Protecting Indian Capital in Bangladesh

Protecting Indian Capital in Bangladesh

The recent dramatic developments in Bangladesh, including the resignation and flight of former Prime Minister Sheikh Hasina, have created a political vacuum and increased uncertainty in India’s eastern neighbour. Beyond the immediate political and diplomatic fallout for India, a significant concern is the impact on Indian companies operating in Bangladesh.

Introduction

Political turmoil not only disrupts the affected nation and its economy but also impacts neighbouring countries, their economies, and the investors who have invested in the troubled country. Indian companies with investments in Bangladesh, such as those by Adani and other firms, now face heightened risks. The need for legal protection for these investments has become more pressing.

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Indian Investments in Bangladesh

• Indian investments in Bangladesh span various sectors, including edible oil, power, infrastructure, fast-moving consumer goods, automobiles, and pharmaceuticals. 
• Despite political opposition, the previous Sheikh Hasina government actively encouraged Indian investment, creating special economic zones to attract investors. However, her opponents launched an “India out” boycott movement targeting Indian goods. 

Legal Protection for Indian Investors

Jeswald Salacuse identifies three primary legal frameworks applicable to foreign investment:

• Domestic Laws: These are the laws of the host country where the investment is made. Indian companies in Bangladesh can utilise local laws like the Foreign Private Investment (Promotion and Protection) Act. 
  • However, these laws can be changed unilaterally by the host state, posing a risk to investors.
• Contracts: Agreements between foreign investors and the host government or local companies can offer some protection. 
  • However, contracts may have limited effectiveness in challenging sovereign actions that adversely affect investments.
• International Law: This framework includes treaties, customs, and general legal principles recognized internationally. 
  • For Indian companies, international law provides a crucial layer of protection, particularly through Bilateral Investment Treaties (BITs).

The India-Bangladesh BIT

• The India-Bangladesh BIT, signed in 2009, aims to protect investments by imposing conditions on the host state’s regulatory behaviour, thus preventing undue interference with investor rights.

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The BIT includes 

• Restrict host states from unlawfully expropriating investments.
• Ensure fair and equitable treatment (FET) of foreign investments.
• Prevent discrimination against foreign investments.

Impact of JINs ( Joint Interpretative Notes)

The JINs adopted in 2017, aimed at overhauling India’s investment treaty practice, may have unintentionally diluted the BIT’s investment protection features:

• Taxation Measures: The exclusion of taxation measures from the BIT’s ambit limits recourse for Indian companies facing unfavourable tax regulations.
• FET Provision: Linking FET to customary international law increases the difficulty of proving treaty violations.

Thus JIN, designed to protect the regulatory freedom of the capital-importing country, might ironically benefit Bangladesh more than Indian investors.

The Larger Question

• India’s foreign direct investment (FDI) has significantly grown, with outward FDI in 2023 reaching approximately $13.5 billion. 
• As one of the top 20 capital-exporting countries, India must ensure robust legal protection for its investments abroad.

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Conclusion

Given India’s role as a major capital-exporting nation, it is essential to refine investment treaty practices to safeguard Indian interests. The case of Bangladesh highlights the need for effective legal frameworks to protect Indian investments globally. India should ensure that investment treaties and protections are beneficial for Indian investors.

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