India’s New Bilateral Investment Treaty (BIT) Model

Syllabus: GS3/ Economy

Context

• The Government of India is revising its 2016 Model Bilateral Investment Treaty (BIT) to make it more investor-friendly while safeguarding India’s regulatory sovereignty and legal system.

What is a Bilateral Investment Treaty (BIT)?

• A Bilateral Investment Treaty (BIT) is an agreement between two countries that promotes and protects investments made by investors of one country in the other.
• It provides legal safeguards such as protection against expropriation, fair treatment, and dispute resolution mechanisms.
• BITs aim to improve investor confidence and facilitate foreign direct investment (FDI).

Features of Bilateral Investment Treaties

• National Treatment: Foreign investors receive treatment no less favourable than domestic investors.
• Protection Against Expropriation: Investments cannot be nationalised or expropriated without due process and adequate compensation.
• Fair and Equitable Treatment (FET): Investors are protected from arbitrary or discriminatory actions by the host state.
• Free Transfer of Funds: Investors can transfer profits, dividends, and capital across borders subject to applicable regulations.
• Dispute Settlement Mechanism: Provides procedures for resolving disputes 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.

Key Features of the Proposed New BIT Model

• Two-Year Local Remedies Requirement: Foreign investors will be 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.
  • The government believes 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: Mandatory exhaustion of local remedies before international arbitration may increase costs and delays. Lengthy judicial processes can discourage foreign investors.
  • The absence of a Most-Favoured Nation (MFN) clause may reduce investor protections available under other treaties.
• India’s Concerns:
  • Excessive investor rights may constrain legitimate public policy measures.
  • Investor-State Dispute Settlement (ISDS) mechanisms can 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: Several 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

• Adopt a balanced BIT framework that protects investors while preserving India’s regulatory sovereignty and policy space.
• Strengthen commercial courts and contract enforcement to enhance investor confidence in domestic legal institutions.
• Ensure regulatory stability and policy predictability through transparent and consistent policymaking.
• Promote mediation, conciliation, and state-to-state dispute settlement mechanisms as alternatives to costly arbitration.

Source: IE