From Stability to Turmoil: Managing Political Risk in Bangladesh for Foreign Investors

Introduction

On August 5, 2024, Sheikh Hasina, Bangladesh’s Prime Minister of 15 years, resigned and fled the country following widespread violent protests. In her place, an interim government led by Nobel laureate Muhammad Yunus as Chief Advisor, with the support of the military, was established on August 8, 2024. This sudden shift in power has raised significant concerns for international corporate entities and individuals who have entered into contracts and made investments in Bangladesh over the years.

The current situation in Bangladesh could lead to various challenges for foreign investors as the interim government or its successor government are likely to take negative measures. These measures may be inter alia i) discriminatory and arbitrary treatment of foreign commercial entities and their subsidiaries; ii) nationalization of corporate assets; iii) damage to corporate assets; iv) termination or suspension of licenses, concessions, and even government contracts; and v) abrupt policy changes.

This civil unrest and the consequent political turmoil are particularly relevant for India, not just politically but economically, as it has the second-highest proposed investments in foreign and joint venture projects in Bangladesh.[1] Last year alone, India contributed USD 133 million in FDI.[2] Further, several Indian power firms are owed more than USD 1 billion by Bangladesh.[3] There have already been instances of discrimination against India and its corporate entities. When Sheikh Hasina won the elections for the fourth consecutive time earlier this year, an opposition-led social media campaign calling for a boycott of Indian goods, popularly known as ‘India Out,’ gained traction[4]. In light of the current political situation, India’s Finance Minister has also expressed concerns over the protection of Indian investments, particularly in Bangladesh’s textile sector.[5]

Protection from Political Risk- Investment Treaties

Bangladesh has a robust framework of bilateral investment treaties (BITs) and multilateral treaties, which protects foreign investors—both individual and corporate— who are nationals of the other contract parties to these treaties from where Bangladesh receives significant foreign direct investment. Examples include Bangladesh-Singapore BIT (2004), the OIC Investment Agreement (1981), Bangladesh-USA BIT (1986) etc.

In addition to these treaties, foreign investors in Bangladesh are safeguarded under the Foreign Private Investment (Promotion and Protection) Act of 1980.

During unforeseen and unstable situations, such as those currently unfolding in Bangladesh, this legal framework of BITs and multilateral treaties is crucial for foreign investors to insulate them from political risk.

These BITs and multilateral treaties offer several layers of protection or treaty protections. They guarantee foreign investors fair and equitable treatment, shielding them from arbitrary, discriminatory, and non-transparent changes in government policies. Investors also enjoy non-discrimination, receiving treatment on par with national and other foreign entities (under national treatment and most-favored-nation principles). The treaties ensure the free transfer of payments related to investments and protect against expropriation of assets.

In investment arbitration practice, the fair and equitable treatment standard has been interpreted to include physical and legal security of both personnel and assets, protection of legitimate expectations, and prevention of denial of justice. Additionally, protection against expropriation encompasses all forms of property deprivation, including the termination of concessions and licenses.

Furthermore, these treaties address losses arising from national emergencies, insurrections, riots, or similar situations. They ensure that foreign investors are treated equitably, similar to domestic investors and other foreign investors, when seeking compensation for losses incurred during such disturbances.

Foreign investors have the right to enforce these protections through investment disputes resolved by neutral, international arbitral tribunals. For example, in Ampal-American Israel Corp. v. Arab Republic of Egypt (ICSID Case No. ARB/12/11), an arbitration tribunal found that Egypt had violated the US-Egypt BIT by failing to protect the investor’s pipeline from repeated attacks during the Arab Spring.

Indian corporate entities and individuals

This is particularly significant for Indian entities, as the Bangladesh-India Bilateral Investment Treaty (BIT) of 2009 remains in force, unlike many other treaties that India terminated in 2017. Further, India and Bangladesh issued the Joint Interpretative Notes (JIN) to the Bangladesh-India BIT in 2017. As a result, the protections provided by this treaty are still available to Indian investors who have made investments in Bangladesh.

Therefore, any Indian investor who has suffered losses may initiate legal action against Bangladesh under the Bangladesh-India BIT and seek compensation. Instead of resorting to Bangladesh domestic courts, these proceedings will be conducted before an international arbitral tribunal in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, 1976.

Contractual Disputes

In light of the recent geopolitical upheaval in Bangladesh, foreign companies and their subsidiaries must proactively evaluate their contractual obligations and rights. For instance, the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) reported substantial financial losses, estimating a shortfall of USD 540 million due to shutdowns and communication breakdowns.[6] This crisis may trigger Bangladeshi textile suppliers from invoking the 'Force Majeure' clauses in contracts, potentially relieving parties from their obligations.

For exporters, suppliers, project contractors, and other commercial entities, it is crucial to thoroughly review contractual terms to determine whether they provide relief for delays, adverse changes, or increased performance costs.

Beyond these specific clauses, general legal principles, such as the doctrine of frustration, might also be relevant. This doctrine can offer a means to discharge contractual obligations when an unforeseen event disrupts the contract’s core purpose.

Next Steps

Given the volatile situation in Bangladesh, commercial entities and private investors should reassess their legal strategies to fully understand the available protections and remedies:

·           This involves verifying whether any formal notices need to be issued under the contracts or the BITs.

·           For foreign investors seeking protection under the BITs, it is essential to review corporate structures to ensure they qualify as a protected investor and investment under the applicable BIT. This qualification is necessary to invoke arbitration under the BITs.

·           Maintaining thorough documentation, including records of communications, losses, reports, and performance issues, is crucial for building a strong legal defense. Additionally, it is important to review the dispute resolution mechanisms outlined in contracts and the BITs—such as arbitration or mediation—to ensure that rights are preserved.

·           Engaging proactively with relevant government bodies and regulatory authorities in their own country as well as in Bangladesh may help in anticipating and mitigating risks, particularly in the context of changing policies and regulations.

·           Understanding where to seek interim measures is also critical, especially if local courts are inaccessible. If immediate protection is required and local courts in Bangladesh are unavailable, the arbitration agreement might allow parties to seek emergency arbitration for swift interim relief. This approach can be instrumental in safeguarding their rights and interests during challenging times.

[1]         India's bets in Bangladesh surged before crisis in neighbouring country, 12 August 2024, Business Standard.

[2]         Foreign Direct Investment and External Debt July-December, 2023, Statistics Department Bangladesh Bank.

[3]         Indian power firms owed over $1 bn by Bangladesh amid financial turmoil, 27 August 2024, Business Standard.

[4]         An ‘India Out’ Campaign Gathers Pace in Bangladeshi Social Media, 15 March 2024, the Diplomat.

[5]         Hope Indian investments in Bangladesh are safe: Nirmala Sitharaman, 10 August 2024, the Hindu.

[6]         Bangladesh garment industry faces crisis amid political unrest and floods, 27 August 2024, The Indian Express.

Authors:

Shravan Yammanur, Partner

Mangesh Krishna, Senior Associate

Disclaimer:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

[1]        India's bets in Bangladesh surged before crisis in neighbouring country, 12 August 2024, Business Standard.

[2]        Foreign Direct Investment and External Debt July-December, 2023, Statistics Department Bangladesh Bank.

[3]        Indian power firms owed over $1 bn by Bangladesh amid financial turmoil, 27 August 2024, Business Standard.

[4]        An ‘India Out’ Campaign Gathers Pace in Bangladeshi Social Media, 15 March 2024, the Diplomat.

[5]        Hope Indian investments in Bangladesh are safe: Nirmala Sitharaman, 10 August 2024, the Hindu.

[6]        Bangladesh garment industry faces crisis amid political unrest and floods, 27 August 2024, The Indian Express.