International Investment Law Notes - Basics relating to ‘Admission’ and ‘Right of Establishment’ of Investment

International Investment Law Notes

‘Admission’ and ‘Right of Establishment’ of Investment

‘Admission’ means that foreign investment is allowed by the host state from other states by virtue of a treaty (BIT). While the foreign investment is allowed, such investment is afforded the same level of protection and promotion that is provided to the domestic investment. Thus, the other party must be admitted on the basis of National Treatment.

Usually such treaties also have a clause stating that any dispute will be decided in accordance with domestic law. Such a clause exists so that the countries can regulate the market access.

‘Right of Establishment’ refers to providing the foreign investors (by virtue of a treaty) with National Treatment and MFN status not only at the time of the admission but also with respect to the establishment. Such treaties ensure the free entry of foreign investment into the host country. However, some country-specific reservations are also provided under such treaties. The host countries prefer to retain some degree of control to regulate the admission of foreign investment by inserting clauses to include or exclude a list of activities or industries or laws from the application of MFN Clause or National Treatment Clause.

A state has the power of admission and establishment because of the following reasons:

1. Sovereignty

2. A state being the representative of the entire masses has the capacity and the responsibility to ensure that the investor is a genuine one.

3. State being the representative exercises authority over the entire populace. Hence, it is the government that is vested with the power to take the call with respect to the investments that are coming in and going out.

Expropriation

Usually BITs allow countries to expropriate foreign investments on a non-discriminatory basis, for a public purpose and against the payment of compensation. An Expropriation Clause grants a state the capacity to acquire the property owned by the alien i.e. the foreign investor. This term is used only under the ‘International Law’.

Essentials of Expropriation

1. It is always required that a law must exist on the issue of expropriation. If such a law does not exist, then acquisition of that property cannot take place and is deemed to be illegal.

2. Due and Adequate Compensation must be provided to the one whose property is being expropriated.

3. The law relating to expropriation must be just, fair and reasonable.

4. Public Purpose – It is required that the expropriation should be done by the state for a genuine public purpose.

5. Purpose of Expropriation – Sometimes the state under the garb of ‘public purpose’ confiscates property of the individuals. This must be avoided at all costs. This also includes the objects and reasons for which the Expropriation Clause is being framed.

Indirect Expropriation

This refers to the situation where a country admits an investor and puts on certain conditions without which the investment cannot be established. It is very tough to imagine a situation where a state allows a person to invest and during the time when the return on investments is about to come, practically, that person is restrained from investing. A legitimate expectation exists on the part of the investor.

When a foreign investor is allowed, fair and equitable treatment would mean that full protection of compensation (due and adequate) and land must be given and if the land is taken away, then both the domestic players as well as international players must be treated in the same manner.

International Investment Law Notes