Indian investors, who remain Nepal's largest trading partner, have in the past been wary of investing in Nepal because of uncertainty about the protection of their investments, particularly the protection of property rights. The BIPPA aims to allay this uncertainty.

Prime Minister Baburam Bhattarai has made it clear that Bilateral Investment Promotion and Protection Agreement (BIPPA) signed with India is not against the national interest and that it is meant to meet the mutual interests. We should be able to find a link between bilateral investment treaties and foreign direct investment (FDI). There could be a debate on the impact of bilateral investment agreement on foreign direct investment in the days to come. The argument is that BIPPA contains many rights which investors can use against the host country investor. India has done such agreement with more than 53 countries. These clearly outlined rules increase investor confident which will result in a flow of investment to the host nation. The rules have a disciplinary effect upon the host country government. This is further qualified by the notion that BIPPA will have more effect on Nepal where the government has to convince investors that their property will be protected. Domestic policies will be highlighted as being in conflict with investors rights. BIPPA can thus be used as shield to these domestic policies thereby encouraging FDI. These agreements however have their own cost effects which will be categorized as reputational, sovereignty and arbitration. Other issues such as the effect of bilateral agreements on development should also be taken into consideration in the medium and long term.

Leaders of the major opposition parties- Nepali Congress and CPN–UML - have flayed the BIPPA which was signed following Prime Minister’s meeting with his Indian counterpart Manmohan Singh in New Delhi. UML Chairman said the signing of the BIPPA is against national interest. He also said that his party will not accept it. “PM Bhattarai has signed BIPPA without consulting the parties. His irresponsible act has insulted other parties. He has thrown our nationality into Yamuna River,” he remarked. Nepali Congress vice president Ram Chandra Poudel also criticised BIPPA saying that there is no meaning of signing such an agreement until there is political stability in the country.

BIPPA entails commitments by the signatories to protect investment from each other and accept liability for losses caused by war, riots or any kind of unrest that are not covered by insurance companies. The agreement bars the host country from nationalizing businesses from foreign countries without paying proper compensation. Similarly, the agreement allows FDI and investment in stocks.

As part of the Economic Reforms Programme initiated in 1991, the foreign investment policy of the Government of India was liberalized and negotiations undertaken with a number of countries to enter into Bilateral Investment Promotion & Protection Agreement (BIPAs) in order to promote and protect on reciprocal basis investment of the investors. Government of India have, so far, (as on July 2009) signed BIPPAs with 75 countries out of which 66 BIPAs have already come into force and the remaining agreements are in the process of being enforced. In addition, agreements have also been finalized and/ or being negotiated with a number of other countries.

The objective of BIPPA is to promote and protect the interests of investors of either country in the territory of another country. Such agreements increase the comfort level of the investors by assuring a minimum standard of treatment in all matters and provides for justifiability of disputes with the host country.

The salient features of BIPPA are:  Under Article 1, "Investment" is defined as every kind of asset, including Intellectual Property Rights (IPRs) in accordance with laws and regulations of the country in which the investment is made. This Article also defines, inter alia, "investor", "returns" and "territory".  In Article 2, the scope of the Agreement extends to investments made by the investors of the either Contracting Party whether made before or after coming into force of the Agreement. In Article 3, each Contracting Party is required to encourage and create favorable conditions for and fair and equitable treatment to investors and allow admission of investment in accordance with its laws and policies.

Article 4 provides for extending National Treatment and Most Favored Nation (MFN) treatment to foreign investments, with an MFN treatment in addition for investors. National Treatment requires each government to accord to investments, treatment no less favorable than that accorded to investments of its own investors or investment of investors of any other third State. Departures from MFN and NT will be permissible on matters concerning taxation, existing or future customs unions or similar international agreement. Article 5 of the Agreement provides that nationalization or expropriation shall not be resorted to except in public interest in accordance with law, on a non-discriminatory basis, and against compensation. Nationalization or expropriation shall also be subject to review by a domestic judicial or other independent authority. A protocol has also been added to explain the term "expropriation" in Article 5. This protocol is intended to protect the investors from "creeping" or "indirect" expropriation, on the one hand, and the Contracting Party from frivolous litigation, on the other. Article 6 enumerates the special conditions under which compensation for losses is to be paid.  Investors of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, a state of national emergency or civil disturbances in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favorable than that which the latter Contracting Party accords to its own investors or to investors of any third State. Resulting payments shall be freely transferable. The term "expropriation" in this article shall be interpreted in accordance with Annex on interpretation of this article. Under Article 7 each country shall grant to investors of the other country, free transfer of investments and returns without unreasonable delay and on a non-discriminatory basis.

Article 8 contains a subrogation clause which requires each Government to recognize rights and claims which may have been subrogated by investors of the other country to its Government or designated agency. Under Articles 9 and 10, there are elaborate dispute resolution mechanisms to resolve disputes between an investor and a host Government as well as between the two Governments. For settlement of disputes between an investor and the host Government, provisions have been incorporated for prior negotiations to resolve disputes as well as for domestic adjudication, conciliation and international arbitration.

Article 11 provides for entry and sojourn, subject to laws and regulations of the host Government, of personnel for the purpose of engaging in activities connected with investments. Article 12 provides the provisions of denial of benefits of the Agreement. Under Article 13, all investments shall, subject to the Agreement, be governed by the laws in force in the territory of the Contracting Party in which the investment is made. This Article also emphasizes the right of host country to take appropriate actions for the protection of its essential security interest or in circumstances of extreme emergency.  Article 14 provides for precedence to other rules if they are intended to provide more favorable treatment to the investors of either Contracting Party. Under Article 15, provisions have been made for entry into force of the Agreement. Finally Article 16 provides that the Agreement shall remain in force initially for a period of 10 years. It shall thereafter deemed to be automatically extended and continue to remain in force until the expiry of one year from the date on which either Government gives written notice of termination to the other. To protect existing investments, it has been provided that in respect of investments made before the termination of the Agreement, its provisions shall continue in effect with respect to those investments for a period of 15 years after the date of termination. �

Nepal is having a widening trade gap and the FDI in agriculture and the industry in the last few years are on a decreasing trend. It is against this background that Nepal and India have signed BIPPA. Given this background there has criticism on the effectiveness and the Nepal’s ability to compensate as per the BIPPA in protecting investors in Nepal. In actual sense BIPPA was signed in a contentious environment, at least after the signing was over. Negotiations relating to the content of a bilateral agreement between Nepal and India had been going on for a decade. Although theoretically a reciprocal agreement, the BIPPA was signed largely to make provision for the Indian business community's interest in investment opportunities in Nepal, particularly in the sectors already identified by Nepal like agriculture, hydropower, tourism etc.

Indian investors, who remain Nepal's largest trading partner, have in the past been wary of investing in Nepal because of uncertainty about the protection of their investments, particularly the protection of property rights. The BIPPA aims to allay this uncertainty.

Political risk has been high in Nepal although there are other means of ensuring against this risk. Such situations are usually provided for the terms of international  laws that demand responsibility of the state to give protection to the interest of the foreigner from anticipated attacks on property; Nationalistic sentiments only pose threat to foreign investments.

The agreement is aimed at specifically protecting private FDI in the host sate. BIPPA has set forth standards for treatment of foreign investors in areas such as expropriation of property, repatriation of funds, and settlement of disputes. When a host state violates the rights guaranteed to the investor by the treaty, an investor has recourse on an international arbitration.

Nepali people are of the view that BIPPA between our two countries to work. BIPPA is a document signaling to the world that Nepal is ready for foreign investments and should not be judged by its past performance. The newly signed BIPPA is definitely a step forward in this direction.

Nepal now needs to abide by the norms of the agreement. This could be a milestone in attracting the FDI in Nepal.

(Singh is General Manager, Nepal Stock Exchange. He can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it )