India’s Model Bilateral Investment Treaty

Syllabus: GS2/IR

Context

• The GoI is evaluating its Model Bilateral Investment Treaty (BIT) to make the investment treaty environment more investor-friendly and conducive, while safeguarding India’s sovereign regulatory space.

What is a Bilateral Investment Treaty (BIT)?

• A Bilateral Investment Treaty (BIT) is an agreement between two countries to facilitate and protect investments by investors from one country into the other.
• The BIT provides legal safeguards, for example protection from expropriation, fair treatment and dispute settlement procedures.
• BITs are designed to promote investor trust and encourage foreign direct investment (FDI).

Features of Bilateral Investment Treaties

• National Treatment: Foreign investors are not treated less favourably than those of the domestic country.
• Fair and Equitable Treatment (FET): The host State shall not treat investors arbitrarily or discriminatorily.
• Free Movement of Capital Investment:  The rules state that gains, dividends and capital may be freely moved across national borders.
• Dispute settlement mechanism: It provides for settlement of issues between investors and host states or between states.

India’s Progress on BITs

• Evolution of India’s BIT Framework: India signed its first Model BIT in 1993, which was amended in 2003.
  • Following several international arbitration disputes, India adopted a new Model BIT in December 2015, which became operational in 2016.
• Recent Developments: India has signed BITs or investment agreements with countries such as; Belarus, Kyrgyz Republic, United Arab Emirates, Uzbekistan and Brazil (through an Investment Cooperation and Facilitation Treaty).
• In Budget 2025-26, the Government announced a review of the BIT framework to make it more investor-friendly while safeguarding national interests.

Why is India revising its Model BIT?

• Net FDI inflows: Net FDI dropped from an average of almost $40 billion in FY20-FY22 to $7.65 billion in FY26.
• Growing outbound investment: Indian enterprises are investing more abroad and need protection in foreign jurisdictions.
• Improve investor confidence: A predictable and balanced investment environment will sustain long-term capital inflows.

Key Features of the Proposed New BIT Model

• Two-Year Local Remedies Requirement: Foreign investors are required to pursue remedies within India’s domestic legal system for at least two years before initiating international arbitration.
  • For certain partner countries, a shorter one-year cooling-off period may also be considered during negotiations.
• No Most-Favoured Nation (MFN) Clause: The revised model is likely to exclude the Most-Favoured Nation (MFN) clause.
  • MFN clauses allow investors to claim more favourable treatment available under India’s treaties with other countries.
  • It is believed that removing the clause will reduce treaty-shopping and legal uncertainties.
• Taxation Matters Excluded: Tax-related disputes will remain outside the scope of investment treaties.
  • This approach is influenced by past arbitration cases involving foreign companies such as Vodafone Group and Cairn Energy.
  • The government maintains that taxation is a sovereign policy matter and should not be subject to investor-state arbitration.

What are the concerns?

• Investor Concerns: The provisions of mandatory exhaustion of local remedies before international arbitration may increase costs and delays. Also lengthy judicial processes can discourage foreign investors.
  • The absence of a Most-Favoured Nation (MFN) clause will reduce investor protections available under other treaties.
• India’s Concerns: Excessive investor rights constrain legitimate public policy measures and also Investor-State Dispute Settlement (ISDS) mechanisms challenge sovereign regulatory actions.
  • International arbitration awards may impose significant financial liabilities on governments.

Global Trends in Investment Dispute Settlement

• Shift Away from Traditional ISDS: Many countries are reconsidering traditional Investor-State Dispute Settlement mechanisms.
  • For example, the BIT between Australia and the United Arab Emirates adopts State-to-State Dispute Settlement (SSDS) instead of ISDS. Under SSDS, disputes are resolved between governments rather than directly between investors and host states.

Way Ahead

• A balanced BIT approach is required respecting India’s regulatory sovereignty and policy space and protecting investor interests.
• Build investor confidence in domestic legal institutions, including strengthening commercial courts and contract enforcement.
• Promote the employment of procedures of mediation, conciliation and resolution of disputes between States as an alternative to expensive arbitration.

Source: TH