There is a growing discussion on revamping India’s bilateral investment treaties (BITs). In the FY26 Budget speech, the FM had announced that the BIT model will be modified to make it more investor-friendly. Reji K Joseph traces the background and explains why the debate has now gained fresh urgency
What are BITs?
Countries aim to attract FDI since it comes as a package of capital, technology, managerial expertise, and linkage. To avoid risks of arbitrary actions by host countries, home and host countries have developed mechanisms to protect foreign investors. BITs are the most widely used such mechanism. Foreign investors who are adversely affected by host country actions can seek compensation for damages in international tribunals. Sometimes investment provisions can be a part of bilateral and multilateral trade agreements. All these together are called international investment agreements (IIAs).
IIAs promise foreign investors some guarantees (fair and equitable treatment, protection against expropriation without compensation, and the freedom to transfer funds). They are backed by the key defining feature of such treaties — the investor-state dispute settlement (ISDS). ISDS allows foreign investors to sue a sovereign state in an international arbitration tribunal.
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Germany and Pakistan signed the first ever BIT in 1959. Initially, BITs were signed mostly between developed and developing nations. India’s first BIT was with the UK in 1994. Evidence suggests IIAs aren’t sufficient in themselves to woo foreign investment. There are other more notable determinants.
Background that led to change in India’s BIT model
By 2015, India had signed more than 80 BITs. The first ISDS award against India was in the dispute involving White Industries of Australia and Coal India over a commercial contract. The ISDS arbitration went against India in 2011. India paid a compensation of A$4.08 million along with interest. India lost this dispute on the “effective means of asserting claims” clause, which White Industries imported from the India-Kuwait BIT using the most-favoured nation clause in the India-Australia BIT.
This was followed by high-profile claims from Vodafone and Cairn Energy over the regulation on retrospective taxation. When India issued its first compulsory licence to reduce the cost of Nexavar, a medicine used in the treatment of cancer, from Rs 2.8 lakh per month to Rs 8,800, Bayer, the patent owner of Nexavar, was advised to start an ISDS dispute against India.
2015 model & current debate around it
Alarmed by the legal entanglement its BITs have created for its regulatory space, the Indian government decided to overhaul its investment-treaty regime. A new model BIT was framed in 2015, followed by the unilateral termination of about 70 of India’s existing BITs. Although terminated, the provisions of the treaties remain valid for a further 15 years, due to the survival (sunset) clause in BITs.
The most significant change in the new model BIT was requirement of exhaustion of local remedies for initiating ISDS proceedings. Foreign investors are required to pursue local judicial and administrative remedies for at least five years to take a dispute to the international arbitration. However, if there is no availability of local remedy for redress, a foreign investor can directly initiate the arbitration.
Some scholars argue that the model BIT 2015 reflects an arrogant attitude towards foreign investors. In this context, the decline in net FDI inflows (gross FDI inflows net of outward FDI from India) and repatriation and disinvestment by foreign investors is attributed to the existing BIT regime.
But a number of Indian firms have invested abroad to facilitate exports and strengthen innovation capabilities. Studies have found in sectors like pharma, firms that invest abroad tend to spend more on R&D in India. Similarly, Ford exited India in 2021 as it couldn’t withstand competition in India’s automotive market. There should be a more nuanced understanding of the decline in India’s net FDI during the last few years.
Will a modified BIT model attract more FDI?
Not necessarily. A model BIT is not a binding instrument, and it is only a template to be followed broadly when India signs IIAs. In the India-UAE BIT of 2024, foreign investors are required to exhaust local remedies only for three years before initiating ISDS arbitration while in the model BIT 2015 it is five years. There are key determinants such as market size, growth prospects, tax rules, business environment, and political stability other than investor protection measures which influence FDI inflows. Geopolitics has become a major critical factor influencing FDI decisions. Therefore, FDI inflows into India and its net FDI position will depend on a number of other factors than its BITs.
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Does India’s BIT model conform to international law?
Yes, the model BIT and IIAs do conform to international law. Exhaustion of local remedies is an accepted principle in international law and countries have the freedom to set standards for this principle, such as whether local remedies should be pursued for six months or five years or irrespective of the time taken. It is also not mandatory that countries have to provide for the ad hoc ISDS arbitration and in fact European countries are deliberating on moving away from ISDS towards a permanent court-based model.
The writer is a faculty member at the Institute for Studies in Industrial Development, New Delhi
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
TOPICSFDIThis article was first uploaded on June twenty-one, twenty twenty-six, at six minutes past eight in the night. © The Indian Express (P) Ltd