Logical Reasoning Questions for CLAT | QB Set 54

Protecting Indian capital in Bangladesh

The dramatic developments in Bangladesh that led to the resignation and fleeing of its former Prime Minister Sheikh Hasina have created a political vacuum and, thus, uncertainty in India’s eastern neighbour. Besides the political and diplomatic fallout of this crisis for India, another significant aspect is how this will impact Indian companies operating in Bangladesh. Indian companies have invested in Bangladesh in sectors such as edible oil, power, infrastructure, fast-moving consumer goods, automobiles, and pharmaceuticals. Despite political opposition, the Sheikh Hasina government rolled out the red carpet for Indian investors and adopted several measures to invite them, such as starting designated special economic zones. Unhappy with India’s alleged support of Ms. Hasina’s regime, her opponents launched an “India out” boycott movement targeting Indian goods. Since Ms. Hasina is no longer in power, the interim or the new government may adopt a hostile attitude towards Indian dynamics. It might enact new restrictive laws or adopt new regulatory measures that may adversely impact Indian capital operating there. What can Indian businesses have in such an eventuality?

Legal protection

As several stakeholders have stressed, investment protection instruments play a crucial role in safeguarding foreign capital in politically uncertain environments. The three main legal frameworks that can provide protection are domestic law, contract law, and international law. Domestic law plays a role but has severe limitations as it can be changed unilaterally by the host state to the investor’s detriment. Likewise, contracts may be of limited value when it comes to challenging sovereign actions of the state that adversely affect foreign investment. Therefore, the third legal framework, international law, assumes importance.

The India-Bangladesh BIT

International law cannot be changed unilaterally and can be used to hold states accountable for their sovereign actions. When protecting foreign investment, the most crucial instrument in international law is a bilateral investment treaty (BIT). A BIT is a treaty between two countries aimed at protecting investments made by investors of both countries. BITs protect investments by imposing conditions on the regulatory behaviour of the host state, thus preventing undue interference with the foreign investor’s rights. These conditions include restricting host states from unlawfully expropriating investments and requiring host states to accord fair and equitable treatment to foreign investors. BITs also often contain provisions for investor-state dispute settlement (ISDS), allowing foreign investors to bring claims before an international tribunal if their investments are adversely affected.

The issue acquires significance with the Joint Interpretative Notes under the India-Bangladesh BIT. The JIN adopted by both countries in 2017 was intended to clarify ambiguous features of the investment protection aspects, such as an unqualified FET provision that can come in handy for Indian companies challenging Bangladesh sovereign regulatory conduct.

However, the twist in the tale is the Joint Interpretative Notes (JIN) that India and Bangladesh adopted in 2017 to clarify the meaning of various terms in the 2009 treaty. This JIN, now a part of the BIT, was adopted at India’s insistence as part of overhauling its investment treaty practice to safeguard its regulatory power. India proposed such JINs to several countries.

It was done with the objective of whether India has an offensive or defensive interest vis-à-vis a specific country. This JIN has diluted the robust protection offered by the original BIT. For instance, FET protection features are excluded from sovereign acts.

Likewise, investor protection is linked to regulatory compliance with tax measures in the host country. This means protection for Indian investments in Bangladesh in politically uncertain times is not as strong as it may appear.

The large scale of investments is thus vulnerable because this BIT is not restricted to robust investor protection, and Indian companies must now re-examine their strategies. According to the World Bank, India accounted for the highest stock of FDI in Bangladesh at $3.332 billion as of June 2022. India’s experience in Bangladesh highlights a need to strengthen its legal infrastructure for overseas investments, while ensuring that investment protection issues are not diluted at the altar of international diplomacy. The impact of these issues, as the article suggests, will require India to evolve BIT and JIN policy going forward.

Question -1) Which of the following can be inferred from the passage about the impact of the Joint Interpretative Notes (JIN) on the India-Bangladesh BIT?

A) The JIN unequivocally strengthens the investment protection features for Indian companies in Bangladesh.
B) The JIN was adopted to primarily benefit Indian companies investing abroad.
C) The JIN has diluted the investment protection features, making it potentially disadvantageous for Indian investors.
D) The JIN prevents any sovereign actions by Bangladesh that could adversely affect Indian investments.

Question -2) Which of the following best describes the primary concern of Indian companies in Bangladesh following the political developments mentioned in the passage?

A) The potential enactment of laws in Bangladesh that could unfavorably impact Indian investments.
B) The withdrawal of the India-Bangladesh BIT, leaving Indian investments unprotected.
C) The introduction of stricter international laws governing foreign investments in Bangladesh.
D) The possibility of Bangladesh unilaterally strengthening its domestic laws to benefit Indian investors.

Question -3) Why might the India-Bangladesh BIT, despite being in place, not offer adequate protection to Indian investors in light of the JIN?

A) Because the BIT has been completely nullified by the JIN.
B) Because the JIN excludes taxation measures and raises the threshold for proving FET violations.
C) Because the JIN expands the scope of protection under customary international law.
D) Because the BIT allows unilateral changes by the Bangladesh government without consequences.

Question -4) Given the content of the passage, which strategy should Indian companies pursue if the new government in Bangladesh enacts unfavorable regulations?

A) Rely solely on Bangladesh’s domestic laws for protection.
B) File claims under the investor-state dispute settlement (ISDS) mechanism using the India-Bangladesh BIT.
C) Renegotiate the terms of their contracts with the Bangladesh government.
D) Withdraw all investments from Bangladesh to minimize risks.

Question -5) What is the potential irony in India’s approach to the JIN, as described in the passage?

A) India developed the JIN to favor its investors abroad, but it ended up strengthening Bangladesh’s position.
B) The JIN was designed to protect Indian companies, yet it unintentionally empowers the host state of Bangladesh.
C) The JIN was meant to protect Bangladesh’s sovereignty, but it also helps Indian companies.
D) India did not anticipate that the JIN, designed from a capital-importing perspective, could disadvantage its own capital exporters.

Question -6) According to the passage, what broader implication does the situation in Bangladesh have for Indian outbound investments?

A) It highlights the need for India to terminate all existing BITs.
B) It shows that Indian companies should avoid investing in politically unstable countries.
C) It underscores the importance of evolving India’s investment treaty practices to consider both host and home country interests.
D) It suggests that international law is always reliable in protecting foreign investments.