Revision of India’s Model Bilateral Investment Treaty (BIT)

Syllabus: GS2/International Relations

Context

• The revision of India’s model Bilateral Investment Treaty (BIT) text, as announced in the Union Budget 2025, aims to make the treaty more investor-friendly while aligning it with current global economic realities.

About the Bilateral Investment Treaty (BIT)

• BIT, also known as International Investment Agreements (IIAs), is a legal framework, under the United Nations Conference on Trade and Development (UNCTAD), designed to protect foreign investments.
• It is a reciprocal agreement between two countries to promote and protect foreign private investments in each other’s territories.
• It establishes minimum guarantees between the two countries regarding the treatment of foreign investments, such as:
  • National Treatment: Treating foreign investors at par with domestic companies;
  • Fair & Equitable Treatment: In accordance with international law; and,
  • Protection From Expropriation: Limiting each country’s ability to take over foreign investments in its territory.
• BIT typically includes mechanisms like investor-state dispute settlement (ISDS) and state-to-state dispute settlement (SSDS) to address conflicts.

BIT & India

• India introduced its first Model Bilateral Investment Treaty (BIT) in 1993, but after facing multiple investor-state disputes, it revised its Model BIT text in 2015.
  • India signed its first BIT in 1994 with the UK and recently signed BITs with UAE and Uzbekistan in 2024.
  • India is currently negotiating BITs with the UK, Saudi Arabia, Qatar, and the European Union.
• Provisions of Model BIT, 2015: The Standing Committee on External Affairs noted that there is still scope for fine-tuning some of its provisions, like investor-state dispute settlement mechanism.

Why is a New Revision Needed?

• Narrow Definition of Investment: Model BIT (2015) limited the definition of investment to enterprises with substantial business operations in India, excluding indirect investments and portfolio investments.
• Overly Protectionist & Discouraging FDI: Several foreign investors view India’s BIT framework as unfavorable, prompting a rethink to balance investor protection with national interests.
• Geopolitical Shifts & Trade Agreements: With India negotiating trade agreements with the EU, UK, and Canada, a more balanced BIT is essential for fostering economic cooperation.
• Investor-State Dispute Settlement (ISDS) Concerns: Model BIT (2015) made it difficult for investors to seek international arbitration, which is a major deterrent for foreign businesses.

India’s Approach in Current Scenario

• Chief Economic Adviser V. Anantha Nageswaran announced that India’s new model Bilateral Investment Treaty (BIT) will be updated to align with the evolving global investment environment, while safeguarding India’s sovereign rights and regulatory space.
• Finance Minister Nirmala Sitharaman also highlighted that the BIT model will be revamped to encourage sustained foreign investment and make it more investor-friendly.

Expected Changes in the Revised Model BIT

• More Balanced Investor Protections: India may introduce a limited MFN clause and expand the scope of investment protections while maintaining regulatory autonomy.
  • It aims to attract more investors while preventing treaty shopping.
• Redefining Exhaustion of Local Remedies Clause: The rigid five-year requirement to exhaust local remedies may be relaxed to make international arbitration more accessible.
  • A ‘fork-in-the-road’ mechanism could be introduced, allowing investors to choose either domestic courts or arbitration.
• Stronger Dispute Resolution Mechanisms: India is likely to reconsider its approach to ISDS.
  • A reformed arbitration mechanism — possibly with a standing appellate body or mediation framework — may be introduced to make dispute resolution more predictable.
• Incentives for Sustainable & Digital Investments: The revised BIT may introduce clauses favoring sustainable investments, digital trade, and green energy projects, in line with India’s climate goals.
• Sector-Specific Provisions: India may introduce sector-specific regulations, particularly for industries like pharmaceuticals, technology, and infrastructure, ensuring national security while attracting high-value investments.

Challenges Associated with the BITs

• Unequal Distribution of Rights and Obligations: BITs often create an unequal distribution of rights and obligations between developed countries, which are the source of most foreign direct investment, and developing countries, which are mainly recipients.
• Risk of Litigation: BITs lead to an increased risk of litigation. Some developing countries have been sentenced by international arbitral tribunals to pay millions of dollars as a result of alleged violations to these treaties.
• Ambiguous Legal Standards: Most of these awards are based on expansive interpretations of ambiguous legal standards and concepts such as ‘fair and equitable treatment’ and ‘indirect expropriation’.
• Limitations in Addressing Issues: BITs can’t address every problem that companies face abroad.
  • For example, American companies in China face challenges in protecting and enforcing their intellectual property rights (IPR).
• Loss of Policy Space: BITs can lead to a loss of policy space for the host country, limiting its ability to regulate in the public interest.
• Treaty Shopping: Investors might take advantage of the most favourable nation clause in BITs to sue a host country under a treaty to which it is not a party.

Conclusion and Way Forward

• A well-crafted Bilateral Investment Treaty (BIT) can play a transformative role in India’s economic growth by boosting investor confidence, attracting foreign investments, and aligning with global standards.
• By providing a stable and predictable business environment, a revised BIT can reassure foreign investors, encouraging them to invest in India.
• Increased foreign investments, in turn, drive economic development, create jobs, and enhance India’s global trade standing.
• Moreover, updating the BIT ensures that India’s investment policies remain competitive and in line with international best practices.
• BITs should capture India’s national interest, particularly regarding regulatory powers, and that BITs should be negotiated independently rather than as part of Free Trade Agreements (FTAs).

Source: IE