Lecture On Investment

Dr.
Tabrez Ahmad
Professor of Law
Agenda

Introduction of Investment
Historical Development of Investment Law
East India Company
2
nd
World War
GATT, WTO
Import Substitution and Export Promotion
MNCs
FDI
Energy and International Investment
NAFTA- Chapter 11
International Energy Charter Treaty- Part-III
Integrated Energy Policy-2008
EXIM Policy 2009
Integrated Energy Policy for Energy Security 2013
Impact of International Investment Agreements on Energy Regulation

Dr. Tabrez Ahmad, http://technolexindia.blogspot.in 2
Impact of International Investment Agreements
on Energy Regulation
Objectives and Policies of Energy Regulations
Security and sufficiency of energy supply
Universal and affordable access to energy
Sustainability and environment protection

Economic Background and Historic development of
International energy Investment
Elements and scope of international energy investment
Cycle of cooperation and confrontation
Sources of international energy investment law in the 21
st
century

International Investment Agreements to Protect Energy
Investment
Protection against expropriation
Santa Elena S.A v. Republic of Costa Rica
ICSID 17 Feb 2000
Due to expropriation- States obligation to pay compensation remains
Fair and equitable treatment
CMS Gas Transmission company v. Argentina Republic
ICSID 12 May 2005
Stable legal and business environment is an essential element of fair and equitable
treatment
Umbrella clauses
SGS Surveillance SA V. Islamic Republic of Pakistan
Contract between the parties should not be covered by umbrella clause-
BIT should be given preference than umbrella claues-
Narrow view of Interpretation of Umbrella clauses to avoid flood gate of
disputes.
Areas of contention
Ownership and economic sovereignty
Price controls
Environmental regulation
Conclusion
International Trade
Trade: voluntary exchange of goods, services, assets, or
money between one person or organization and
another
International trade: trade between residents of two
countries
Classical Country-Based Trade Theories
Mercantilism
Absolute Advantage
Comparative Advantage
Comparative Advantage with Money
Relative Factor Endowments
Mercantilism
A countrys wealth is measured by its holdings of gold
and silver
A countrys goal should be to enlarge holdings of gold
and silver by
Promoting exports
Discouraging imports
Modern Mercantilism
Neomercantilists or protectionists
American Federation of Labor-Congress of Industrial
Organizations
Textile manufacturers
Steel companies
Sugar growers
Peanut farmers
Disadvantages of Mercantilism
Confuses the acquisition of treasure with
the acquisition of wealth
Weakens the country because it robs
individuals of the ability
To trade freely
To benefit from voluntary exchanges
Forces countries to produce products it
would otherwise not in order to minimize
imports
Absolute Advantage
Export those goods and services for which a country is
more productive than other countries
Import those goods and services for which other
countries are more productive than it is
Table 6.1 The Theory of Absolute
Advantage: An Example
Wine 2 1
Clock
radios
3 5
Dr. Tabrez Ahmad, http://technolexindia.blogspot.in
France Japan
OUTPUT PER HOUR OF LABOR
13
Absolute Advantages Flaw
What happens to trade if one country has an absolute
advantage in both products?
No trade would occur
Comparative Advantage
Produce and export those goods and services for which
it is relatively more productive than other countries
Import those goods and services for which other
countries are relatively more productive than it is
Differences between Comparative and
Absolute Advantage
Absolute versus relative productivity differences
Comparative advantage incorporates the concept of
opportunity cost
Value of what is given up to get the good

Table 6.2 The Theory of Comparative
Advantage: An Example
Wine 4 1
Clock
radios
6 5
France Japan
OUTPUT PER HOUR OF LABOR
17
Comparative Advantage with
Money
One is better off specializing in what one
does relatively best
Produce and export those goods and
services one is relatively best able to produce
Buy other goods and services from people
who are better at producing them
Table 6.3 The Theory of Comparative
Advantage with Money: An Example
French
Made
Japanese
Made
French
Made
Japanese
Made
Wine 3 8 375 1,000
Clock
Radios
3 1.6 250 200
Cost of Goods in France Cost of Goods in Japan
19
Relative Factor Endowments
Heckscher-Ohlin Theory
What determines the products for which a country will
have a comparative advantage?
Factor endowments vary among countries
Goods differ according to the types of factors that are
used to produce them
Relative Factor Endowments_2
A country will have a comparative advantage in
producing products that intensively use resources
(factors of production) it has in abundance
China: labor
Saudi Arabia: oil
Argentina: wheat
Modern Firm-Based Trade Theories
Country Similarity Theory
Product Life Cycle Theory
Global Strategic Rivalry Theory
Porters National Competitive Advantage
Growth of Firm-Based Theories
Growing importance of MNCs
Inability of the country-based theories to explain and
predict the existence and growth of intraindustry trade
Failure of Leontief and others to empirically validate
country-based Heckscher-Ohlin Theory
Firm-Based Trade Theories
Incorporate additional factors into explanations of
trade flows
Quality
Technology
Brand names
Customer quality

Country Similarity Theory
Explains the phenomenon of intraindustry trade
Trade between two countries of goods produced by the
same industry
Japan exports Toyotas to Germany
Germany exports BMWs to Japan
Country Similarity Theory_2
Trade results from similarities of preferences among
consumers in countries that are at the same stage of
economic development
Most trade in manufactured goods should be between
countries with similar per capita incomes
Product Life Cycle Theory
Describes the evolution of marketing strategies
Stages
New product
Maturing product
Standardized product
Global Strategic Rivalry Theory
Firms struggle to develop sustainable competitive
advantage
Advantage provides ability to dominate global
marketplace
Focus: strategic decisions firms use to compete
internationally
Sustaining Competitive Advantage
Owning intellectual property rights
Investing in research and development
Achieving economies of scale or scope
Exploiting the experience curve
Porters National
Competitive Advantage
Success in trade comes from the interaction of four
country and firm specific elements
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, structure, and rivalry
Theories of
International Trade
Country-Based Theories
Country is unit of analysis
Emerged prior to WWII
Developed by economists
Explain interindustry trade
Include
Mercantilism
Absolute advantage
Comparative advantage
Relative factor
endowments
Firm-Based Theories
Firm is unit of analysis
Emerged after WWII
Developed by business school
professors
Explain intraindustry trade
Include
Country similarity theory
Product life cycle
Global strategic rivalry
National competitive
advantage
Types of International Investments
Does the investor seek an active management role in
the firm r merely a return from a passive investment?
Foreign Direct Investment
Portfolio Investment
International Investment Theories
Ownership Advantages
Internalization
Dunnings Eclectic Theory
Ownership Advantages
A firm owning a valuable asset that creates a
competitive advantage domestically can use that
advantage to penetrate foreign markets through FDI
Why FDI and not other methods?
Internalization Theory
FDI is more likely to occur when transaction costs with
a second firm are high
Transaction costs: costs associated with negotiating,
monitoring, and enforcing a contract
Dunnings Eclectic Theory
FDI reflects both international business activity and
business activity internal to the firm
3 conditions for FDI
Ownership advantage
Location advantage
Internalization advantage
Factors Affecting the FDI Decision
Supply Factors Demand Factors Political Factors
Production costs Customer access Avoidance of trade
barriers
Logistics Marketing advantages Economic development
incentives
Resource availability Exploitation of
competitive advantages
Access to technology Customer mobility
India ranked 25th in terms of the average value of FDI
inflows worldwide between 2000 and 2006.
In 2006, FDI in India totaled $50.7 billion, an increase
of $33.2 billion over FDI stock in India in 2000.
FDI stock in India as a proportion of GDP was 5.7
percent in 2006.
India posted an average growth rate of more than 7
percent in the decade between 1996 and 2006
When India gained independence from British rule in 1947,
the country
welcomed foreign investment to establish a technology base
as well as
skills in entrepreneurship. In 1973, the Foreign Exchange
Regulation Act
(FERA) imposed a ceiling of 40 percent in foreign investment
equity in
Indian companies, leading to a flight of foreign investors. In
the mid-1980s,
India reversed course and began liberalizing its economy,
including
removing various restrictions on foreign investment.
Further liberalization
followed the announcement of a new Industrial Policy in July
1991. The
Reserve Bank of India automatically approved foreign
investment in
industries designated by the government as priority
recipients of
investment. The Foreign Exchange Management Act of 1999
replaced
FERA and removed restrictions on foreign corporations.
Further, policies
on licensing were liberalized

While India has liberalized its foreign investment policy
substantially since
1991, according to an Indian government official, the most
important
liberalization has occurred in domestic investment brought
on by the
privatization of the Indian economy. As the government
continues to
privatize state-owned sectors such as ports and energy
production, India
would like to attract both domestic and foreign private
investment
The Foreign Exchange Management Act (FEMA) is one of the primary
laws regulating foreign investment in India.52
FEMA broadly regulates the
foreign exchange market and provides the Indian government the legal
authority to restrict foreign investment. Because FEMA does not include
implementing regulations, Indian foreign investment policy is primarily
established through a series of public notices or Press Notes issued
separately for each sector. Press Notes are usually approved by the
government cabinet and released by the Department of Industrial Policy
and Promotion (DIPP), a department within the Ministry of Commerce
and
Industry. DIPP makes all Press Notes publicly available and has published
a comprehensive summary of the individual Press Notes
The Press Notes establish, among other things, whether investments in
each individual sector must receive government approval or whether
investments fall under the automatic route, which does not require
government approval. The Foreign Investment Promotion Board (FIPB) is
an interagency body with the authority to approve investment
transactions. Any proposed investment that requires government
approval
must receive approval from the FIPB before the transaction can be
completed. In addition to investments in sectors specifically listed as
requiring approval by the Press Notes,
an investment must receive
government approval if (1) the activity requires an industrial license, (2)
the investment is in the financial sector or is subject to the Securities and
Exchange Board, (3) the investor has an existing joint venture in India in
the same field, or (4) the investment falls outside of ownership caps or in
sectors in which foreign investment is prohibited. Investment that
receives
FIPB approval is granted the general permission of the Reserve Bank of
India, which administers FEMA, without a separate approval process.

The Press Notes also establish the percentage of a company that can be
owned by a foreign investor in each sector. Foreign ownership caps are
usually set at one of the following levels: zero percent (prohibited), 26
percent (allowing the foreign investor a sufficient share to block major
decisions), 49 percent (maintaining that a majority of shares are held by
Indian nationals), 74 percent (maintaining that Indian nationals hold a
sufficient share to block major decisions), or 100 percent (completely
open). The reasons for the limits on foreign ownership vary from sector to
sector. However, according to an Indian government official, domestic an
economic concerns, such as the effect on Indian businesses,
contribute to
the restrictions. In some industries with primarily domestic
concerns, such
as retail trade, foreign investment is prohibited. However, it
is allowed,
within limits, in the defense industry, which is commonly
associated with
national security concerns.
The following are examples of sector-based ownership caps
on foreign
investment in India.53
Foreign investment is prohibited in:
retail trades (except single-brand retail),
atomic energy,
lotteries,
gambling and betting,
housing and real-estate business,
54
certain types of agriculture
Limited to 26 percent in (among others):
defense industries,
print media,
insurance.
broadcasting,
domestic airlines,
infrastructure/service sectors.
establishment and operation of satellites,
atomic minerals,
exploration and mining of coal.
Allowed up to 100 percent in other sectors, including:
development of airports,
private oil refineries,
nonatomic electricity generation,
roads and highways.
Ownership caps are independent of government approval requirements.
For example, a sector open to 100 percent foreign ownership may still
require government approval, while a sector capped at 49 percent may be
open through the automatic route. There are no stated monetary
thresholds that trigger a review of foreign investment, except for certain
currency transactions, which must be reviewed by the Reserve Bank of
India at various thresholds
Foreign investors under the automatic route are only required to notify
the
Reserve Bank of India within 30 days of completing the transaction.
According to a government official, the notification information is
primarily for statistical purposes. All foreign investment transactions
require notification, regardless of value or equity percentage, although
according to a government official, there are no measures in place to
ensure compliance with the notification requirement. According to an
Indian government official, potentially harsh penalties for noncompliance
deter investors from avoiding requirements.
Some sectors have additional restrictions and approvals. The Industries
(Development and Regulation) Act of 1951 currently requires industrial
licenses for several sectors, including alcoholic drinks, tobacco, electronic
aerospace and defense equipment, industrial explosives, and hazardous
chemicals. An industrial license was also required for a manufacturing
plant with capital of more than 10 million rupees (roughly $250,000) to
produce any of the 114 items that are reserved for small scale producers
(under 10 million rupees) as well as for any industrial project within 25
kilometers of any city with a population of 1 million or more as of the 1991
census. According to the U.S. State Department, the government of India
recently reduced the number of small scale reservations from 114 to 35,
part of an incremental reduction that is expected to continue. Investments
in these sectors must receive an industrial license in addition to approval
from the FIPB.
In addition to the required FIPB review and approval for foreign
investment, investment in the financial sector is subject to
approval by the
Reserve Bank of India. Guidelines for FIPB reviews state that for
private sector banks, FIPB approval would be granted only after
permission had
been obtained, in principle, from the Reserve Bank. These
guidelines are
included in a document entitled Investing in India: a
Comprehensive
Manual for Foreign Direct Investment-Policy and Procedures,
published
by the Indian government.

Foreign institutional investors such as mutual funds are regulated by the
Securities and Exchange Board of India Act as well as under FEMA. While
foreign nationals are not allowed to invest directly in the Indian stock
market, foreign institutions that are regulated in their home country are
allowed to invest, subject to certain rules, according to the Indian
government. For example, no single foreign institutional investor can
acquire more than 10 percent of an Indian company, and all foreign
institutional investment cannot exceed 24 percent of the capital of the
Indian company.
Foreign institutional investors must also receive approval
from the Reserve Bank in some instances, such as non-stock exchange
sales and purchases. According to a law firm familiar with foreign
investment policies in India, the Securities and Exchange Board of India
regulations are much less demanding than those under the FIPB approval
process. In 2006, India amended the Securities and Exchange Board of
India regulations, expanding the list of entities considered foreign
institutional investors, which are allowed to invest in the Indian stock
market, to include governmental agencies such as sovereign wealth funds.

For those transactions that do not qualify for the automatic route, the
FIPB has the authority to reject an investment transaction, and judges
each proposal on a case-by-case basis. FIPB can reject a transaction based
upon special circumstances or on factors it considers relevant,
according to FIPB guidelines. While the guidelines emphasize FIPBs
flexibility, they also offer nonbinding factors that FIPB should consider in
a review. For example, FIPB should consider whether an investment has
any strategic or defense-related considerations. However, the FIPB
guidelines do not specify what would constitute a strategic or defense
related consideration.
An Indian government official stated that while an
FIPB review could consider other factors, the primary focus
of a review is
to determine whether the proposed investment is compliant
with Indian
policy, such as sector equity caps, joint venture approval
requirements,
and industrial licensing requirements. According to an
Indian government
official, in most cases, FIPB denies approval only if a
transaction is not
compliant with Indian foreign investment policy
requirements.

The FIPB is composed of the Secretaries of the Department of Economic
Affairs (the Chair), the Department of Industrial Policy and Promotion,
the
Department of Commerce, the Division of Economic Relations within the
Ministry of External Affairs; and the Ministry of Overseas Indian Affairs.
According to an Indian government official, the ministry with industry
jurisdiction for each case contributes to the FIPB decisions. Guidelines
suggest that applications submitted to specific ministries should be
brought before the FIPB within 15 days of submission, and that
government approval or rejection should be communicated within 30
days.
However, according to an Indian government official, an investor should
plan on a 3-month review and approval process.
Investors may file
grievances or complaints to the Grievances Officer-cum-Joint
Secretary
within the DIPP or to the Business Ombudsman within the
Ministry of
Commerce and Industry. Once an investor has received approval
through
the FIPB, he or she is automatically granted the general permission
of the
Reserve Bank without additional review; however, the companies
must
notify the Reserve Bank within 30 day of receipt of inward
remittances
and within 30 days of the issue of shares to the foreign investors.

According to a lawyer familiar with investment in India, FIPB
approval is
usually a legal formality, and FIPB denials are rare. FIPB does
not place
conditions upon approval. However, according to a U.S. State
Department
official, if the investment application requires modification,
an investor is
permitted to resubmit an amended investment application to
the FIPB for
approval. Proposals can also be deferred or referred to a
different
regulatory body.
Government ministries can exert influence on investment transactions
prior to the transaction entering the formal FIPB process. According to a
U.S. State Department official, the Indian government has intervened in a
number of cases where investors from countries of concern have
attempted to invest in sectors deemed sensitive, such as the
telecommunications sector, often through involvement from the ministry
with industry jurisdiction on an ad hoc basis rather than through the
formal process. Negotiations and informal discussions with the ministries
occur before an investor submits an application to the FIPB, according to
the U.S. State Department. Furthermore, some investment applications
to
the FIPB from investors in countries of concern have sat for over a year
without approval or denial, according to a U.S. State Department official.
New Developments
Indian foreign investment policy in individual sectors changes frequently.
Each year, the Indian Cabinet reviews foreign investment policy and
announces a series of sector-based changes as part of a government-
wide
FDI review, according to the U.S. State Department. In January 2008 the
Indian government approved several changes to its FDI policy. The limit
on foreign investment in state-owned petroleum refineries was increased
from 26 to 49 percent. The limits in some parts of the civil aviation sector,
including cargo airlines, were increased from 49 to 74 percent, although
investment in passenger airlines is still limited to 49 percent. Additional
liberalization of foreign investment rules was approved for construction
development projects, commodity exchanges, credit information
companies, industrial parks, and titanium mining.
According to the U.S.
State Department, the cabinet-approved policy, which was delayed
several
months, dropped the most controversial proposals to expand FDI in retail
and other areas. Changes to individual sectors also can occur outside the
annual foreign investment policy review, according to the U.S. State
Department. For example, in April 2007, the government announced
changes to the conditions of ownership in the telecommunications sector
as a follow-up to changes made in March of 2005 that increased the
telecommunications sector ownership cap from 49 percent to 74 percent.
The 2007 changes introduced additional specific security conditions for
the telecommunications industry, which, according to business
association representatives, are intended to offset potential security
concerns associated with increased foreign ownership in the sector

According to business representatives that have had experience investing
in India, there have been no recent significant changes that have tightened
controls on foreign investment or increased ownership restrictions. Indian
government officials as well as representatives from a law firm with Indian
investment experience stated that the trend of liberalization will continue
in India. Despite a likely trend of liberalization in the long term, one of the
most controversial areas for liberalization has been in the retail sector,
where foreign investment is seen as a threat to small Indian retail
businesses. According to the U.S. State Department, The Ministry of
Commerce and Industry announced in October 2007 that liberalization in
the retail sector would not occur as part of the ongoing foreign investment
policy review.
The Indian government has also recently considered implementing
a
security-based review process. According to the U.S. State
Department,
the Indian National Security Council Secretariat suggested creating
a
National Security Exception Act (NSEA), which would have
established a
process for assessing security threats related to foreign investment,
similar
to the U.S. CFIUS process. The idea met resistance from the
Ministry of
Commerce and Industry and the Ministry of Finance and was
subsequently
abandoned. The debate over the changes represents the institutional
differences between agencies. The National Security Council Secretariat
and the Ministry of Home Affairs would prefer to make security controls
an explicit part of the formal process, while the Ministry of Commerce
and
Industry and the Ministry of Finance are concerned about the effect on
investment that further review requirements might have, according to the
U.S State Department. Since the initial proposal was abandoned, U.S.
State
Department officials have reported that Indian government agencies are
still debating the need for a national security review of foreign
investment
Phases of Indian Economy 1947-1980

Command and Control Economy
Allocation of resources by the Government (budgetary
grants)
Government took active part in setting priorities for
the economy
Self-Reliance was the buzz word
Nationalisation of Banks
Limited scope for private participation

67 Dr. Tabrez Ahmad, http://technolexindia.blogspot.in
Phases of Indian Economy
1991-2000
Liberalization and Globalization of Indian Economy
Increased emphasis on private sector participation
Limited extent of FDI participation
Gradual improvement in the enabling environment

Phases of Indian Economy
post 2000
Political Coalitions have started providing stable
governments
Government to get out of owning and managing
businesses: Disinvestment Policy
Gradual relaxation in the FDI Policy
Progressive Liberalisation

Pre-1991

FDI was allowed selectively up to 40% under FERA
This period was dominated by the Congress party
1991 35 high priority industry groups were placed on the Automatic Route for FDI up
to 51%
Minority Congress government: Initiated economic reforms in a big way
1997 Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/
51%/50%
United Front Government: Inclusive of left parties, was perceived as
traditionally opposed to FDI, but continued with the reforms.
2000 All sectors placed on the Automatic Route for FDI except for a small negative list
BJP coalition government:(coalition of Left and Right wing parties) was
traditionally seen as opposed to FDI, but continued with economic reforms.
Post 2000 Many new sectors opened to FDI; viz., insurance (26%), integrated townships
(100%), mass rapid transit systems (100%), defence industry (26%), tea
plantations (100%), print media (26%).
Sectoral caps in many other sectors relaxed;
BJP coalition government: pursued reforms vigorously and initiated second
generation reforms.
Consensus on Economic Liberalisation
Change in perception
Indian Business Houses
Government
Legal Framework: shift from a Positive List to a Negative
List (FERA FEMA)
Gradually all sectors moving to Choice and
Competition (Multiple Player Model)

Present Picture
India: Fourth largest economy in terms of Purchasing Power Parity
Tenth most industrialized economy
GDP growth rate of 8.1% - Second highest in the world.
Considerable improvement in FDI inflows
FII inflows:
For the period, July 2003 Jan 2004 FII inflow has exceeded USD
7 bn, which is more than the cumulative FII inflow in the last five
years.
Still a big gap between India and China
The Industrial Policy
Industrial Licensing
All Industrial undertakings exempt from obtaining an industrial
license to manufacture, except for:
Industries reserved for the Public Sector
Industries retained under compulsory licensing
Items of manufacture reserved for the Small Scale Sector
If the proposal attracts locational restriction
Industrial Entrepreneur Memorandum
Industries reserved for the Public Sector: (1) Atomic Energy and (2)
Railway Transport
Compulsory licensing needed in the following industries:
Distillation and brewing of alcoholic drinks
Cigars and cigarettes and manufactured tobacco substitutes
Electronic aerospace and defence equipment of all types
Industrial explosives including detonating fuses, safety fuses, gun
powder, nitrocellulose and matches
Certain hazardous chemicals

Locational Policy
Industrial undertakings are free to select the location
Location to be 25 km away from any city with a million strong
population
Exceptions:
When located in an area designated as an Industrial Area
before the 25
th
July, 1991.
Electronics, Computer Software and Printing (and any other
industry which may be notified in future as non polluting
industry).

Small Scale Industries
Suitable for Foreign Investment?
Cap on Investment in fixed assets (plant and machinery) is Rs. 10
million (approx. SGD 3,70,000)
Not more than 24 per cent of total equity can be held by any
industrial undertaking either foreign or domestic
Upon such equity exceeding 24% the SSI status is lost. Carry-on-
Business (COB) Licence required.
Various items reserved exclusively for SSIs.

The Entry Process
.
77
Automatic Route Prior Permission
Investing in India
General rule
Inform RBI within 30 days of
inflow/issue of shares
Pricing: FEMA Regulations
Unlisted CCI
Listed SEBI
Cap of Rs. 600 Crore
(approx SGD 222 million)
By exception
Approval of Foreign
Investment Promotion
Board needed.
Decision generally
within 4-6 weeks
The Entry Process: Automatic Route
All items/activities for FDI investment up to 100% fall under the
Automatic Route except the following:
All proposals that require an Industrial Licence.
All proposals in which the foreign collaborator has a previous
venture/ tie up in India.
All proposals relating to acquisition of existing shares in an
existing Indian Company by a foreign investor.
All proposals falling outside notified sectoral policy/ caps or
under sectors in which FDI is not permitted.
The Entry Process: Government Approval
FIPB Approval
For all activities, which are not covered under the Automatic Route
Composite approvals involving foreign investment/ foreign technical
collaboration
Published Transparent Guidelines vs. Earlier Case by Case
Approach
Downstream Investment
Subsequent Investment in the same or allied field
Press Note 18
No Automatic Route for FDI and/or technology collaboration for
those who have or had any previous joint venture/technology
transfer/ trade mark agreement in the same or allied field.
Same field : Four digit NIC 1987 Code
Allied field : Three digit NIC 1987 Code.
IT Sector & International Financial Institutions exempted.
New Trend: FIPB examines objections by the earlier partner
objectively.

Acquisition of shares in a Listed Company
Takeover Code
Acquisition of more than specified equity stakes would entail
public offer
Pricing: Average of 26 weeks or 2 weeks, whichever is higher
No takeover of management before completion of Takeover
Code formalities
Other modes of Foreign Direct Investment
GDR, ADR, FCCB
Indian Companies allowed to raise equity capital in the international
market through the issue of GDRs/ ADRs/FCCBs.
No ceiling on investment

Other modes of Foreign Direct Investment
GDR, ADR, FCCB (Contd.)
No end-use restrictions on GDR/ ADR/ FCCB issue
proceeds
Except
Investment in real estate
Stock markets.
Government clearance required when sectoral cap is
exceeded, or for a project not falling under Automatic
Route.
25% of the FCCB proceeds can be used for general
corporate restructuring.
Foreign Technology Collaboration
Foreign technology collaborations are permitted
either through the automatic route or by the
Government.

Policy for Automatic Approval
To all industries for foreign technology collaboration
agreements, irrespective of the extent of foreign equity in
the shareholding, subject to:
The lump sum payments not exceeding US $ 2 Million;

Policy for Automatic approval (contd.)
Royalty payable being limited to 5 per cent for domestic
sales and 8 per cent for exports, subject to a total
payment of 8 per cent on sales
No restriction on the duration of the royalty payments
The aforesaid royalty limits are net of taxes and are
calculated according to standard conditions.

Policy for Automatic approval (contd.)
Payment of royalty up to 2% for exports and 1% for
domestic sales is allowed under automatic route on use of
trademarks and brand name of the foreign collaborator
without technology transfer.
Registration of FC Agreement with RBI.
The Entry Strategy
Forms in which Business can be conducted
in India
Wholly owned subsidiary
Joint Venture Company
Branch Office
Project Office
India Presence: Liaison Office

The Entry Strategy: Joint Venture
Company
Advantages
Limited liability
Market Penetration
Local Partners Expertise and Experience
Vital Considerations
Choice of Joint Venture Partner
Due Diligence

Company
Vital Considerations (Contd.)
Clearly defined agreement
Terms of the Shareholders Agreement should be
reflected in the Articles of the Company.
Share Transfer Restriction in a Public Limited
Company
Disproportionate voting Rights: Veto
Non-compete

Company
Vital Considerations (Contd.)
Agreement for future issue of share capital
Dispute Resolution
Non-disclosure of confidential information post
termination

The Entry Strategy: Branch Office
Purpose/Viability of a Branch Office
Represent the business interest of foreign company
For the purpose of execution of the Project
Project Office is in the nature of a
Branch Office set up for a particular
project.

Permissible activities for a Branch
Office
Export/Import of goods
Professional or Consultancy Services
Carrying out research work in which the parent
company is engaged
Promoting technical or financial collaborations
between Indian Companies and parent or overseas
group companies

Permissible activities (Contd.)
Representing the parent company in India and acting as
Buying and Selling Agent
Rendering Technical Support to the products supplied
by parent/group companies.
Foreign Airlines/ Shipping Companies
Issue: Project/ Branch Office Permanent
Establishment

The Entry Strategy: Liaison Office
Liaison office for
Promotion of business interest; spreading
awareness of companys products; explore
opportunities; work as channel of communication etc.
Cannot carry on any commercial, trading or
industrial activity or earn any income in India
Is required to maintain itself out of inward remittances
received from abroad through normal banking
channels.

The Entry Strategy
Branch Office/Liaison Office can be set up only with
prior RBI approval
Profit of the Branch or Surplus of the project after
completion can be remitted, after payment of all
applicable taxes in India

Exit Issues
Transfer of shares from non-resident to non-
resident does not require RBI approval for pricing
Transfer of shares from non-resident to resident
does not require any FIPB Approval, though RBI
approval is required for pricing
Pricing as per FEMA listed and unlisted securities
RBI permission not required if sale through Stock
Exchange
Mauritius Route: Capital Gain Advantage

Legal Structures facilitating
FDI
Facilitating FDI in India
Emergence of Independent
Regulators: Electricity, Telecom,
Insurance, Capital Market and
Competition Law
Ensuring level playing field vis--vis Government
Corporations and inter se private players
Expertise in the subject matter involved
Expeditious resolution of dispute

Emergence of Independent Regulators (Contd.)

Regulators under consideration: Petroleum, Railways,
Information and Broadcasting
Regulator to curb Anti-Competitive Practices
Government Directives
Labour laws a more contractual
approach.
Move towards: hire and fire
Progressive use of discretionary executive powers
Permissions granted for closure of unviable units
Inspections only upon workers grievances
Voluntary Retirement Schemes
EPZs, SEZs etc may be exempted from application of certain
labour laws
Amendment to Industrial Disputes Act under consideration
Amendment to Contract Labour (Regulation & Abolition)
Act, 1970 under consideration.

Investment Incentives

Incentives for Investment in
Power Sector
New Legal Regime: Electricity Act, 2003
The Act provides for: Multiple Buyer Model,
Independent Regulatory Body, Open Access,
Power Trading as an independent business,
delicensing of generation
100% FDI Automatic Route in:
Hydro-electric power plants;
Coal/lignite based thermal power plants;
Oil/gas based thermal power plants.

Incentives for Investment in
Power Sector

Other investment incentives:
New Power Projects eligible for 100% tax holiday in
any block of ten years, within first fifteen years of
operation.
The Deadline for income tax exemption for new
power projects extended from 2006 to 2012.
Various indirect tax incentives:
Concessional rate of import duties
Special project import scheme
Deemed export benefit for certain categories of power
projects.

The motives for international
economic integration
To enhance efficiency in production made
possible by increased specialization in
accordance with the law of comparative
advantages;
To increase production level due to better
exploitation of economies of scale made possible
by the increased size of the market;
To improve international bargaining position
made possible by the larger size leading to better
term of trade;
To enforce changes in economic efficiency
brought about by enhanced competition; and
changes effecting both the amount and quality of
the factors of production due to technological
advance;
Factor mobility across the borders
of member nations;
The coordination of monetary and
fiscal policies;
The goal of full employment, higher
rates of economic growth and better
income distribution becoming
unified target.
Legal frameworks governing foreign
investment
Domestic Laws and regulations
International Law
International Codes of conduct, Guidelines
Treaty Regime (BITs, Regional Treaty, Multilateral
Treaty)
WTO Rules and Regulations relating to investment
Special regime for investment liberalisation
Unilateral liberalization of investment

Legal frameworks governing FDI at the international
sphere
International Law
Traditional recognized absolute State sovereign rights
Diplomatic protection
State responsibility
Minimum international standard of treatment
International Codes and Guidelines, soft law
The role of WTO
Multilateral Investment Agreement
General Agreement on Trade related-investment measures (TRIMs)
The General agreement on trade in services (GATs)
General Agreement on Trade-related intellectual property rights
(TRIPs)
Regional economic integration : EU, NAFTA, ASEAN (regional level)

Investment Treaty Regime
Bilateral Investment Treaty

Regional investment treaty

Multilateral investment treaty
Unilateral Liberalisation
Unilaterally liberalise foreign investment
Economic policy
Attraction of inward capital flow
Special regime
Special Economic Zone, Free Zone* (It is different from
Free Trade Area, the former is domestic special scheme,
the latter is at international level, bilateral or
regional/multilateral)* not be confusing one with the
other!
Actors/Players in the field of Foreign Direct
Investment
The Multinational Corporations

States Corporations

Home Country

Host Country
Sovereign Rights of Host Country to admit
and control foreign investment
Pre entry
Pre-entry treatment
Total Exclusion
Exclusion from negative
list, sensitive list, closed
sectors
Screening
Quantitative restriction
Conditional entry
Restricted allocation
Etc.

Post entry
Post- entry Treatment
Form of establishment
Ownership control
Governmental intervention
Special requirements
Other Restrictions
Control over the operation
of MNEs
Expropriation/
Nationalization
Etc.
Admission and Establishment
States sovereign Rights

The form of Controls or restrictions over the
admission and establishment of foreign investor
The acquisition of interests in local business
The limitations on foreign ownership and control
Registration and report requirements
The conditional entry of foreign investors:
investment measures, incentive regimes, economic
policy
Measures relating to admission and
establishment
Control over access to the host country economy
Conditional entry into the host country economy
Measures relating to ownership and
control
Control over ownership
Controls based on limitation of shareholder powers
Control based on governmental intervention in the
running of the investment
Other types of restriction

Control over access to the host country
economy
Absolute ban on all forms of FDI: Former centrally
planned economies prior to the transitional
process.
Closing certain sectors, industries or activities to
FDI for economic, strategic or other public policy
reasons.
Quantitative restrictions on the number of foreign
companies admitted in specific sectors, industries
or activities for economic, strategic or other public
policy reasons.
Investment must take a certain legal form:
incorporation in accordance with local company law
requirements.
Compulsory joint ventures either with state
participation or with local private investors.
Control over access to the host country
economy
General screening/authorization of all investment
proposals; screening of designated industries or
activities, screening based on foreign ownership
and control limits in local companies.
Restrictions on certain forms of entry: mergers and
acquisitions may not be allowed, or must meet
certain additional requirements.
Investment not allowed in certain zones or regions
within a country.
Admission to privatization bids restricted, or
conditional on additional guarantees, for foreign
investors.
Exchange control requirements.

Conditional entry into host country: General
conditions
Conditional entry upon investment meeting certain
development or other criteria (environmental
responsibility, benefit to national economy) based on
outcome of screening evaluation procedures
Investors required to comply with requirements related
to national security, policy, customs, public morals as
conditions of entry.
Condition based on capital
requirement
Minimum capital requirements.
Subsequent additional investment or reinvestment
requirements
Restrictions on import of capital goods needed to set up
investment ( e.g. machinery, software) possibly
combined with local sourcing requirements.
Investors required to deposit certain guarantees ( e.g.
for financial institutions)
Other Conditions
Special requirements for non-equity forms of
investment (e.g. BOT agreement, licensing of foreign
technology).
Investors to obtain licenses required by activity or
industry specific regulations
Admission fees ( taxes) and incorporation fees (taxes)
Other performance requirements ( e. g. local content
rules, employment quotas, export requirements).
Measures relating to ownership and control:
Control over ownership
Restrictions on foreign ownership : no more than 50%
foreign-owned capital allowed.
Mandatory transfers of ownership to local firms usually
over a period of time ( fade-out requirements).
Nationality restrictions on the ownership of the
company or shares thereof
Control based on limitation of shareholder
powers
Restriction on the type of shares or bonds held by
foreign investors e.g. shares with non-voting right
Restrictions on the free transfer of shares or other
propriety rights over the company held by foreign
investors e.g. shares cannot be transferred without
permission.
Restrictions on foreign shareholder rights e.g. on
payment of dividends, reimbursement of capital
upon liquidation, on voting rights, denial of
information disclosure on certain aspects of the
running of the investment.
Controls based on governmental intervention in
the running of the investment
Government reserves the right to appoint one or more
members of the broad of directors.
Restriction on the nationality of directors, or limitations on
the number of expatriates in top managerial positions
Government reserves the rights to veto certain decisions, or
requires that important board decisions be unanimous
Golden shares to be held by the host Government allowing
it, for example, to intervene if the foreign investor captures
more than a certain percentage of the investment
Government must be consulted before adopting certain
decisions.
Host Countrys General post-entry Control over
FDI
Control over Capital movements
Control through tax legislation
Control through disclosure legislation
Control through merger legislation
Control over operations resulting in divestment
Dispute Settlement
Expropriation
Traditional concept
Creeping expropriation

Related issues to Hosts country control
Definition of investment : the limitation of power
of the host country to control or to allow greater
discretion to the host state to control FDI
Exceptions and derogations: national security,
public health, public policy, specific industries
Incentives
National treatment and most favoured-nation
treatment
Social responsibility
Transparency
Dispute settlement

Other types of restriction
Management restrictions on foreign- controlled
monopolies or upon privatization of public companies.
Restrictions on land or immovable property ownership
and transfers thereof.
Restrictions on industrial or intellectual property
ownership or insufficient ownership protection.
Restriction on the use of long-term (five years or more)
foreign loans e.g. bond

Country Approaches to entry and establishment
of FDI
The Investment Control model, which preserves
full State Control over entry and establishment;

The Selective Liberalization model, which offers
limited rights of entry and establishment, i.e. only
in industries that are included in a positive list by
the agreement of the contracting States;
The Regional industrialization programme
model, which offers full rights of entry and
establishment based on national treatment for
investors from member countries of a regional
economic integration organization only for the
purposes of furthering such a programme
Country Approaches to entry and
establishment of FDI
The Mutual national treatment model, which
offers full rights of entry and establishment based
on national treatment for all natural and legal
persons engaged in crossed-border business activity
from member countries of a regional economic
integration organization;

The Combined national treatment/most-favoured-
nation treatment (NT/MFN) model, which offers
full rights of entry and establishment based on the
better of NT or MFN, subject only to reserved
negative lists of industries to which such rights do
not apply.
Models and policy options
Model 1. Investment
Control (followed by most
BITs, although some exceptions
exist; US BITs and Canada BITs).
This model does not offer
positive rights of entry &
establishment. It based on
national discretion
Model 2. Selective
Liberalization (illustrated
by GATs: a right of establishment
exists where a member of GATs
makes specific commitments on
market access under Art. XVI.
(considerable discretion in
determining the extent of its
market access).
To accept complete State
discretion through the
investment control model,
thereby preserving the
general power to screen
proposed investments

To liberalize cautiously
through the adoption of the
selective liberalization
model, opening up one or
more industries at a time
Model 3. Regional
industrialization
programme (followed by
ANCOM, COMESA, ECOWAS,
ASEAN Industrial Joint ventures,
ASEAN AICO, ASEAN Brand-to-
Brand Complementation Scheme
To follow the regional
industrial programme
model and encourage the
establishment of regional
multinational enterprises,
thereby setting up a
supranational form of
business organization
aimed at encouraging
intraregional economic
development.
Model 4. Mutual
national treatment
(followed by EC when it was
European Community, in the
Treaty Establishing the European
Community), Code of
liberalization of Capital
Movements and the Code of
Liberalization of Current
Invisible Operations of the
OECD, CARICOM, ECCAS, CEPGL,
COMESA, Revised ECOWAS.
To grant full liberalization
of entry and establishment
on the basis of mutual
national treatment, thereby
allowing such rights to exist
between States that see a
common interest in
regional integration, but
which are not necessarily
committed to full
multilateral liberalization
Model 5. Combined
national treatment/Most-
Favoured-nation treatment
(NT/MFN) (followed by NAFTA,
Modern US BITs model, Free
Trade Treaty between Colombia,
Mexico and Venezuela,
MERCOSUR, APEC non-binding
investment principles, ASEAN
AIA (ASEAN Investment Area
under ASEAN Open Regionalism)
To follow the full NT/MFN model
and open up entry and
establishment for investors from
the contracting State on the basis
of the better of these two
standards, subject only to a
NEGATIVE LIST OF RESERVED
ACTIVITIES, INDUSTRIES OR
APPLICABLE POLICIES. The
existence of a negative list of
excepted industries emphasizes
that certain strategic industries
may be beyond the reach of
liberalization measures.
Model 6. Hybrid model
To follow a mix of models
bearing in mind that some
of the options appear to be
incompatible or difficult to
combine. The economic
effect of these hybrid
options would be to offer
more specialized
alternatives that may be
more compatible with the
mix of location advantages
enjoyed by particular host
countries.
National Treatment
The nature and origins of the national treatment
standard
Scope and application
The substantive content of the national treatment
standard
The relationship between national treatment and other
general standards of treatment
De jure and de facto treatment
Exceptions to national treatment
The nature and origins of the NT standard
under International Law
The standard represents one of the competing
international law doctrines for the treatment of the
person and property of aliens The Calvo Doctrine
or the so called Negative National Treatment

The doctrine of State Responsibility for injuries to
aliens and their property. It asserts that customary
international law establishes a minimum
international standard of treatment to which aliens
are entitled, allowing for treatment more
favourable than that accorded to nationals where
this failes below the international standard

Definition
National treatment can be defined as a
principle whereby a host country extends to
foreign investors treatment that is at least as
favourable as the treatment that it accords to
national investors in like circumstances.
In this way the national treatment standard
seeks to ensure a degree of competitive
equality between national and foreign
investors.
General application of NT
National treatment typically extends to the post-
entry treatment of foreign investors.
Some international investment agreements also
extend the standard to pre-entry situations. (US
and Canada BITs)
Normally such an extension accompanied by a
negative list of excepted areas of investment
activity to which NT does not apply, or a positive
list of areas of investment activity to which NT is
granted.
Several types of general exceptions to national
treatment exist concerning public health, safety
and morals, and national security.
National Treatment VS MFN Treatment
National treatment seeks to grant treatment
comparable to domestic investors operating in the
host country. (to secure a certain level of treatment
for FDI in host country)

NT serves to eliminate distortions in competition
and thus is seen to enhance the efficient operation
of the economies involved

MFN seeks to grant foreign investors treatment
comparable to other foreign investors operating in
the host country
The differences of NT that applicable to trade
and investment
National Treatment in trade agreement is applicable to
Product

The national treatment in investment agreement is
applicable to investments and/ or investors
The factual area to which NT applies
The same, Identical situation
The list of economic activities
The like or similar cases or circumstances
The case-by-case basis, no factual comparisons

Scope and application of NT
What stage of investment process does NT apply?
Whether NT applies to both pre-, post- entry stages
of the investment process or it applies only to
investment that have already been admitted to the
host country
What is the meaning of NT where States have
subnational authorities exercising constitutional
powers to make investment policy?
The substantive content of the national
treatment standard
Factual situations in which national treatment applies
The same or identical circumstances
The economic activities and /or industries to which
national treatment applies
like situations, similar situations or like
circumstances
Definition of the standard
same or as favourable as treatment
no less favourable treatment
The substantive content of NT
What are the factual situations in which NT applies?
This defines the limits of factual comparison

In what manner, and to what extent, is the treatment of
foreign investors assimilated to that of nationals?
This deals with the techniques of comparison, the
application of which is limited to the factual situations
identified in answering the first question
The comparable treatment
The treatment will be
The same as
The as favourable as
The no less favourable
That accorded to national
investors
De jure and De facto NT
De Jure NT, the treatment of foreign investors
based on NT provided under national law and
regulation or under the investment treatment

De facto NT, the treatment of foreign investors
under the factual measures that might work
against NT e.g. licensing requirements,
qualification requirements. Although these
measures may be justified on policy grounds.
Exceptions to National treatment
Classification of exceptions
General exceptions
Subject-specific exceptions
Industry-specific exceptions
Reciprocal national treatment clauses
Exceptions based on development considerations
Monitoring
Exceptions to national treatment
General exceptions: public health, order and
morals, and national security
Subject-specific exceptions: intellectual property
rights guaranteed under IP conventions, taxation,
prudential measures in financial services,
incentives, safeguards, cultural industries
exception
Country specific exceptions: specific industries for
national economic policy and social policy
Reciprocal national treatment clauses
Exceptions based on development considerations
Monitoring
Most-Favoured-Nation Treatment
Definition and scope
MFN treatment and equality of competitive
opportunities
The free rider issue
The identity issue
Exceptions: general exceptions, reciprocal subject-
specific exceptions, country-specific exceptions
The rationale behind the application of MFN to
foreign investors
The most-favoured-nation treatment (MFN)
standard is a core element of international
investment agreements. It means that a host
country treats investors from one foreign country
no less favourably than investors from any other
foreign country in like cases.
The MFN standard gives investors a guarantee
against certain forms of discrimination by host
countries, and it is crucial for the establishment of
equality of competitive opportunities between
investors from different foreign countries.

Definition and scope
The MFN standard means that a host country must extend to
investors from one foreign country the same treatment it
accords to investors from any other foreign country in like
cases.
It potentially applies to all kinds of investment activities,
such as operation, maintenance, use, sale or liquidation of
an investment. (It rarely applies to the admission and
establishment, except in the case of the US and Canada BITs,
NAFTA, APEC, MERCOSUR Draft Energy Charter
Supplementary Treaty)
MFN treatment can be applied unilaterally or reciprocally,
conditionally or unconditionally, limitedly or unlimitedly.
MFN treatment is usually applied to trade, investment,
foreign exchange, intellectual property, diplomatic
immunities, and recognition of foreign judicial awards.
Coverage of the application of MFN
standard
Under NAFTA treaty : establishment, acquisition,
expansion, management, conduct, operation,
sale or other disposition of investment,
Under The Energy Charter : all investment-related
activities, management, maintenance, use,
enjoyment , disposal ,
Under the French BIT model : activities in
connection with an investment ,
Under the GATs : any measures covered by this
agreement
The principles of the application of MFN
treatment
In order to be covered by the MFN clause, the
treatment has to be the general treatment usually
provided to investors from a given foreign country
Therefore, if a host country granted special
privileges or incentives to an individual investor in
an investment contract between it and the host
country (so-called one-off deals) there would be
no obligation under MFN clause to treat other
foreign investors equally. Freedom of contract
prevails over the MFN standard. Only if this
individual behaviour became general practice in the
host country then MFN treatment will be applied to
all that are eligible to MFN treatment.
The principles of the application of MFN
treatment
The MFN standard does not mean that foreign investors
have to be treated equally irrespective of their concrete
activity in a given country. Different treatment is justified
vis--vis investors from different foreign countries if they are
in different objective situations.
The MFN clause will apply to investment or investors that are
in the same/like situations, or like circumstances. Thus,
the MFN standard does not impede host countries from
according different treatment in different sectors of
economic activities, or to differentiate between enterprises
of different size. It would therefore not violate the MFN
standard per se for a host country to grant subsidies only to
investment in high-technology industries. Likewise, big
foreign investors cannot claim government assistance under
programme that was designed only for SMEs. But this cannot
be used for excluding investors from a particular country or
of nationality from the benefits of the programme, if they
are in the same or like situation.
General exceptions
Public order/health/morals/ protection of human,
animal, plant life or health (problem, it is hard to
identify concrete case or give definition, such as human
right issue, to take necessary measures
National security (problem, self judging clause)
The exceptions must not be a disguise restriction on
economic activities
General exceptions of MFN
Public order/health/morals
National security
Reciprocal subject-specific
exceptions
Taxation
Intellectual property
Regional economic integration
Mutual recognition
Other bilateral issues

Reciprocal subject-specific exceptions
Taxation : Double taxation Treaty: the avoidance of double
taxation cannot be grated on MFN basis
Intellectual property: the Berne Convention and the Rome
Convention explicitly allow contracting parties to deviate
from the MFN standard, a foreign investor may acquire and
use intellectual property rights covered by the Berne
Convention and the Rome Convention in a particular host
country only to the extent that the investors from the latter
country have the same rights in return. (TRIPs Agreement
confirms this rule).
Regional economic integration: it is widely accepted not to
extend privileges to non-members
Mutual recognition: imply a reciprocal commitment
Other bilateral issues: base on a contractual basis, many
investment-related issues that are usually addressed only on
a bilateral basis, and thus do not lend themselves to
multilateralisation via an MFN provision.
Country-specific exceptions
The GATs approach: progressive liberalisation, selective
liberalisation, bottomup liberalisation model
The NAFTA approach: the MFN clause does not apply to
non-conforming measures maintained at the level of
the federal, state or local government. The only limit is
that the exceptions cannot be exercised by reason of
nationality. Public procurement and subsidies,
government-supported loans, guarantee and insurance,
and IP are exceptions to MFN clause.
Reciprocal subject-specific exceptions
Taxation : Double taxation Treaty: the avoidance of double
taxation cannot be grated on MFN basis
Intellectual property: the Berne Convention and the Rome
Convention explicitly allow contracting parties to deviate
from the MFN standard, a foreign investor may acquire and
use intellectual property rights covered by the Berne
Convention and the Rome Convention in a particular host
country only to the extent that the investors from the latter
country have the same rights in return. (TRIPs Agreement
confirms this rule).
Regional economic integration: it is widely accepted not to
extend privileges to non-members
Mutual recognition: imply a reciprocal commitment
Other bilateral issues: base on a contractual basis, many
investment-related issues that are usually addressed only on
a bilateral basis, and thus do not lend themselves to
multilateralisation via an MFN provision.
The differences of the application of MFN
to trade and investment
The MFN standard only applies to measures at the
border, in particular to tariffs, for trade issue. (do
not be confused with NT)
The MFN standard applies, for investment issue, to
many possible measures that if there is no MFN
treatment might discriminate against foreign
investors. (post-entry stage except those cases
include pre-entry stage)
MFN principle, under investment, is itself flexible
in the sense that it allows in-built exceptions that
could accommodate development concerns of host
countries.
The free rider issue
To keep contractual balance between the former
and the latter investment agreements made with
the host country that the investors under the latter
might be entitled to the treatment granted to the
investors under the former based on MFN principle
but without imposing any obligations to the latter,
the so-called condition MFN clause is applied to
tackle the Free rider problem.
This means that the MFN treatment was granted on
condition of strict and specific reciprocity.
However, this reciprocal MFN principle has been
argued that it deprived the MFN clause of its
automatic effect and thereby made it essentially
inoperative.
The identity issue
It is difficult to identify the nationality of the TNCs
group of company where the parent company and
its subsidiaries or branches are differently located
in different countries. (Who is US? Case). How far
back in the corporate chain it is appropriate to
reach in order to determine an affiliates
nationality.
Even if an investing company can be clearly
identified, the owners of that company do not
necessarily have the nationality of the country in
which the investing company is located. This may
result in a situation in which an investors indirectly
benefits from an MFN obligation in a treaty that
does not apply to it!
Investment agreement
The Purposes of investment
agreement

To guarantee the protection of investment:
compensation for expropriation
To liberalize investment flows: To grant the right of
entry and establishment
To promote investment: to facilitate investment
insurance, provide incentives
To regulate investment: to prohibit corrupt
practices
To guarantee a good treatment to foreign investor:
NT/MFN treatment, fair, standard treatment
Investment Agreement
Scope of international investment agreement
By its geographical coverage
By its temporal application
By its subject matter
Definition of key terms
Investment
The broad asset-based definitions of investment
The narrow asset-based definition
The enterprise-based and transaction-based definition
Impacts on investment definitions
Investor
Entities considered Investors
Which investors are covered
Investment
Any kind of asset
Movable and immovable property
Interest in the companies ( both portfolio and
direct investment, but generally portfolio and
short term investment would be excluded)
Contract rights (service agreement)
Business concession
Each of these types of investment has
different economic and development
implications for host and home countries
The Broad Asset-based Definition of
Investment
Property: tangible property, merchandise
Property rights: mortgage, lien, pledge, companys
interest, debt, equity, debenture, bonds, portfolio
investment
Contractual rights: professional services, turnkey
contract, insurance policy, contract for sale of goods
or services, claims to money
Intellectual property rights: trademarks, trade
secret, patent, copyrights, technical process, know-
how, good will
Business concession rights: resources concession
The Narrow asset-based definition
Limitation to permitted investment
Limitation on time of
establishment
Limitation on nature of the
investment, i.e. only FDi or indirect
investment (port folio)
Limitation to size, sector: energy
The enterprise-based
Establishment & acquisition of an enterprise
Shares of enterprise

Transaction-based

Transaction of establishment
Liquidation of enterprise not asset
The scope of investment agreement
The scope of investment agreements is defined
primarily through definitions of key terms, such as
investment and investor.
The critical functions of the definition are
the identification of assets to which the treaty applies
The determination of the nature of the obligations
created by the treaty
Coverage of the definition
Investment
Is the term defined by reference to types of assets
that, in theory, could amount to an investment?
Or does one also refer to the underlying transaction
in which those assets are involved?
Investor
Is this term defined by reference to categories of
legally recognized persons?
Or on the basis of the transactions involved,
regardless of the legal status of the person or entity
undertaking that transaction?
Scope of international Investment
agreement
The scope of an international investment
agreement is delimited in at least three ways:
By its geographical coverage
By its temporal application
By its subject matter
Limitations on the scope of investment covered
Limitation to permitted investment under host country
laws
Limitations on time of establishment
Limitations on the nature of the investment
Limitation on the size of investments
Limitations on the sector of the economy
Investor
Entities considered investors
Exclusions based on legal form
Exclusions based on purpose
Exclusions based on ownership
Establishing the link
Natural persons
Legal entities
Nationality of enterprise/legal entity
Seat of the enterprise/company
Incorporation place
Controlling Shareholder

Own or Control

Definition of ownership

Definition of Control

Territory: to what extent the location of
investment is covered
Geographical Areas: maritime zone, EEZ,
continental shelf, territorial sea, etc.
Extended geographical areas, protective land, areas,
country
Coverage of Sovereign rights or jurisdiction of the
parties to the investment agreement
Coverage of Intangible rights: location of a
particular asset
Location of the investment of contractual rights

The term investment and its interaction with
other related issues
Investment and admission and establishment
Investment and National Treatment and Most-
Favoured-Nation Treatment
Investment and incentives
Investment and full protection and security
Investment and taking of property
Investment and funds transfer
Investment and dispute settlement
Returns
The earnings from investment
The elements of the term returns mirror the element of
the term investment
Investment Returns
-Shares -Dividends
-Debt -Interest payment
-Intellectual -Royalties
Property
-Service contract -Fee
To identify the extent of covered return to be protected
under the treaty

Diagram of The MFN Clause
MFN standard of treatment
Pre and post Entry Post entry only

United States & Canadian BITs Most BITs

NAFTA, ART. 1130 Energy Charter Treaty,
Art. 10 (7)
APEC nonbinding Investment
Principles

Draft Energy Charter
Supplementary Treaty

MERCOSUR Protocol, Art. 3
Beneficiaries
Investors Investments

Service suppliers - NAFTA formula: Art
GATS, Art. II 1130 establishment,
acquisition,
expansion, and sale or
other disposition of
investment
Energy Charter Treaty
Art. 10(7) ..
Management,
maintenance, use,
enjoyment or disposal,
whichever is the most
favorable.
Various BITs entitle both investors & Investments to MFN
Scope of MFN
I. General Exceptions
Public order/health/morals National security
-EU Art. 56 -GATs Art. XIV bis
-GATS Art. XIV -OECD Code on
Capital movement
Art 3
-OECD Code on Capital -Energy Charter Art 24 (3)
Movement Art. 2
-Energy Charter Art. 24 (c) -NAFTA , Art. 2102
And Art. 24 (2)(b) (1)

II. Country-Specific exception
GATs Art. II, XII NAFTA- Art. 1108
(public procurement) (7) procurement
by a Party or
state enterprise:
or subsidiaries or
grants provided by a
Party or a state
enterprise, including
government-
supported loans,
guarantees and
insurance.

III. Reciprocal subject-specific MFN
Exception
Taxation
Intellectual property (IP)
Regional Economic Integration
Arrangement/organization
(REIA/REIO)
Mutual recognition
Other bilateral issue
Taxation
Ex. - Chile-Malaysia BIT, Art. 3: shall not be interpreted
to oblige a Contracting Party to extend to investors of
the other Contracting Party the benefits of any
treatment, preference or privilege by virtue of: (b) any
international convention or agreement related totally
or principally to taxation, or any national legislation
related totally or partially to taxation
Ex. - Berne Convention
- Rome Convention
- TRIPs Art. 4 (6) (protection of reciprocity Rule)
- NAFTA Art. 1108 (5) (not limited to protection of
reciprocity but applies to IP rights in general
Regional Economic Integration
Organization
Ex. - Chile Malaysia BIT Art. 3 shall not be
interpreted to oblige a Contracting Party to extend
to investors of the other Contracting Party the
benefits of any treatment, preference, or privilege
by virtue of (a) any customs union, free trade,
common market or monetary union, or any similar
international convention or other forms of regional
cooperation, present or future, of which any of the
Contracting Parties might become a party

- GATs Art. V.
Mutual Recognition
Ex. - Patents
- GATS, Art. VII

Other bilateral issues

Transport
Fishery
Energy Investments in the EU and Russia:
Investment Regulation under the Third
Energy Package and the Russian Law on
Foreign Investments in Strategic Sectors

187
Content of the Presentation
- Russian energy investments regulation

- Foreign investments in Russia (landmark events)

- EU energy investments regulation (Russian view)

- Russian investments in the EU (landmark events)

188
Foreign Investments in Russia
Law on Strategic Investments
Transactions resulting into establishment of control over the
strategic companies are subject to the prior approval of a
Government Commission.
The provisions of the Law apply to the companies doing
business inter alia in the following areas:
- subsoil use (including exploration) for subsoil parcels having
federal importance; service companies fall within the scope;
- natural monopolies, such as oil and gas transportation via
pipelines, electricity transmission (excl. distribution);
- electricity generation from nuclear power plants.
189
Foreign Investments in Russia Criteria of
Control over Strategic Companies
holding more than 50 % (sometimes less than 50 %; for
companies holding exploration and/or production license
for the subsoil parcel of federal importance 25 %);
being able to determine decisions;
being able to appoint the executive body and/or more than
50% of the members of the BoD (25% for the companies
holding subsoil license);
being the corporate executive body.
190
Foreign Investments in Russia Criteria of
Federal Importance for Subsoil Parcel
located on the land territory of Russia and having
extractable reserves of oil of more than 70 million tons or
having reserves of natural gas of more than 50 bn cubic
meters;
located in the internal waters, territorial sea and
continental shelf of Russian Federation;
the use of which is only possible by using the land plots of
the so-called defence-purpose lands.
191
Limitations for Use of Subsoil Parcels on
the Russian Continental Shelf
License to use the subsoil parcels of federal importance on
the continental shelf may only be granted to the Russian
legal entities:
having at least 5 years experience of the Russian
continental shelf exploration/production
with at least 50 % participation of the Russian Federation
De-facto it means that only Gazprom and Rosneft (and their
subsidiaries) may be granted licenses to use subsoil
parcels on the continental shelf.
192
landmark events (oil and gas)
- Decision not to ratify the ECT

- Shtokman field

- Cooperation agreements between Rosneft, Exxon and
Statoil

- Sale of TNK-BP to Rosneft
193
landmark events (electricity)
- E.On: owner of 82 % of OGK-5

- Enel: owner of 56% of OGK-4 and of 49% of
Rusenergosbyt

- Fortum: owner of 97% of TKG-10 and blocking
shareholding in TGK-1

- EdF: management company for Tomsk distribution comp.
194
Russian Investments in the EU

Access to markets and security of demand

Ownership unbundling provisions

Certification of TSOs in electricity and gas sectors

Unclarity of PCI and TYNDP rules and procedures for third
countries promoters
195
Russian Investments in the EU
landmark events
- North Stream (Project of European Interest 2006)
- South Stream v. Nabucco
- Russian decision not to ratify the ECT
- ECJ case European Comission v. Repulic of Slovakia
- Lietuvos dujos case
- MOL resale made by Surgutneftegaz
- 3 TYNDP applications made by the Russian Electricity
System Operator

International Rules on FDI

Dr. Tabrez Ahmad
Professor of Law
197
Topics for discussion
I. International framework on investment

II. Trends in IIAs

198
I. The international framework
on investment

20 years ago or more, many countries had reservations about
FDI and excluded or restricted FDI inflow

Today, every single country seeks to attract FDI

Unilateral efforts in FDI liberalization and promotion are
complemented by efforts at 3 levels:

bilateral - eg. BITs, FTAs
regional eg. COMESA
multilateral eg. GATS, TRIMs

IIAs have different purposes or objectives:
investment protection
Investment promotion
Investment liberalisation.
6
Interface between national and
international FDI policies
200
Network of international
investment rules
National laws and regulations, investment codes

State contracts, investment agreements, stabilization agreements

Bilateral investment treaties (BITs) for the promotion and protection
of investment

Double taxation treaties (DTTs)

Preferential trade and investment agreements

Regional (COMESA, OECD, APEC) and sectoral agreements
(Energy Charter Treaty)

Multilateral disciplines and specific agreements (WTO GATS,
TRIMs, TRIPs; ICSID, NY Convention, MIGA)
201
Investment contracts are not IIAs
State contracts and investment agreements between
individual investors and the host State set rules, rights and
obligations for both parties

These investment agreements are not treaties! (i.e. BITs)

Focus is on a specific investment project e.g. concession

202
Recent trends in IIAs - highlights
Rapid proliferation at all levels

International investment rules are increasingly being
formulated as part of agreements that encompass a
broader range of issues (FTAs)

Investment provisions in the new agreements tend to be
increasingly sophisticated and complex in content

South-South cooperation on international investment
policy is intensifying

Increasing activity in international investment treaty-
making has been paralleled by a rise in investor-State
disputes.

203
The international investment legal framework: role
and objectives
International investment agreements (IIAs):

Contribute to the creation of a stable, predictable and
transparent regulatory framework for international investment

Facilitate the coordination of investment relations (relations
between host States, home States, international investors and
other development stakeholders) through internationally agreed
common denominators

Complement national laws on investment (interface between
national and international investment policies)

Impact of IIAs on FDI flows? Diverging views

204
Objectives of the legal
investment framework
Restrictions
- Entry and
establishment
- Ownership and
control
- Operational
restrictions
- Authorization and
reporting
Etc..

Standards of treatment
& protection
Transparency

Treatment
(NT, MFN)

Expropriation &
compensation

Transfer of funds

Dispute settlement

Etc.

R
E
D
U
C
I
N
G

B
U
I
L
D
I
N
G

These objectives can be achieved through:
National policies
Investment contracts/State contracts
International investment agreements (IIAs)
205
The international framework for investment
IIAs have several possible objectives:
Promotion

US-CAN-JAP BITS
FTAS
NAFTA
Liberalization Protection
206
Many IIAs cover more or less the same issues
Scope and definition of foreign investment

Admission of investment or pre-establishment NT and MFN

Treatment of investment, i.e. national treatment, MFN

FET

Guarantees and compensation in respect of expropriation

Transfer of funds and repatriation of capital and profits

Dispute settlement, both State-State and investor-State
but the concrete way in which they are addressed
differs substantially
12
207
II. Global trends in IIAs
208
What are bilateral investment treaties
(BITs) ?

Bilateral reciprocal agreements (between two
States) aimed at protecting and promoting foreign
investment through legally-binding rights and
obligations.


For host countries (traditionally developing)
To improve their investment climate and to attract
foreign investors

To portray a positive international image of
openness

For home countries (traditionally developed)
To protect their investments abroad

Some countries are both capital importing and
exporting (both home and host) - twin objectives:
investment attraction and investment protection.

Why do countries sign BITs?
The network of BITs continues to grow
rapidly, there are now over 2500 BITs
0
50
100
150
200
250
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
Years
A
n
n
u
a
l

B
I
T
s
0
500
1000
1500
2000
2500
3000
C
u
m
u
l
a
t
i
v
e

B
I
T
s

8%
10%
40%
25%
4%
13%
Between developing countries
Between developed and developing countries
Between developing countries and countries of SEE&CIS
Between developed countries
Between developed and countries of SEE&CIS
Between countries of SEE&CIS
BITs concluded by country group, end 2007
The top ten signatories of BITs, end 2007
0 20 40 60 80 100 120 140
Number of BITs concluded
Republic of Korea
Belgium and
Netherlands
France
Italy
Egypt
United Kingdom
Switzerland
China
Germany
213
BITs signed by 11 African countries
Botswana 9
Cameroon 14
Central African Republic 4
Ethiopia 22
Kenya 6
Lesotho 3
Mauritius 34
Rwanda 3
Sudan 26
Tanzania 11
Uganda 15

Intra-region BITs:

Botswana Mauritius 2005
Cameroon Mauritius 2001
Ethiopia Sudan 2000
Rwanda Mauritius 2001

214
Trend towards renegotiating BITs

109 BITs have been renegotiated

13 renegotiated in 2006

Albania and Romania renegotiated two BITs each in 2006.
A new generation of BITs since 2004:
innovations
A new generation of BITs follows the trend set by some of the recent FTAs

These contain four main innovations:

A comprehensive, but finite definition of investment (such as in the
Canadian model).

Revisions to the wording of various substantive provisions.

A broader set of issues is addressed, including health, the
environment, safety and labour rights.

Innovations regarding investor-State dispute settlement procedures.

216
Economic integration agreements (EIAs) with
investment provisions (eg FTAs)
International investment rules are increasingly being
included in agreements that cover a broader range of
issues including:

trade, services, competition, intellectual property

Free trade agreements, economic partnerhsip agreements,
regional integration agreements,or economic cooperation
agreements

Coverage of investment varies.

- in todays group activity we will explore this further!

Over 250 EIAs with investment provisions
by end 2007
0
50
100
150
200
250
300
1
9
5
7
-
1
9
6
7
1
9
6
8
-
1
9
7
8
1
9
7
9
-
1
9
8
9
1
9
9
0
-
2
0
0
0
2
0
0
1
-
2
0
0
7
A
g
r
e
e
m
e
n
t
s

o
t
h
e
r

t
h
a
n

B
I
T
s

w
i
t
h

i
n
v
e
s
t
m
e
n
t

p
r
o
v
i
s
i
o
n
s

By period Cumulative
EIAs with investment provisions by country
group, end 2007
5% 2%
10%
39%
8%
36%
South-South
North-North
North-South
North-transition economies
Transition economies-transition economies
South-transition economies

Recent FTAs with investment chapters

Free Trade Agreement between the United States of America and Peru

Free Trade Agreement between Singapore and Panama

Association Agreement between the European Community and Albania

Free Trade Agreement between Turkey and Morocco

Free Trade Agreement between the Hashemite Kingdom Jordan and the
Republic of Singapore

Economic Partnership Agreement between Japan and Philippines

Economic Partnership Agreement between Japan and Chile

Economic Partnership Agreement between Japan and Thailand

220
South-South cooperation:
developing countries active in IIAs
Many developing countries are active participants in
negotiating IIAs

BITs between developing countries leaped from 47 in
1990 to over 650 by the end of 2006

Over 90 EIAs among developing countries had been
signed by end of 2006.
221
South-South cooperation through
IIAs is intensifying

0
100
200
300
400
500
600
700
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
N
u
m
b
e
r

o
f

a
g
r
e
e
m
e
n
t
s
0
100
200
300
400
500
600
700
800
900
1'000
F
D
I

o
u
t
w
a
r
d

s
t
o
c
k
Total BITs Total DTTs FDI outward stock
222
Interregional agreements
The EU is negotiationing Economic Promotion
Agreements (EPA) with all of the Africa Caribbean
Pacific (ACP) regions.

EU-CARIFORUM EPA was signed in October 2008

It contains a chapter on commercial presence
(investment)

ESA-EU EPA interim agreement
SADC-EU EPA interim agreement

African regional agreements no investment protection
provisions
Common Market for Eastern and Southern Africa (COMESA),
(1993) contains framework provisions on investment promotion,
with some general principles on investment protection.

The Treaty establishing the African Economic Community (AEC)
(1991) contains provisions under which the parties agree to ensure
the free movement of capital within the Community trough the
elimination of restrictions on capital transfers.

Treaty for the Establishment of the East African Community (EAC)
(1999) contains commitments by which States parties agreed to
adopt measures to achieve the free movement of persons and
services.

The South African Development Community (SADC, 1992), aims at
the progressive establishment of free movement of goods, services,
capital and persons.
224
Plurilateral agreements:
Investment Agreement for the
COMESA Common Investment Area
CCIA signed in 2007

Not yet fully implemented?

Contains provisions that depart from standard
provisions in BITs

Includes detailed language on some issues in light of
recent arbitral decisions

Aims to find balance between the rights of investors
and the states right to regulate.

225
Investment in the multilateral context
Historical overview: Havana Charter, World Bank Guidelines,
UN Code of Conduct, OECD MAI

Investment in the WTO: a missed opportunity?

Investment-specific agreements: dispute settlement
(ICSID, NY Convention,..), insurance (MIGA)

Limited membership: OECD rules, APEC

Limited scope: Energy Charter Treaty, GATS, TRIMS, TRIPs.
226
The increase in IIAs has been paralleled by an
increase in investor-State disputes

250 known claims by end 2006 (cumulative
number of treaty-based cases)

Awards given in these proceedings have helped
to clarify the meaning and content of individual
treaty provisions, some contradictory decisions
have also created uncertainty.
227
Known investment treaty arbitrations
(cumulative and newly instituted cases, 1987-2006)
0
10
20
30
40
50
60
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
A
n
n
u
a
l

n
u
m
b
e
r

o
f

c
a
s
e
s
0
50
100
150
200
250
300
C
u
m
u
l
a
t
i
v
e

n
u
m
b
e
r

o
f

c
a
s
e
s

ICSID Non-ICSID All cases cumulative
Dr. Tabrez Ahmad
Professor of Law
Agenda
1. Definitions and scope
2. Admission and establishment
3. Four pillars of protection:
Standards of treatment
Expropriation
Transfers
Settlement of disputes
4. Liberalisation through NT and MFN
5. Transparency
Definitions and Scope

Matter coverage: define those assets to which the
treaty applies.

Subject coverage: define those persons and legal
entities to which the treaty applies.

Geographical coverage: define the territory to
which the treaty provisions apply.

Temporal coverage: determine the date of entry
into force of the IIA and its duration.
Scope of an IIA
Definition of investment
Depending on purpose of treaty, two main approaches:

A. Open-ended asset-based definition : broad
protection

Including usually:

Movable and immovable property
Various types of interest in companies
Claims to money and claims under a contract having a financial
value
Intellectual Property Rights
Business concessions, including natural resources concessions
Example of asset-based definition
BIT Ethiopia Sudan 2000 Art. 1 Definitions

For the purpose of this Agreement:
a) "Investment" means every kind of asset invested by Investors of one Contracting Party in the
territory of the other Contracting Party, in accordance with the laws and regulations of the
latter, and in particular, though not exclusively, includes:
(i) movable and immovable and any other rights such as mortgages, liens or pledges;
(ii) Shares, stocks and debentures of companies or interests in the property of such companies;
(iii) claims to money or to other assets or any performance having an economic value,
(iv) intellectual and industrial property rights, including rights with respect to copy rights,
patents, trade marks, trade names, industrial designs, trade secrets, technical processes and
know-how and goodwill;
(v) business concessions conferred by Law or under contract, including concessions to search for,
cultivate, extract or exploit natural resource;

A change in the form in which assets or capitals have been invested or reinvested shall not affect
their designation as "Investments" for the purpose of this Agreement.

Definition of investment
B. Alternative definitions:

Closed list definition (finite list)

Enterprisebased definition

Focus on the business enterprise or the controlling interests in a business
enterprise. Includes the establishment or acquisition of a business enterprise,
as well as a share in a business enterprise, which gives the investor control over
the enterprise

Tautological definition

Definition of the term "investment" in economic terms. Covering every asset
that an investor owns and controls, directly or indirectly, that has the
characteristics of an investment. Approach complemented by explicit exclusion
of several kind of assets

Investment - key issues
Claims of money: will all claims of money be covered? Even those claims of
money not related to FDI? What about payments derived from commercial
transactions or from the sale of goods and services?

Debt instruments: will all debt instruments be covered? What about those
debt instruments with short-term maturity? Should there be a minimum
maturity term specified?

Intellectual property rights (IPRs): should a reference to a legal framework
be included? Would only those IPRs provided in accordance to domestic
legislation be considered an investment? Those IPRs existing pursuant
international agreements?

State Contracts: need for special treatment in definitions or substantive parts
of the agreement.

Exclusions: Public debt? Property acquired not for an economic activity (i.e.
leisure houses)? Short term debt instruments?
Definition of investor
A. Natural persons

Criteria of nationality
Criteria of domicile or residence

Natural persons - example
Nationality criterion:

BIT China - Germany, 2003, Art. 1 Definitions
2. the term "investor" means
(a) in respect of the Federal Republic of Germany: Germans within the meaning of the Basic Law for the
Federal Republic of Germany, ()
(b) in respect of the Peoples Republic of China: natural persons who have the nationality of the Peoples
Republic of China in accordance with its laws, ()

BIT Uganda Mozambique, Art. 1 Definitions

4. "investor" of a Contracting Party shall mean:
a) any natural person who is a national of that Contracting Party in accordance with its law

Domicile or residence criterion:
BIT Canada -Argentina, 1991, Article 1- Definitions

b) The term "investor" means (i) any natural person possessing the
citizenship of or permanently residing in a Contracting Party in accordance with its laws, () who
makes the investment; ().
Definitions - investor
B. Legal entities

Criteria to determine the nationality of the legal
entity/investor:

Country of organization or incorporation
Country of seat
Ownership and control
Denial of benefits clause: (deny treaty protection to those
companies that are controlled by investors of a non-Party
(particularly with which the host country does not maintain
diplomatic relations) and/or that have no substantial business
activities in the territory of the party under whose laws it is
constituted)

Legal entities example 1
Criterion of the seat:

BIT China - Germany, 2003

Article 1: Definition
2. the term "investor" means (a) in respect of the Federal Republic of
Germany: any juridical person as well as any commercial or other
company or association with or without legal personality having its seat
in the territory of the Federal Republic of Germany, irrespective of
whether or not its activities are directed at profit; ().

Criterion of ownership or control:

Andean Community - Decision 291 Regime for the
Common Treatment of Foreign Capital and Trademarks,
Patents, Licensing Agreements and Royalties

Article 1: Foreign Enterprise:

an enterprise incorporated or established in the recipient country, in
which national investors own less than fifty one percent of the equity
capital or, if more than that, in the judgment of the competent national
agency that percentage is not reflected in the technical, financial,
administrative and commercial management of the enterprise.
Example of combined criteria:

BIT China - Germany, 2003

Article 1: Definition
2. the term "investor" means (b) in respect of the Peoples
Republic of China:
economic entities, including companies, corporations,
associations, partnerships and other organizations,
incorporated and constituted under the laws and regulations of and
with their seats in the Peoples Republic of China, irrespective of
whether or not for profit and whether their liabilities are limited or not.

Legal entity example 4
Extent of treaty protection:

US BIT Model, 2004

Article 17: Denial of Benefits
2. A Party may deny the benefits of this Treaty to an investor of the other
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 Party and investors of a non-Party, or of the
denying Party, own or control the enterprise.

Admission and Establishment
Admission of foreign investment
Traditionally, right of States to control and limit
addmission. Recent trend towards States deciding to limit
this right.

Two approaches in IIAs:

Admission model: entry in accordance with laws and
regulations of the host country: NO LIBERALIZATION

Pre-establishment model: right of establishment. National
treatment at the pre-establishment stage (approach of
western hemisphere, Japan, Korea): LIBERALIZATION :
removal of barriers to access
Admission model
Host country discretion: laws and regulations
relating to entry may change

Once admitted, foreign investment is granted NT
and MFN

No exceptions in the treaty: no need.

Australia India BIT

1. Each Contracting Party shall encourage and promote favourable conditions
for investors of the other Contracting Party to make investments in its
territory. Each Contracting Party shall admit such investments in accordance
with its laws and investment policies applicable from time to time.

Tanzania Netherlands BIT (2001)

Art 2 Promotion and Protection of Investments

Each Contracting Party shall within the framework of its laws and
regulations, promote economic cooperation through the protection in its
territory of investments of investors of the other Contracting party. Subject
to its right to exercise powers conferred by its laws or regulations, each
Contracting Party shall admit such investments.

Examples of admission model:
Pre-establishment model
NT and MFN at all stages of the investment, including at
the pre-establishment stage: establishment, acquisition
and expansion.

Lists of exceptions: all countries have closed sectors or non
conforming measures.

Mostly negative lists. Very few exceptions (TAFTA)

The commitment is made in the Treaty, the national laws
must be in conformity with Treaty obligations.

Establishment of investment
Each contracting Party shall permit establishment of a new business enterprise or acquisition
of an existing business enterprise or a share of such enterprise by investors or prospective
investors of the other Contracting Party on a basis no less favorable than that which, in like
circumstances, it permits such acquisition or establishment by:
(a) investors or prospective investors of any third state;
(b) its own investors or prospective investors.

Treatment of Established Investment
1. Each Contracting Party shall grant to investments and to returns of investors of the other
Contracting Party treatment no less favourable than that which, in like circumstances, it grants
to investments and returns of:
(a) investors of any third State;
(b) its own investors.

Each Contracting Party shall grant investors of the other Contracting Party, as regards the
enjoyment, use, management, conduct, operation, expansion, and sale or other disposition of
their investments or returns, treatment no less favourable than that which, in like
circumstances, it grants to: (a) investors of any third State; (b) its own investors.
Pre-establishment NT and MFN model
Canada-Lebanon BIT

Fair and Equitable Treatment
1. Fair and Equitable Treatment
Absolute standard (not relative)

3 approaches:

Stand alone FET

FET in accordance with the principles of international
law

FET combined with MFN/NT
Dutch model BIT

1. Each Contracting Party shall ensure fair and equitable treatment of the investments of
nationals of the other Contracting Party and shall not impair, by unreasonable or
discriminatory measures, the operation, management, maintenance, use, enjoyment or
disposal thereof by those nationals. Each Contracting Party shall accord to such investments
full physical security and protection.

Kenya United Kingdom BIT (1999), Art. 2 Promotion and Protection of Investment

(2) Investments of nationals or companies of each Contracting Party shall at all times be
accorded fair and equitable treatment and shall enjoy full protection and security in the
territory of the other Contracting Party. Neither Contracting Party shall in any way impair by
unreasonable or discriminatory measures the management, maintenance, use, enjoyment or
disposal of investments in its territory of nationals or companies of the other Contracting
Party

Fair and Equitable Treatment:
examples


Fair and Equitable Treatment:
examples
Uganda Eritrea BIT (2001), Article 3 Treatment of Investment

(1). Each Contracting Party shall in its territory accord to
investments made by investors of the other Contracting Party fair
and equitable treatment which in no case shall be less favourable
than that accorded to its own investors or to investors of any third
state, whichever is the more favourable from the point of view of the
investors.

(2) Each Contracting Party shall in its territory accord investors of
the other Contracting Party, as regards their management,
maintenance, use, enjoyment or disposal of their investment, fair
and equitable treatment which in no case shall be less favourable
than that accorded to its own investors or to investors of any third
State, whichever of these standards is the more favourable from the
point of view of the investor.
2. International Minimum Standard of
Treatment

Content of the clause in US and Canadian treaties
Clarification of the standard
Explicit reference to international customary law (ICL)

Relationship with other standards
Explicit clarification that the violation of any other obligation of the agreement
does not entail the violation of the minimum standard of treatment Same
issue for State Contracts.


1. Each Party shall accord to covered investments treatment in accordance with customary international
law, including fair and equitable treatment and full protection and security.

2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of
treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The
concepts of fair and equitable treatment and full protection and security do not require treatment in
addition to or beyond that which is required by that standard, and do not create additional substantive
rights. The obligation in paragraph 1 to provide:

(a) fair and equitable treatment includes 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 of the world; and

(b) full protection and security requires each Party to provide the level of police protection
required under customary international law.

3. A determination that there has been a breach of another provision of this Treaty, or of a separate
international agreement, does not establish that there has been a breach of this Article.

Fair and Equitable Treatment
US model BIT(2004)
Expropriation
Expropriation protection

Content of the clause
Several categories of takings:
expropriations,
nationalizations,
direct or indirect
Regulatory takings: measures tantamount to expropriation
Creeping expropriations

Conditions for the expropriation to be lawful:
Public purpose
Non-discrimination
Due process of law
Compensations

Possible standards of compensation:

The Hull formula (prompt, adequate, effective)
Appropriate compensation
Different valuation methods: book-value method,
discounted cash-flow method,..

Expropriation and Regulatory Takings: Necessary
clarification of the obligation

General exception: public health and safety.
The right to regulate for public purpose.

Expropriation - compensation


Expropriation protection:
Uganda Eritrea BIT (2001)
Article 4 Expropriation

(1) Investments of each Contracting Party shall not be nationalised,
expropriated or subjected to measures having effect equivalent to
nationalisation or expropriation (hereinafter referred to as
expropriation) in the territory of the other Contracting Party except
for expropriations made in the public interest, on a basis of non-
discrimination, carried out under due process of law, and against
prompt, adequate and effective compensation.

(2) Such compensation shall amount to the fair market value of the
investment expropriated immediately before the expropriation or
impending expropriation became known in such a way as to affect the
value of the investment. The fair market value shall include but not
exclusively the net asset value thereof as certified by an independent
firm of auditors.

(3) Compensation shall be paid promptly and include interest at a
commercial rate established on a market basis from the date of
expropriation until the date of payment.

Uganda Eritrea BIT (2001) cont.

(4) The expropriated investor shall have a right to prompt review under the law
of the Contracting Party making the expropriation, by a judicial or other
competent and independent authority of the Contracting Party, of its case, of
the value of investment, and of the payment of compensation, in accordance
with the principles set out in paragraph 1 of this Article.

(5) When a Contracting Party expropriates the assets of a Company or an
enterprise in its territory, which is incorporated or constituted under its law,
and in which investors of other Contracting Party have an investment ,
including shareholding, the provisions of this Article shall apply to ensure
prompt, adequate and effective compensation for those investors for any
impairment or diminishment of the fair market value of such investment
resulting from the expropriation.

Transfers
Free Transfer of Funds

Two types of transfers: inward and outward.
Exceptions
BOP safeguards: temporary derogations
Transitional provisions: maintaining existing
restrictions.

South Africa Mauritius BIT (1998)

1. Each Contracting Party shall allow investors of the other Contracting Party the free transfer of
payment relating to their investments and returns, which shall include in particular, though not
exclusively -
(a) profits, capital gains, dividends, royalties, interest, and other current income accruing from any
investment;
(b) the proceeds of the total or partial liquidation of any investment;
(c) repayments made pursuant to a loan agreement in connection with investments;
(d) licence fees in connection to matters in Article 1(1)(b);
(e) payment in respect of technical assistance, technical services and management fees;
(f ) payments in connection with contracting projects;
(g) earnings of nationals of the other Contracting Party who work in connection with an investment
in the territory of the Contracting Party;
(h) compensation paid pursuant to the provisions of Articles 4 and 5.

2. All transfers shall be effected without undue delay in any convertible currency at the market rate of
exchange applicable on the date of transfer. In the absence of a market for foreign exchange, the rate
to be used will be the most recent exchange rate applied to inward investments or the most recent
exchange rate for conversion of currencies into Special Drawing Rights, whichever is the more
favourable to the investor.
Free Transfer of Funds

Dispute Settlement
Two types of Dispute Settlement
mechanisms

State-to-State: applies only between State parties to the
Agreement.
(like the DSU in the WTO, the ASEAN DSB)

Investor-to-State: allows private investors to submit claims against
a host State to international arbitration
(eg. NAFTA and BITs)

Most IIAs contain both types of mechanisms
Investor-to-State mechanism
Consultations and negotiations (time-period)
Most IIAs do not require exhaustion of local remedies
In some, resort to local courts precludes subsequent submission
to international arbitration: the fork in the road.
Direct resort to international arbitration (institutional or ad hoc):
ICSID Convention
Ad hoc arbitration following UNCITRAL Arbitration Rules
Investor-to-State mechanism
Constitution of tribunal (as per arbitral rules)
Applicable law: IIAs provisions; law of the host-State;
investment contract, rules of international law.
ICSID Convention (Article 42): absent agreement between
parties, the tribunal shall apply the law of the host State and
the applicable rules of international law.
Arbitral awards: final and binding, but require exequatur
(except in the case of ICSID awards)
ICSID Members shall recognize and enforce the awards in
their territory as if they were final judgements of a State court
NT and MFN
Non discrimination: NT and
MFN
National treatment: grant foreign investors, in like
circumstances, treatment no less favourable than the
treatment of nationals.

Most-favoured-nation treatment: treat all foreign
investors alike. No discrimination among foreign
investors on the basis of nationality.
National Treatment

1. The application de jure and de facto of the
standard

Most agreements do not specifically limit the scope of the
national treatment standard only to a de jure test. Thus,
jurisprudence has found that the standard applies both to
de jure and de facto discrimination.

Approach may have a positive effect in fostering discipline
in the domestic application of legislation

However, it is important to examine administrative practice
and existing legislation that may have a de facto
discriminatory impact on foreign investment.

2. Treatment in like circumstances
Comparison requires a comparator.

3. Best in state treatment

When negotiating with countries having federal systems of
government, a situation may arise when one subnational unit
discriminates among other subnational units from the same country.

Important to ensure that the National Treatment standard applies with
respect to a regional level of government, treatment no less favourable
than the most favorable treatment accorded, in like circumstances, by
that regional level of government to investments or investors of the
Party from which it forms a part.

National Treatment

4. Exceptions and reservations to national treatment

General exceptions based on reasons of public health, order and morals, and
national security. Such exceptions are present in most regional and multilateral
investment agreements, and also in a number of BITs.

Subject-specific exceptions which exempt specific issues from national
treatment, such as intellectual property, taxation provisions in bilateral tax
treaties, prudential measures in financial services or temporary
macroeconomic safeguards.

Country-specific exceptions whereby a contracting party reserves the right to
differentiate between domestic and foreign investors under its laws and
regulations in particular, those related to specific industries or activities for
reasons of national economic and social policy. Country-specific exceptions
may overlap with subject-specific exceptions.
National Treatment

MFN Treatment

Additional specific issues:

The Maffezzini jurisprudence and subsequent
cases

Free rider issue: is there a free-rider problem in
investment policy?

REIO and other exceptions: taxation, other
investment agreements.
Other Issues

Transparency
Other issues
Governmental measures: home country measures, host
country operational measures (limitation to operations
and performance requirements), incentives
Entry and sejourn of key foreign personel
Transparency
Environment and labour
Implementation issues: ratification, entry into force,
enactment/implementation of treaty obligations into
national legislation, management of investment disputes
Transparency in IIAs
1. Identify the actors of transparency obligations:

Host country
Home country
Investor

2. Content of the transparency obligation:

Degree of intrusiveness of transparency measures into the
national legal system.

Transparency
3. Modalities for the implementation of transparency
obligations:

Consultation and exchange of information
Making information publicly available
Answering request for information
Notification requirements
Modalities can be voluntarily, binding, reciprocal,
unilateral, ad hoc or be part of a on-going process

Transparency
4. Timing- Timely implementation of transparency

5. Exceptions and safeguards:
National security and defense
Legislative or judiciary process
Confidentiality of business information

6. Recent developments in IIAs:
Transparency in the negotiation process
Transparency in dispute settlement procedures
278
UNCTADs IIA work programme
Research and policy analysis:
1
st
Series on issues in IIAs (28 booklets): completed
2
nd
Series on international investment policies for
development: on-going

E-tools:
BIT database (2,000 texts available)
Country list of BITs
Compendium of international investment instruments
(selection of relevant instruments and model agreements)
Database of investment dispute cases
Network of IIA Experts to exchange information and
experiences (600 members)
279
UNCTADs IIA work programme
Technical assistance:
The distance-learning course on key issues in IIAs
(5 modules) in 5 languages
The regional training sessions for IIA negotiators (including
a negotiation skills workshop)
The advanced training courses on managing investment
disputes
National and regional seminars on IIAs (tailor-made at the
request of countries or regional organizations)
Ad hoc advisory services
Facilitation of BIT negotiations and BIT signing ceremonies
280
Conclusions
1. No open doors for oil and gas investments: Russia is
protecting its subsoil resources whereas the EU is protecting
its internal market (customer base ).
2. Moderate limitations for investments in electricity sector.
3. Legal framework both in Russia and in the EU provides for
substantial degree of political discretion on the side of the
investments recipient.
4. All large investment projects in the energy sector on both
sides require political support. Energy investments should
be accompanied with various forms of energy diplomacy.
5. Possibility of having an investment treaty is an open
question.
Conclusion
Economics occupies centre stage in 2004 elections
Rising expectations; rising prosperity
Legal regime: more stable and predictable
Bureaucracy: changing with the times
The Future beckons

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