Portfolio investment is a term of art that seeks to assist in defining investments that are capable of protection under international investment protection instruments. Generally speaking, portfolio investment connotes investment in intangible assets, such as bonds, equity or debt instruments, debentures etc., i.e. investments that are outside the managerial control of the individual investor and as such do not confer any rights of participation in the management of the underlying investment upon the investor.
With this in mind, historically speaking, arbitral tribunals used to draw a distinction between foreign direct investment on the one hand and portfolio investment on the other. Only foreign direct investments, which focused on investment in tangible assets, such as the sale and purchase of land or property and the investment in a business in the host State, which in turn would allow an investor to exercise some measure of control over the investment, was regarded as capable of protection under investment protection treaties whilst portfolio investment – due to the lack of any management control of the investor - was not considered to produce the typical beneficial effects on the wider economy of the host State that foreign direct investments would have. That said, the boundaries of such a distinction gradually became somewhat blurred in application to shares in investment enterprises. As a result, it became generally understood, following the definition given to direct investments by the International Monetary Fund,1 that a participation interest of 10% or more in such an enterprise would qualify as protectable and as such constitute a direct investment rather than a portfolio investment.
The strict distinction between foreign direct investment and portfolio investment has gradually eroded thanks to the evolution and rapid modernisation of the global economy over recent decades and the continued refinement and wider availability of sophisticated international financial instruments that assist in the financing of international investment projects. Nowadays, therefore, there is no general prohibition on portfolio investment being protected under international investment protection instruments. Whether or not a portfolio investment is protectable in the individual case will depend on the wording of each individual investment protection instrument: some investment treaties or national laws take a wider, others a narrower approach. Essentially, the question whether a portfolio investment is covered by a particular investment protection instrument requires a case-by-case analysis of the scope of the underlying instrument.
ICSID tribunals have developed a test to assist in identifying their own subject matter jurisdiction, which has also found ready application to the determination of whether a particular portfolio investment is covered by an underlying investment protection instrument, typically a bilateral investment treaty read in the light of Article 25(1) of the ICSID Convention.
That test, the so-called double barrel test, asks two main question of the underlying investment: firstly, does the investment in question qualify as an investment pursuant to the parties’ consent in the terms expressed in the underlying investment protection instrument? And secondly, does the investment at issue fall within the scope of Article 25(1) of the ICSID Convention?
In its practical application, ICSID tribunals have placed varying degrees of emphasis on these two questions, some prioritizing a consensual approach (hence emphasizing the first question), others a typical characteristics approach (hence emphasizing the second question). The typical characteristics approach more specifically follows the Salini test.
III. Case law precedent
The consensual approach itself has produced mixed results. In Lanco v. Argentina,2 the tribunal qualified an 18.3% minority equity participation in a consortium as a protected investment under Article I(1) of the Argentina-US BIT. By contrast, in Gruslin v. Malaysia,3 the purchase of securities by a Belgian investor by way of a mutual fund did not satisfy the notion of investment within the meaning of the 1979 Intergovernmental Agreement between Malaysia and the Belgo-Luxembourg Economic Union. In Olguin v. Paraguay,4 highly speculative financial instruments were found to qualify as a protected investment under the Peru-Paraguay BIT, which admits monetary claims of any type of benefit of economic value. Ambiente Ufficio v. Argentina5 sets a precedent for protected investments in a host State’s sovereign bonds. The tribunal in Fedax v. Venezuela6 regarded promissory notes issued by Venezuela as a protected investment. So was a loan offered by a bank to a collection agency subject to guaranteed repayment by the government in CSOB v. Slovakia.7
Applying the typical characteristics approach, in Joy Mining v. Egypt,8 the tribunal did not regard a bank guarantee ancillary to a supply agreement between a foreign investor and a governmental enterprise as a protected investment within the meaning of Art 25(1) of the ICSID Convention. Equally, the tribunal in PSEG v. Turkey9 rejected the qualification of a financial option as a protected investment on the basis that there had to be a limit to what could reasonably qualify as a protected investment. Deutsche Bank v. Sri Lanka10 found that a derivative instrument could qualify whereas Postova banka v. Greece11 reached the opposite conclusion with respect to interests in Greek government bonds.
Risso, G.L., Portfolio Investment in ICSID Arbitration: Just a Matter of Consent?, Journal of International Arbitration, Vol. 37, Issue 3, 2020, pp. 341-362.
Rubins, N., The Notion of ‘Investment’ in International Investment Arbitration, in Horn, N. and Kroell, S.M. (eds.), Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects, Kluwer Law International, 2004, pp. 283-324.
Salacuse, J.W., The Law of Investment Treaties, Oxford University Press, 2nd ed., 2015, p. 30.
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