayan State of Nepal. Thanks to the

comprehensive peace agreement concluded in November 2006, described as a

‘Nepali-owned’ peace process by the Special Representative of the UN Secretary-

General in his report to the Security Council on Nepal, and the adoption of a

power-sharing Interim Constitution in January 2007, Nepal was back on the road

to democracy. Under the peace deal the Maoists locked away their weapons under

the watchful eyes of the UN and confined their fighters to UN monitored sites

dubbed as ‘cantonments’.17

The main objective of the agreement between the Maoists and other political

parties was to hold fresh elections to elect a constituent assembly to write a

permanent constitution for the country. The purpose of a new permanent

constitution was to restructure the system of governance within Nepal, allowing

equal access to power for traditionally marginalized ethnic, religious and racial

groups in this highly stratified traditional society, and to eliminating discrimination

against them. Thus, when the election for the constituent assembly took place in

April 2008 and the monarchy was abolished a month later by the Assembly, Nepal

had completed one of the important phases of political transition.18

However, due to the lack of consensus amongst the major political parties on some

key issues such as the criteria for the new federal structure of the country and the form

of governance, the Constituent Assembly was not able to agree on a new constitution.

After four years, the Assembly was dissolved in May 2012, as the Supreme Court of

the country ruled that the Assembly could not go on indefinitely in a state of political

stalemate since it had initially been elected with a two-year mandate in 2008. Fresh

elections of a new Constituent Assembly with a new mandate to write a new

constitution are expected in the near future (possibly within 2013).

Nepal’s foreign policy continues to be affected by its geo-strategic location

between China and India and its attempt to maintain its own equilibrium between

these powerful neighbours. Nepal’s relationship with India is governed by the 1950

Treaty of Peace and Friendship which replaced a 1923 Treaty with Britain.19

Nepal made serious efforts during the reigns of both King Mahendra and King

Birendra to assert greater independence in its foreign policy by establishing

bilateral diplomatic relations with other countries and joining various multilateral

and regional organizations. During his Coronation in 1974, King Birendra

proposed that Nepal be declared a Zone of Peace.20 This proposal was endorsed

by 119 States—except by India.

The 1950 Treaty of Peace and Friendship concluded by the last Rana Prime

Minister of Nepal, who led a system of oligarchic rule, with India is the foundation

for India-Nepal relations. Under this treaty each government agreed to acknow-

ledge and respect the other’s sovereignty, territorial integrity and independence; to

continue diplomatic relations; and, on matters pertaining to industrial and

economic development, to grant rights to nationals of the other residing in its

17 Surya P Subedi, ‘Post-conflict Constitutional Settlement in Nepal and the Role of the United Nations’ in MorlyFrishman and Sam Muller (eds), The Dynamics of Constitutionalism in the Age of Globalisation (Hague Academic Press2010) 71–87.

18 Sebastian von Einsiedel, David M Malone and Suman Pradhan (eds), Nepal in Transition: From People’s War toFragile Peace (CUP 2012).

19 Treaty of Friendship between Great Britain and Nepal (signed 1923) [published in Subedi (n 12) 188]. See alsoSurya P Subedi, ‘The Himalayan Frontier Policy of British-India and the Significance of the 1923 Treaty ofFriendship between Great Britain and Nepal’ (2003) 27 J B–Nepal S 35–39.

20 Surya P Subedi, Land and Maritime Zones of Peace in International Law (OUP 1996).

388 ICSID Review VOL. 28

territory equal to those of its own citizens. Because of the long, porous, open

border between the two countries, India seems to be concerned about those

activities within Nepal that may have a detrimental impact on India’s security.

Consequently, India has flexed its economic muscle every now and then to ensure

that Nepal remains firmly within India’s sphere of influence.21

III. NEPAL’S FOREIGN INVESTMENT PROMOTIONPOLICY AND INDIAN INVESTMENT

In recent years, successive governments of Nepal have accorded priority to

attracting foreign investment. Article 26(12) of the Constitution of the Kingdom

of Nepal 1990 stated that ‘[t]he State shall, for the purposes of national

development, pursue a policy of taking measures necessary for the attraction of

foreign capital and technology, while at the same time promoting indigenous

investment.’22 The country’s Ninth Development Plan (1997–2002) had the

objectives to ensure the safe entry of foreign capital, technology and managerial

and technical skills particularly for the development of industry, tourism, water

resources and infrastructure; to accelerate industrialization by mobilizing foreign

investment and private sector participation; to promote international exports by

improving production, productivity and quality; and to raise the standard of living

by expanding the opportunities for gainful employment and income generation.

Subsequent development plans have included similar objectives to attract

foreign investment, and various policies and laws have been adopted to encourage

foreign investment and provide protection. Some examples are the promulgation

of the Industrial Policy 1992, the Foreign Investment and One Window Policy

1992, the Foreign Investment and Technology Transfer Act 1992 and Industrial

Enterprises Act 1992. In addition, various provisions in the Finance Act, the

Immigration Rules of 1994, the Customs Act 1997, the Electricity Act 1992, the

Privatisation Act 1992, the Copyright Act 1965 and the Patent Design and Trade

Mark Act 1996 were designed to accelerate the pace of economic development in

Nepal and to encourage foreign investment into the country. Nepal has also

established the Investment Promotion Board to facilitate foreign investment.

Nepal is a member of the World Bank, the International Monetary Fund (IMF) and

the Multilateral Investment Guarantee Agency (MIGA). It has also been a party to

the International Centre of Settlement of Investment Disputes (ICSID) since 1969.23

Nepal has concluded relatively few BITs with other countries; the one concluded with

India in 2011 being the latest. All of these BITs are designed to accord protection to

foreign investors. They contain the following standard provisions: (i) National

treatment; (ii) Non-discrimination; (iii) Expropriation; (iv) Transfer of Funds and

(v) Dispute settlement. For the reasons outlined above, Nepal can expect significant

investment from India. There have already been some notable joint venture

investments in Nepal by Indian investors, including Nepal Lever Limited

21 Surya P Subedi, ‘Transit Arrangements between Nepal and India: A Study in International Law’ (1997) 2Geopolitics and Intl Boundaries 175–96.

22 His Majesty’s Government of Nepal, Ministry of Law, Justice and Parliamentary Affairs, The Constitution of theKingdom of Nepal 2047 (1990) (Nepal Law Books Management Board 1992).

23 In exercise of its rights under art 13(1) of the Convention, the Government of Nepal designated the presentauthor in 2012 to serve on the Panels of Arbitrators and of Conciliators of ICSID.

FALL 2013 India’s New BIT with Nepal 389

(Hetauda), Soaltee Hotels Limited (Kathmandu), Manipal Education and Medical

Group (Nepal) Limited (Pokhara), Everest Rolling Industry Pvt Ltd (Bhairahawa),

Taragaon Regency Hotel Ltd (Kathmandu), Colgate Palmolive (Nepal) Pvt Ltd

(Hetauda) and Arati Strips Pvt Ltd (Biratnagar).

While some investments in Nepal by Indian businesses exploit lax environmental

standards and tax regimes, others seem to exploit the favourable conditions,

including the pleasant climatic conditions and cheap labour Nepal offers in sectors

such as health and education. Specifically, Indian investors have invested or

expressed an interest in investing in Nepal in: (i) hydropower, (ii) tourism,

(iii) health-related services, (iv) forest products, (v) herbal products, (vi) food

processing, (vii) infrastructure development and (viii) the information technology

and software industries.

However, the issue of security in Nepal became detrimental in recent years,

especially after the start of the Maoist insurgency. This fostered India’s joint

ventures in Nepal as Maoists, who built their power base on an anti-India

platform,24 attacked Indian-owned business. Therefore, it was ironic that a Maoist

Prime Minister of Nepal should conclude a BIT with India to assure Indian investors

security and protection in Nepal. It was imperative to address the concerns of the

Government of India and the private sector over insecurity and political instability in

Nepal, which is what the BIPPA seems to be designed to accomplish.

Both the Nepalese and Indian authorities have acknowledged that the India-

Nepal BIPPA was concluded primarily to provide protection to Indian investment

in Nepal and thereby attract further investment. The idea seems to be to provide

an additional layer of protection since Indian investors were already protected by

the domestic investment laws of Nepal and the 1950 treaty of peace and

friendship. One of the most important protections available to Indian investors in

Nepal under the new treaty is the prohibition on expropriation or nationalization

without adequate compensation. Another one is the mechanism for dispute

settlement in the BIPPA. A drawback of the 1950 treaty of peace and friendship is

the absence of a mechanism to settle disputes between the two countries arising

out of the interpretation and application of the treaty. The elaborate mechanism

for settlement of investment disputes in the new BIT remedies this and is one of

the main incentives for Indian investors to invest in Nepal.

IV. THE CONTENT OF THE INDIA–NEPAL BIPPA

A. Definition of Investment

Since only the kinds of investment defined in the term ‘investment’ enjoy

protection under the Treaty, one has to look at the definition of this term in the

Treaty. Article 1(b) has a broad definition of ‘investment’ which is similar to the

definition of ‘investment’ in recent BITs concluded by India with other countries.

24 For instance, it was reported that during the Maoist insurgency in Nepal, an Indian company, Colgate-Palmolive, was forced to shut down and sell its Nepalese subsidiary following harassment and extortion demands bythe Maoist rebels. The company claimed that the local government officials in Nepal failed to provide much supportin response to its requests for greater security. See ‘Signing of Investment Deal Uncertain’ The Kathmandu Post (19October 2011) and ‘Colgate-Palmolive After-sale Row Continues in Nepal’ DNA India (24 November 2008) <http://www.dnaindia.com/money/1209087> accessed 14 April 2013.

390 ICSID Review VOL. 28

It defines ‘investment’ in the following words:

(b) ‘investment’ means every kind of asset established or acquired, including changes in

the form of such investment, by investor of one Contracting Party in accordance with the

laws of the other Contracting Party in the territory of the latter and in particular, though

not exclusively, includes:

(i) movable and immovable property as well as other rights related thereto such as

mortgages, liens or pledges;

(ii) shares in and stock and debentures of a company and any other similar forms of

participation in a company;

(iii) claims to money or to any performance under contract having a financial value;

(iv) intellectual property rights, in accordance with the relevant laws of the respective

Contracting Party;

(v) business concessions conferred by law or under contract, including concessions to

search for and extract oil and other minerals.

B. General Scope of Protection

Article 2 limits the scope of protection under the Treaty to those investments

made in accordance with the laws and regulations of the host country. It reads as

follows:

This Agreement shall apply to any investment by investors of either Contracting Party in

the territory of the other Contracting Party admitted in accordance with its laws and

regulations, whether made before or after coming into force of this Agreement, but shall

not apply to any dispute concerning an investment which arose, or any claim which was

settled, before its entry into force.

Such a clause protects the freedom of action of the contracting parties to regulate

foreign investment, including the power to enact new laws relating to foreign

investment or to amend existing ones since both Nepal and India are democracies,

new governments coming to power would be free to enact or amend laws

regulating foreign investment. Thus, the BIPPA should not be regarded as a treaty

capable of guaranteeing protection to all Indian investors in Nepal in all

circumstances at the same level. Of course, thanks to the existence of the rules

of international customary law on the protection of aliens and their investment in

any law abiding State, no State (except for those which are persistent or

subsequent objectors to a rule of customary law) is free to enact laws that

undermine the basic principles of international law. However, it is up to the

sovereign States to determine how to regulate foreign investment within the

general framework of international law.

Article 2 of BIPPA also limits protection to a dispute concerning an investment

that arose, or any claim settled, before its entry into force. This is broadly in line

with the practice of many other countries in concluding BITs and India’s own BIT

practice with other countries.

V. PROTECTION AND PROMOTION OF INVESTMENT

With regard to the promotion and protection of investments, Articles 3 and 4

include the standard provisions encompassing the principles of fair and equitable

FALL 2013 India’s New BIT with Nepal 391

treatment, MFN treatment and national treatment. However, Article 3(1) of the

treaty does not oblige the contracting parties to admit every kind of foreign

investment. It is up to them to decide what kind of investment they wish to admit.

The duty to encourage and create favourable conditions for investors of the other

contracting party stipulated in the India-Nepal treaty is more of a recommenda-

tory, or soft law, provision than a provision requiring one contracting party to

admit investment from another contracting party. Once foreign investment has

been admitted and made in compliance with the laws and regulations of the host

State then that investment would be accorded the fair and equitable treatment.

Volumes have been written about the nature, scope and meaning of the principle

of ‘fair and equitable treatment’ and numerous international tribunals and courts

have interpreted and applied this principle. The concept of fair and equitable

treatment is a major, if not the most important, principle of foreign investment

law, and is deeply rooted in customary international law. However, it is an evolving

concept rather than a static one. It is possible for a future international investment

tribunal called upon to resolve a dispute under the India-Nepal BIPPA to interpret

this principle in the context of the unique relations prevailing between the two

countries. While there are certain elements of this principle which are generally

accepted, its precise application to individual cases can vary. This is because this

principle is difficult to define in concrete terms and is open to different

interpretations. In essence, a widely held view seems to be that the principle of

fair and equitable treatment is concerned mainly with the obligation not to deny

justice in criminal, civil or administrative adjudicatory proceedings in accordance

with the principle of due process embodied in the principal legal systems in use

worldwide.

Articles 3 and 4 read as follows:

Article 3

Promotion and Protection of Investments

(1) Each Contracting Party shall encourage and create favourable condition for investors

of the other Contracting Party to make investments in its territory, and admit such

investments in accordance with its policies, laws and regulations.

(2) Investments and returns of investors of each Contracting Party shall at all times be

accorded fair and equitable treatment in the territory of the other Contracting Party.

Article 4

National Treatment and Most-Favoured-Nation Treatment

(1) Each Contracting Party shall accord to investments of investors of the other Contracting

Party, treatment which shall not be less favourable than that accorded either to

investments of its own investors or investments of investors of any third State.

(2) In addition, each Contracting Party shall accord to investors of the other Contracting

Party, including in respect of returns on their investments, treatment which shall not

be less favourable than that accorded to investors of any third State.

(3) The provisions of paragraphs (1) and (2) above shall not be construed so as to oblige

one Contracting Party to extend to the investors of the other the benefit of any

treatment, preference or privilege resulting from:

(i) any existing or future customs unions or similar international agreement to which

it is or may become a party; or

(ii) any matter pertaining wholly or mainly to taxation.

392 ICSID Review VOL. 28

Since the India-Nepal BIPPA does not define the term ‘fair and equitable’, it

might be inferred that the parties intended to accept the traditionally generally

agreed definition of this term under the customary international law principle of

the international minimum standard of treatment available to foreign investors.

There are no indications to suggest that the contracting parties intended to qualify

this principle or accord a meaning that may vary from its meaning under the

customary international law principle of minimum standard of treatment.

Therefore, it is submitted that the meaning and scope of the principle of fair

and equitable treatment in the India-Nepal BIPPA should be no different from the

meaning and scope of the term generally understood in general international law.

With regard to the provisions concerning MFN treatment and national

treatment, the India-Nepal BIT does not attach any conditions, and the treatment

of investments or returns on investments must be no less favourable than accorded

to those of host State or third party investments and investors. The protections

available under these provisions are not qualified. It is quite common for a BIT to

offer this level of protection and is binding on both Nepal and India.

VI. EXPROPRIATION AND COMPENSATION

The provisions concerning expropriation in this Treaty are somewhat different from

many BITs, although broadly in line with the practice of India. This is because this

Treaty speaks of ‘fair and equitable’ compensation against expropriation or

nationalization of foreign investment rather than ‘prompt, effective and adequate’

compensation generally known as the ‘Hull Formula’. From this point of view, the

standards of compensation under this Treaty could be slightly lower or less stringent

than those available under the Hull Formula. It will depend upon how a given

international investment tribunal will interpret and apply the term ‘fair and equitable

compensation’. Other criteria required in the Treaty to make an instance of

nationalization or expropriation lawful are the same as in customary international law

or general practice of States. In other words, expropriation or nationalization can take

place only if the following four main conditions are met: (i) it must be for a public

purpose; (ii) it must be non-discriminatory; (iii) it must be against fair and equitable

compensation and (iv) it must be in accordance with the law.

Article 5 on expropriation goes on to define the parameters of the powers to

expropriate or nationalize the assets of foreign companies by a host State in the

following terms:

Article 5

Expropriation

(1) Investments of investors of either Contracting Party in the territory of the other

Contracting Party shall not be subjected to nationalisation, expropriation or any

other measure having similar effects [. . .] except for reasons of public purpose in

accordance with the law, on a non-discriminatory basis and against fair and equitable

compensation.

(2) It is understood that:

(a) Indirect expropriation results from a measure or series of measures of a

Contracting Party having an equivalent effect to direct expropriation without

formal transfer of title or outright seizure;

FALL 2013 India’s New BIT with Nepal 393

(b) The determination of whether a measure or series of measures of a Contracting

Party constitute indirect expropriation requires a case-by-case, fact-based inquiry

considering among other factors:

(i) the economic impact of the measure or series of measures, however, the sole

fact of a measure or series of measures having adverse effects on the

economic value of an investment does not imply that an indirect

expropriation has occurred;

(ii) the extent to which the measures are discriminatory either in scope or in

application with respect to an investor or a company of a Party;

(iii) the extent to which the measure or series of measures interfere with distinct,

reasonable investment-backed expectations concerning the investment;

(iv) the character and intent of the measure or series of measures, whether they

are for bona fide public interest purposes or not and whether there is a

reasonable nexus between them, and the intention to expropriate.

However, since the India-Nepal BIPPA incorporates the NAFTA-type provision

on expropriation,25 it is not clear how questions such as what constitutes

expropriation; what is a ‘public purpose’; what constitutes discrimination; and

what is meant by ‘fair and equitable’ compensation would be resolved in the event

of a dispute. Taking without due process of law would entail a taking in

contravention of the principle of equality before the law, fair hearing and other

principles of natural justice generally recognized by the world’s principal legal

systems. Similarly, a discriminatory taking would entail unlawful discrimination

between domestic and foreign investors engaged in like business and in like

circumstances as well as between foreigners of different nationalities.

25 NAFTA art 1110 on expropriation and compensation reads as follows:Article 1110: Expropriation and Compensation(1) No Party may directly or indirectly nationalize or expropriate an investment of an investor of another

Party in its territory or take a measure tantamount to nationalization or expropriation of such aninvestment (‘expropriation’), except:(a) for a public purpose;(b) on a non-discriminatory basis;(c) in accordance with due process of law and Article 1105(1); and(d) on payment of compensation in accordance with paragraphs 2 through 6.

(2) Compensation shall be equivalent to the fair market value of the expropriated investment immediatelybefore the expropriation took place (‘date of expropriation’), and shall not reflect any change in valueoccurring because the intended expropriation had become known earlier. Valuation criteria shall includegoing concern value, asset value including declared tax value of tangible property, and other criteria, asappropriate, to determine fair market value.

(3) Compensation shall be paid without delay and be fully realizable.(4) If payment is made in a G7 currency, compensation shall include interest at a commercially reasonable

rate for that currency from the date of expropriation until the date of actual payment.(5) If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of payment,

if converted into a G7 currency at the market rate of exchange prevailing on that date, shall be no lessthan if the amount of compensation owed on the date of expropriation had been converted into that G7currency at the market rate of exchange prevailing on that date, and interest had accrued at acommercially reasonable rate for that G7 currency from the date of expropriation until the date ofpayment.

(6) On payment, compensation shall be freely transferable as provided in Article 1109.(7) This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual

property rights, or to the revocation, limitation or creation of intellectual property rights, to the extentthat such issuance, revocation, limitation or creation is consistent with Chapter Seventeen (IntellectualProperty).

(8) For purposes of this Article and for greater certainty, a non-discriminatory measure of general applicationshall not be considered a measure tantamount to an expropriation of a debt security or loan covered bythis Chapter solely on the ground that the measure imposes costs on the debtor that cause it to default onthe debt.

394 ICSID Review VOL. 28

What also is significant in the India-Nepal BIPPA is that the right to define what

is for a public purpose is not left solely in the hands of the governments but more

in the hands of the legislative body of the contracting parties. By stating in Article

5(1) that ‘Investments of investors of either Contracting Party in the territory of

the other Contracting Party shall not be subjected to nationalization, expropriation

or any other measure having similar effects [. . .] except for reasons of public

purpose in accordance with the law, on a non-discriminatory basis and against fair

and equitable compensation’ the BIPPA seems to have given the powers to the

law-making organ of the State to decide what is for a public purpose and what is

not rather than to the executive branch of the State.

Another significant provision in the India-Nepal BIT is that it defines the

conditions under which a governmental measure could be regarded as an indirect

expropriation. Provisions such as this which cannot be found in older generations

of BITs are helpful in the sense that they limit the scope of interpretation of an

‘indirect expropriation’ by an international investment tribunal. The Contracting

Parties themselves have defined what constitutes ‘indirect expropriation’ in the

treaty rather than leaving it to future investment tribunals. This is a welcome

development that increases legal certainty and predictability for foreign investors.

VII. REGULATORY EXPROPRIATION

Regulatory expropriation is a relatively new phenomenon in international

investment law. Most older BITs have no provision on regulatory expropriation

as an exception to the rules on expropriation and compensation. The India-

Nepal BIT defines in Article 5(2) the nature and scope of regulatory

expropriation.

Article 5 (2) defines the nature and scope of regulatory expropriation in the

following words:

(c) Non-discriminatory regulatory measures by a Contracting Party that are designed and

applied to protect legitimate public welfare objectives including the protection of health,

safety and environment do not constitute expropriation or nationalization; except in rare

circumstances, where those measures are so severe that they cannot be reasonably viewed

as having been adopted and applied in good faith for achieving their objectives.

(d) Actions and awards by judicial bodies of a Contracting Party that are designed,

applied or issued in public interest including those designed to address health, safety and

environmental concerns, do not constitute expropriation or nationalization.

The definition of regulatory expropriation in the India-Nepal BIPPA is rather

generous, yet is generally in tune with changes taking place both within

international investment law and other areas of international law that have an

impact on the activities of foreign investors. A provision of this nature is a

welcome attempt to reconcile the law on foreign investment protection with other

competing principles of international law. It respects the sovereignty of States and

enables them to fulfil their commitments flowing from other international treaties

or to pursue bona fide economic, environmental, health- and safety-related policies

in the greater interest of the native residents in the host countries. Given the ‘small

State’ syndrome that exists in the minds of Nepalese political leaders and the

historical sensitivity to sovereignty and freedom of action in Nepal, this BIT with

FALL 2013 India’s New BIT with Nepal 395

India could be regarded as a progressive instrument for Nepal in many respects.

However, the risk for Indian investors is that the principle of regulatory

expropriation could be misused to expropriate Indian investment in Nepal when

there is a change of government in Kathmandu. Since the anti-business and

especially anti-Indian business sentiment amongst many left or left-leaning parties

in Nepal is strong, the health/safety exceptions might be used against Indian

businesses in the future. The host government may interpret the health/safety

exceptions liberally since many activities of foreign investors could pose some

danger to the health and safety of the local population. What is more, there is no

general agreement or certainty in science as to the permitted limit of human

exposure to environmentally harmful activities and substances. Many of the

industrial activities in developing countries have the potential of damaging people’s

health.

What is missing in this definition of regulatory expropriation is the measure

designed to protect human rights. Having said this, it should be noted that this

Treaty is not alone in omitting human rights considerations. Human rights are the

latest entrants into the realm of international investment law and it will take time

for them to find their way into BITs or free trade agreements. If the trend of

accepting legitimate or bona fide governmental measures undertaken in a non-

discriminatory manner for good environmental, health or safety causes as non-

compensable regulatory expropriation continues, the days will not be very far

when bona fide governmental measures to protect core human rights will also be

subsumed under the definition of regulatory expropriation.

VIII. DETERMINATION OF THE QUANTUM OFCOMPENSATION

The method outlined in the India-Nepal BIT to determine the quantum of

compensation for expropriation is similar to that which can be found in other

BITs concluded by India with other countries or between many other countries.

Article 5 (3) and (4) reads as follows:

(3) The compensation shall be equivalent to the fair market value of the investment

expropriated, immediately before the expropriation or before the impending expropria-

tion became public knowledge, whichever is the earlier, shall include interest at a

commercially reasonable rate until the date of payment, shall be made without

unreasonable delay, be effectively realizable and be freely transferable.

(4) The affected investor shall have the right to, in conformity with the laws of the

Contracting Party that makes the expropriation, the prompt review, by a judicial or other

independent authority of that Contracting Party, of its case, in order to decide if the

expropriation and assessment of its investment have been adopted pursuant to the

principles established in this Article.

Again, these provisions are broadly in line with the existing norms of custom-

ary international law founded on State practice and coupled with opinio

juris. Provisions such as this can be found in BITs concluded by India with

other countries including the Anglo-Indian BIT of 1994 or Sino-Indian treaty of

2006.

396 ICSID Review VOL. 28

IX. COMPENSATION FOR LOSSES ANDREPATRIATION OF INVESTMENT AND RETURNS

Articles 6 and 7 in the India-Nepal BIT with regard to the compensation for losses

and repatriation of investment and returns are broadly in line with the practice of

other countries and are fair. When foreign investors suffer losses owing to war or

other armed conflict, a state of national emergency or insurrection or riots, they

are entitled as regards restitution, indemnification, compensation or other

settlement to be treated no less favourably than the treatment accorded to its

own investors or to investors of any third State. In other words, the principle of

national treatment and the MFN treatment would be extended to foreign investors

with regard to the compensation of losses resulting from such activities.26

X. DISPUTE RESOLUTION

One of the main reasons why foreign investors wish to see the conclusion of a BIT

is to obtain access to an international dispute resolution mechanism for disputes

arising out of their international investments in the host State. A demand of this

nature springs from a vote on the part of foreign investors of no confidence in the

ability of the national judiciary to provide impartial, speedy and effective justice in

the event of a dispute between a host State and a foreign investor. Indeed, in the

author’s view, the judiciary in many developing countries, especially those which

are not fully democratic or have no long traditions of democracy, is not as

independent as it should be and it may be replete with political cronyism,

corruption and inefficiency.

26 India-Nepal BIT (n 3) art 9, Settlement of Disputes between an Investor and a Contracting Party:(1) Any dispute between an investor of one Contracting Party and the other Contracting Party in relation to

an investment of the former under this Agreement shall, as far as possible, be settled amicably throughnegotiations between the parties to the dispute.

(2) Any such dispute which has not been amicably settled within a period of six months may, if both partiesagree, be submitted:(i) for resolution, in accordance with the law of the Contracting Party which has admitted the investment

to that Contracting Party’s competent judicial, arbitral or administrative bodies; or(ii) to international conciliation under the Conciliation Rules of the United Nations Commission on

International Trade Law.(3) Should the parties fail to agree on a dispute settlement procedure provided under paragraph (2) of this

Article or where a dispute is referred to conciliation but conciliation proceedings are terminated otherthan by signing of a settlement agreement, the dispute may be referred to Arbitration. The Arbitrationprocedure shall be as follows:(i) If the Contracting Party of the Investor and the other Contracting Party are both parties to the

Convention on the Settlement of Investment Disputes between States and Nationals of other States,1965 and both parties to the dispute consent in writing to submit the dispute to the InternationalCentre for the Settlement of Investment Disputes such a dispute shall be referred to the Centre; or

(ii) If both parties to the dispute so agree, under the Additional Facility for the Administration ofConciliation, Arbitration and Fact-Finding proceedings; or

(iii) to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules ofthe United Nations Commission on International Trade Law, 1976, subject to the followingmodifications:(a) The appointing authority under Article 7 of the Rules shall be the President, the Vice-President

or the next senior Judge of the International Court of Justice, who is not a national of eitherContracting Party. The third arbitrator shall not be a national of either Contracting Party;

(b) The parties shall appoint their respective arbitrators within two months;(c) The arbitral award shall be made in accordance with the provisions of this Agreement and shall

be binding on the parties to the dispute; and(d) The arbitral tribunal shall state the basis of its decision and give reasons upon the request of

either party.

FALL 2013 India’s New BIT with Nepal 397

Foreign investors who invest in such countries with weaker reputations,

especially those who make longer-term investments and commit sizeable capital

to such countries, seek an assurance against political risks; one of the means of

providing that assurance is through a promise to take a dispute with the host

government out of the jurisdiction of that country to an international court or

tribunal that is independent and impartial and can provide effective, speedy and

efficient justice. Against this background, most BITs provide for an international

dispute settlement mechanism; the new India-Nepal BIT is no exception.

There are two kinds of disputes that can arise in relation to BITs: first, between

a foreign investor and investor-receiving country, also known as a host country,

and second, between the contracting parties themselves. Accordingly, the BIPPA

provides for an elaborate and flexible mechanism with a number of options for the

settlement of disputes between, on the one hand, an Indian investor and the

Government of Nepal and, on the other, a Nepalese investor and the Indian

Government. The preference is clearly on a negotiated settlement of disputes.

Only when negotiations do not produce a mutually satisfactory outcome within six

months do the other options, including referring the matter by mutual agreement

of the parties to the competent national judicial, arbitral or administrative bodies

in the host country or an international conciliation under UNCITRAL will arise.

In other words, it is very much up to the parties to agree which of the above two

would be best for them. Thus, what is interesting about this BIPPA is that even

when negotiations do not result in a mutually satisfactory outcome, the recourse to

an international arbitration mechanism such as ICSID or an ad hoc arbitration

operating under UNCITRAL is not automatic.

The disputing parties have an option of referring the matter either to competent

national judicial, arbitral or administrative bodies of the host country in

accordance with the law prevailing in the country concerned, or to an

international conciliation, operating under the rules of UNCITRAL. Only when

the disputing parties fail to agree as to which of these two options would be

acceptable to them or when the international conciliation proceedings are

terminated other than by signing of a settlement agreement can a dispute be

referred to an international arbitration. Even then, it is not mandatory to refer

the matter to permanent arbitration mechanisms such as ICSID. The matter can

be referred to ICSID or to another arbitration operating under the rules of

UNCITRAL. However, two conditions have to be met before a dispute can be

referred to ICSID: first, both of the contracting parties must be parties to the

ICSID Convention and second, both parties to the dispute, that is, the investor

and the host government, must consent in writing to submit the dispute to ICSID.

Furthermore, the parties to the dispute themselves can agree to refer to additional

facility for the administration of conciliation, arbitration and fact-finding

proceedings. However, no second condition of consent of both parties is required

to refer the matter to an UNCITRAL tribunal. Any disputing party can refer the

matter to an UNCITRAL tribunal.

The India-Nepal BIT provides a different mechanism for the settlement of

disputes between the two countries concerning application or interpretation of the

BIT. As with the disputes between a foreign investor and a host State, the disputes

between the two countries themselves should as far as possible be resolved through

negotiations. Only when the negotiations do not produce a mutually satisfactory

398 ICSID Review VOL. 28

outcome within six months from the time the dispute arose can a dispute be

referred to an international arbitration, any arbitration mechanism of their choice,

by either party. There is no requirement of mutual agreement to refer the dispute

to a tribunal. For such inter-State disputes, there is no provision for international

conciliation. Nor is there any requirement to refer the matter to ICSID or to the

International Court of Justice. It is a simple and straightforward provision whereby

an attempt should be made through negotiation between the two countries to

resolve the dispute; when no success is achieved through negotiation is achieved,

the only option is to refer the matter to an international arbitration.

Thus, overall, the India-Nepal BIPPA provides for an elaborate yet flexible

mechanism for the settlement of disputes between an investor and the host

State as well as between the two countries themselves. It offers a wide range of

options on its ‘menu’ for the settlement of disputes. Not many BITs concluded

between other countries offer as flexible and elaborate a mechanism as does the

India-Nepal Treaty.

XI. ENTRY OF PERSONNEL, APPLICABLE LAWSAND OTHER PROVISIONS

The provisions relating to applicable laws and movement of natural persons or

personnel in the India-Nepal BIT are standard provisions found in many BITs.

Article 11 of the treaty provides for the entry into and sojourn of personnel in a

contracting party from the other contracting party employed by companies or

connected with investments of that party, however, the entry and sojourn of such

personnel is subject to the laws in force in the countries concerned. Under Article

12, the contracting parties have retained the right to regulate foreign investment by

stating that ‘all investments shall be governed by the laws in force in the territory

of the Contracting Party in which such investments are made’.27 Although the

1950 Treaty of Peace and Friendship between India and Nepal already provides

for national treatment for each other’s nationals with regard to the freedom of

movement across the borders, the provisions with regard to the entry and sojourn

of personnel employed by the companies from the other contracting party in this

BIT appears to contain its own provisions to this effect without necessarily

establishing a connection between the two treaties. This may be to assure foreign

investors that regardless of the general provisions of the 1950 Treaty, the BIT will

contain its provisions to this effect. This is because the BIT is an independent and

autonomous agreement whose provisions will not be dependent on the existence

or non-existence or functioning or non-functioning of other treaties. Given the

political controversy around the 1950 Peace and Friendship Treaty, it was sensible

to address all matters relating to investment protection under the BIT rather than

to leave some of the necessary matters still to be governed by other treaties.

Similarly, nothing in the India-Nepal BIPPA precludes either Nepal or India

‘from taking action for the protection of its essential security interests or in

circumstances of extreme emergency in accordance with its laws normally and

reasonably applied on a non discriminatory basis’.28 This provision too safeguards

27 India-Nepal BIT (n 3), art 2.28 India-Nepal BIT (n 3), art 13.

FALL 2013 India’s New BIT with Nepal 399

the vital national interests of the contracting parties if such an event were to occur.

However, since the terms ‘essential security interests’ or ‘circumstances of extreme

emergency’ are not defined in the treaty or in international law in general,

the interpretation of these terms could be a source of controversy between the

contracting parties, should one of the States invoke these provisions to deny the

level of protection available under the treaty to the investor from the other State.

XII. DENIAL OF BENEFITS

The provisions in Article 14 of the India-Nepal BIPPA are designed to deny the

benefits of the agreement to investors or investments belonging to a certain

category. Provisions such as these are relatively new and not included in many

other BITs of older generation or at least not in an elaborative manner as in the

India-Nepal BIT. Under this article a contracting party may deny the benefits of

the agreement to an investor of the other contracting party and to investments of

that investor, if persons of a non-party own or control such investor and the

denying contracting party: (i) does not maintain diplomatic relations with such

non-party or (ii) adopts or maintains measures with respect to such non-party that

prohibit transactions with the investor or that would be violated or circumvent if

the benefits of this agreement were accorded to the investor or to its investments.

This article goes on to deny the benefits of this agreement to an investor of the

other contracting party that is an enterprise of such other party and to investments

of that investor if the enterprise has no substantial business activities in the

territory of the other contracting party and persons of a non-party, or of the

denying contracting party, own or control the enterprise. Provisions such as these

are designed to make sure that only the genuine and bona-fide investments and

investors from the contracting parties can benefit from the protection available

under the treaty.

XIII. THE FUTURE OF INDO–NEPAL BIPPA

The India-Nepal BIT was concluded for a period of 10 years and is automatically

renewable for an indefinite period unless either Contracting Party gives to the

other Contracting Party a written notice of its intention to terminate the

Agreement at any time after the first ten years. However, the Treaty requires

ratification before it can enter into force; it has not yet been ratified by either

party. What is more, it is uncertain whether it will be ratified in the near future.

This is because Article 156 of the Interim Constitution of Nepal requires

parliamentary approval of such treaties before they can be ratified. However,

this BIT has run into trouble as the political opinion is divided in Nepal on the

desirability of concluding such a treaty with India. The Constituent Assembly

which also acted as parliament had not ratified this BIT by the time the Assembly

was dissolved in May 2012. At present, Nepal has no parliament; the future of this

BIT seems to depend on holding fresh, parliamentary elections and on the future

composition of parliament, as well as on the views on the BIPPA of different

political parties to be represented in a future parliament.

In addition, an application was made to the Supreme Court of Nepal seeking

immediate annulment of the Treaty, claiming that it was an unequal treaty on

400 ICSID Review VOL. 28

31 October 2011. The writ filed by an advocate under public interest litigation

argued that the agreement should be scrapped as it is not in the larger interests of

Nepal. Although the writ petition was no more than nit-picking and raised

relatively minor issues of a technical nature, the Supreme Court entertained the

matter and directed the Government not to implement the Treaty without

obtaining parliamentary approval of the Treaty in accordance with Article 156 of

the Interim Constitution. Article 156 reads as follows:

Article 156

Ratification of, Accession to, Acceptance of or Approval of Treaty or Agreements:

(1) The ratification of, accession to, acceptance of or approval of treaties or agreements

to which the State of Nepal or the Government of Nepal is to become a party shall

be as determined by the law.

(2) The laws to be made pursuant to clause (1) shall, inter alia, require that the

ratification of, accession to, acceptance of or approval of treaty or agreements on the

following subjects be done by a two-thirds majority of the total number of members

of the Legislature-Parliament present in the House:

(a) peace and friendship;

(b) security and strategic alliance;

(c) the boundaries of Nepal; and

(d) natural resources and the distribution of their uses.

Thus, no BIPPA with India or with any other country can be ratified by the

Government of Nepal without parliamentary approval. Article 15, on the ‘Entry

into Force’, of the India-Nepal BIT itself reads as follows:

This Agreement shall come into force on the date of exchange of diplomatic notes

confirming that the legal requirements of the Contracting Parties have been fulfilled for

the entry into force of this Agreement.

Although the Supreme Court did not conclude that the BIPPA had undermined

Nepal’s sovereignty, as had been argued by the petitioner, by staying the

implementation of Article 15 the Supreme Court has in effect stayed the exchange

of diplomatic notes until the Treaty is approved by Parliament—and there is at the

moment no parliament sitting in Nepal. Stating that the BIT needs to be tabled

before Parliament as per Article 156 of the Interim Constitution and Sections 4

and 5 of Nepal Treaty Act 1990, a three-member special bench issued the order.29

The Court made it clear that the order will remain valid until parliamentary

process takes place or a final decision in the case by the apex court is delivered.

However, the court declined to stay the process of parliamentary approval, saying

the treaty was of utmost importance as it aimed to protect and promote bilateral

investment and that a stay order would create adverse impact on the objectives of

the agreement. The court stated that ‘Parliament can examine whether any

provision of the agreement contradicts the Interim Constitution as per Article 156,

henceforth it would be wrong to draw a conclusion that the agreement

29 See ‘SC Stays Implementation of BIPPA’ Nepal News (29 November 2011) <www.nepalnews.com> accessed 14April 2013.

FALL 2013 India’s New BIT with Nepal 401

undermined country’s sovereignty and integrity, as claimed by the writ petitioner’,

adding that it ‘will be improper to raise doubts on legislative wisdom’.30

The future of the India-Nepal BIPPA does not seem to depend only on the

political developments in Nepal as India too seems to be going through a period of

revaluation of its policies on future BIPPAs. It remains to be seen whether India

would ratify the India-Nepal BIPPA in its present form. The Indian Government

seems to have ordered a freeze of all BIPPA negotiations until a review of the

Indian Model BIPPA is carried out and completed.31 This review seems to have

been inspired by a spate of show cause notices on the Government by foreign

companies seeking to recover their investments under various BITs following the

cancellation by the Indian Supreme Court of the 2G licenses. It may also partly be

due to the loss by India of its first BIT case in November, 2011 in White Industries

Australia Limited v India in which an ad hoc Tribunal made an award against

India.32 The Tribunal operating under the UNCITRAL rules held that India’s

inordinate delay in enforcing an arbitral award violated the ‘effective means’

standard incorporated by the MFN provision of the 1999 India–Australia BIT.

The above factors could also explain why the subsequent BITs such as the India-

Nepal BIPPA included qualifications and restrictions additional to those in the

Model BIT of India.

XIV. CONCLUSIONS

The BIPPA is a fundamentally mutually beneficial treaty between the two

countries. Most of its provisions are similar to other BIPPAs signed by India and

are actually better for a country such as Nepal than are other, earlier, BITs India

has concluded with other countries. Under the treaty Nepal has retained its

freedom of action with regard to so many issues relating to the regulation of Indian

investment in Nepal. While the treaty has offered a number of guarantees to

Indian investors in Nepal, the treaty allows the Contracting Parties to assert their

sovereign rights where necessary. This is a better treaty than many other treaties

concluded by Nepal with India. From an international perspective too, this is a

more balanced BIT than many other BITs concluded between a major investor

and more powerful country, on the one hand, and a investor receiving and weaker

country, on the other. Therefore, it is difficult to agree with the breakaway faction

of the Maoist party and other fringe parties in Nepal that the India-Nepal BIT is

an ‘unequal treaty’. Having said this, it remains to be seen whether the new India-

Nepal BIPPA will result in more substantial Indian investment in Nepal since

much will depend on sorting out Nepal’s internal political chaos, and on having

the Maoists and other political parties committed to respecting both in word

and deed the principles of democracy, rule of law, good governance and human

rights; these would include the right to property of both natural and juridical

persons in Nepal. Investment protection agreements such as the BIPPA alone, no

matter how sound they may be, are unlikely to have much impact on inflows of

30 As quoted in Kathmandu, ‘BIPPA Left for House to Take Up’ The Himalayan Times (28 November 2011)<http://www.thehimalayantimes.com/fullNews.php?headline=BIPPA+left+for+House+to+take+up+&NewsID=310931> accessed 14 April 2013.

31 See Sujay Mehdudia, ‘BIPA Talks Put on Hold’ The Hindu (21 January 2013) <http://www.thehindu.com/business/Economy/bipa-talks-put-on-hold/article4329332.ece> accessed 14 April 2013.

32 White Industries Australia Limited v The Republic of India, UNCITRAL, Award (30 November 2011) paras 8.1.1.

402 ICSID Review VOL. 28

foreign investment. A treaty such as the BIPPA is, however, certainly helpful

in instilling confidence in foreign investors to invest in a least-developed country

with its internal political problems, and in assuring that their investment will

be safe regardless of the internal politics or public posturing by politicians to

win votes.

When the BIPPA is ratified, Indian investors in Nepal will enjoy greater

protection of their investment and would be able to sue the government of Nepal

if a government in Kathmandu does not provide the protection that they are

entitled to under the treaty or takes any measure that is inconsistent with the

provisions of the treaty. Indian investors would be entitled to compensation

according to international standards in the event of direct or indirect expropriation

of their assets or nationalization. Indian investors in Nepal would have the

protection of the following sets of laws: (i) Nepali domestic law on foreign

investment, (ii) protection under the 1950 treaty of peace and friendship between

the two countries which has a provision for national treatment for the nationals of

each other with regard to certain commerce and business activities, (iii) customary

international law principles concerning the treatment of aliens in general and

investment protection in particular such as those available under the principle of

the minimum international standard, including fair and equitable and (iv) the

provisions of India-Nepal BIPPA of 2011. This should instil enough confidence in

Indian business organizations to invest in Nepal. The provisions in BIPPA are

robust enough to enable Indian investors to seek compensation arising from

political acts of the Nepalese government.

The BIPPA with India is important for Nepal in many respects. People of all

political persuasions have to be won over by the arguments based on the benefits

of BITs such as BIPPA. In that case, Nepal will be well placed to conclude such

BITs with other countries, including China, another major neighbouring country

with a rapidly growing economy that is already on the lookout for host States in

which they could outsource businesses, towards relocating certain industries that

are ‘graduating’ from the Chinese internal market. Because of Nepal’s strategic

location, its favourable climatic conditions, its reputation as a tourist haven, as a

gateway to the Tibet Autonomous Region of China, and as a country with a

traditional reputation of holding its faith in the policy of neutrality or non-

alignment vis-a-vis not only its immediate neighbours but also other major powers

outside of the region, Nepal is well placed to attract foreign investment and

accelerate its economic development.33 If Nepali political leaders are able to

demonstrate the wisdom, perspicacity, far-sightedness and ability to rise above

petty political and personal interests, the country would benefit hugely from the

cross-border trade and investment from its giant immediate neighbours, both of

which are going through a period of rapid economic growth. The leaders of the

main faction of the Maoist party have demonstrated their maturity in dealing with

India and all other major political parties have supported the BIPPA with India.

This is an example of the ability of the leaders of all major political parties to rise

33 See Surya P Subedi, ‘The Challenges to the National Security of Nepal and the Role of International Law andForeign Policy’ in Rajan Bhattarai and Geja S Wagle (eds), Emerging Security Challenges of Nepal (Nepal Inst for Poli S2010) 65–110.

FALL 2013 India’s New BIT with Nepal 403

above party-political interests and support something that is in the national

interests of the country. The new BIPPA with India would work as a catalyst

towards such successful ends if politicians in Nepal were to combine their skills,

knowledge, time, and energy into working together for the greater good of their

and their children’s country.

404 ICSID Review VOL. 28