Gopika Kalidas, a distinguished graduate from Alliance Law School, Alliance University, Bangalore. Read More
THE NEW FACE OF INDIA’S BILATERAL INVESTMENT TREATIES
India’s investment treaty system has seen substantial evolution over time, reflecting the country’s changing economic priorities and global engagement. India first adopted a more investor-friendly approach, establishing bilateral investment treaties (BITs) that provided international investors with significant protection from host-state regulations. However, as India’s economy grew and its regulatory system matured, the need for a more balanced approach became obvious. However, the current situation is marked by a standstill, with ongoing discussions and barriers to enacting the new Model BIT.
In response to these evolving expectations, India implemented a revised Model BIT in 2015. This approach sought to create a more fair environment that safeguarded both international investors and the host country’s regulatory authority. The new model had several essential aspects, such as improved host-state security, more openness and accountability, and a focus on long-term growth. The implementation of the modified Model BIT was a substantial break from India’s previous approach to overseas investment. It exhibited a grasp of the need of balancing foreign investors’ interests with the host country’s overall development objectives. However, implementing the updated strategy has not been without obstacles.
Historical Background
During the early phases of its economic liberalization, India signed a number of BITs that were mostly modeled after Western models, with an emphasis on investor protection above host state interests. These agreements often gave foreign investors extensive ability to challenge local legislation, raising questions about India’s regulatory autonomy. India approved the first Model BIT in 1993, with the purpose of encouraging foreign investment by establishing a legal framework to safeguard investors’ interests. However, in response to a rise in disputes and investor-state arbitration claims against India in the mid-2000s and 2010s, the country revised its position on investment treaties.
The Early Years: 1993 Model BIT
India entered the arena of bilateral investment treaties in the early 1990s, a time defined by economic liberalization and a greater emphasis on attracting Foreign Direct Investment (FDI). The 1993 Model BIT aims to provide strong protections for foreign investors and a stable investment climate. The major factors were the agreement defined “investment” broadly, encompassing both tangible and intangible assets. Fair and Equitable Treatment (FET) was created to guarantee that investors did not face unfair, arbitrary, or discriminatory treatment from the host country. There is also Investor-State Dispute Settlement being that if there is a disagreement, investors can seek arbitration directly against the host state.
Rising Disputes and Reassessment (2000s – 2010s)
Foreign investment in India increased, and so did the number of BIT-related difficulties. Some high-profile cases, such as those involving Vodafone, Cairn Energy, and White Industries, exposed the shortcomings of the 1993 BIT model. These debates were mostly centered on taxation and Retrospective Measures: Foreign investors are concerned that India’s retrospective tax demands violate their bilateral investment treaty rights. The FET standard was commonly used to attack India’s regulatory practices, undermining the country’s authority to change legislation. The growing number of disputes prompted a reassessment of India’s BIT structure, culminating in the decision to construct a new Model BIT.
India’s 2016 Revised Model BIT
The 2016 Model BIT represented a fundamental shift in India’s approach to investment treaties. It included many additional paragraphs aiming at striking a better balance between investor protection and host nation regulatory agencies. India’s modified Model BIT is the result of significant public consultation and thorough examination by the Law Commission of India [1]. The revised Model BIT addresses a number of semantic and conceptual concerns raised by the interpretation of the 2003 version or, more broadly, arbitrations before ICSID Tribunals under other countries’ bilateral investment treaties or free trade agreements. The revised Model BIT is expected to eliminate interpretative uncertainties that existed in its previous 2003 version, as well as reduce India’s exposure to unjustified investment claims resulting from the previously ambiguous wording of a number of Model BIT provisions, such as culturally/environmentally motivated State measures and those adopted for the State’s security.
Unlike the 1993 Model BIT, which generally defined “investment,” the 2016 version had a more specific definition. It now emphasizes genuine and direct investments in an Indian-based company. This means that only investments with a significant presence and contribution to the economy are eligible for treaty protection, thereby eliminating “treaty shopping” and speculative claims. The amended BIT increases the criteria for qualifying a “investor.” It requires investors to execute “substantial business activities” in their home state, reducing the likelihood of shell businesses gaining protection. This ensures that only real investors with a strong economic ties to their home country are eligible for BIT protections.
One of the most noticeable changes to the amended Model BIT is the elimination of the FET clause. Instead, the treaty’s duties are more precise, such as prohibiting:
- Denial of justice in legal or administrative proceedings.
- Fundamental breach of due process.
- Clearly arbitrary treatment.
This modification reduces the ambiguity that typically accompanies FET allegations and the likelihood of investors disputing India’s regulatory actions.
The 2016 Model BIT requires foreign investors to exhaust all available local remedies in Indian courts for a minimum of five years before pursuing international arbitration. This clause strengthens the role of India’s courts in dispute resolution by allowing the state to address issues domestically before resorting to international arbitration.
Recognizing the importance of retaining regulatory autonomy, the amended Model BIT contains a robust carve-out provision. It permits India to control public-interest investments, such as health, environmental preservation, and security measures. This assures that India’s ability to carry out social welfare projects is unaffected by investment commitments.
This form of BIT imposes a set of restrictions on foreign investors, including compliance with host-state laws, adherence to corporate social responsibility (CSR) norms, and the prohibition of corruption and fraudulent behaviour. This revision makes the treaty more balanced, holding investors accountable for their conduct in the host country.
Focus on State-to-State Dispute Settlement (SSDS)
The Model BIT prioritizes State-to-State Dispute Settlement (SSDS) above ISDS. While ISDS remains a possibility, the regulations limit its use in order to reduce the number of arbitration proceedings filed against India.
Implications of India’s Revised Model BIT
The 2016 Model BIT represents India’s ambition of developing a balanced investment treaty framework, but it has important ramifications for both international investors and the Indian government.
Impact on Foreign Investors:
- Reduced Access to ISDS: The necessity to exhaust local remedies before proceeding to international arbitration may dissuade some investors, who see the system as time-consuming and costly.
- Regulatory Autonomy: Investors may see the carve-out clauses as restricting the breadth of protection against future regulatory changes.
- Fewer treaties in force: Following the implementation of the new Model BIT, India terminated or allowed certain old BITs to expire. This has caused investor uncertainty because many assets are no longer protected by treaty clauses.
Strengthening India’s Regulatory Framework
- Greater Policy Space: The Model BIT allows India more leeway to oversee investments that align with its development goals, without fear of investor lawsuit. This stage permits the government to pursue policies related to health, the environment, and taxation while keeping its sovereign power.
- Strengthening Domestic Legal Systems: The emphasis on pursuing local remedies demonstrates the government’s trust in India’s judicial system, encouraging investors to seek relief domestically.
Key Features of the Revised Model
- Enhanced Protection for Host States: The new model gives host countries more regulatory leeway, allowing them to take steps to safeguard public health, safety, and the environment. This is a shift from previous BITs, which typically provided considerable protection to foreign investors against such acts.
- Increased Transparency and Accountability: The revamped plan prioritizes transparency in investment dispute resolution processes. It includes opportunities for public engagement in certain situations, with the goal of increasing public confidence and transparency.
- Investing as a “enterprise”: It refers to a business formed, structured, and run in good faith by an investor in line with the country’s local regulations.
- Non-discriminatory treatment via due process: Each Party must provide complete safety and security for investments and investors.
- National treatment and expropriation safeguards: Neither party has the ability to nationalize or expropriate an investor’s investment, directly or indirectly.
- Focus on Sustainable Development: The idea combines sustainable development concepts to ensure that investments benefit both the host country’s economy and society.
- Dispute Resolution Mechanisms: While the new model includes provisions for ISDS, it also investigates alternative dispute resolution methods such as mediation and arbitration as a means of resolving disputes more efficiently and cost-effectively.
India’s Investment Treaty Regime and Negotiations
Since 1991, when India liberalized foreign investment, it has imposed 74 BITs. However, India was exposed to multiple investor-state litigation, the most significant of which being the White Industries case, in which the ISDS arbitration ordered India to pay $1.07 million in damages and costs. Between 2011 and 2015, India signed just one BIT with the United Arab Emirates (UAE) and one International Investment Agreement (IIA) with ASEAN. This shift happened with the introduction of the new Indian Model-BIT in 2015, which prioritized the host state’s regulatory capacities over the complete substantive safeguards for investors established in the old 2003 Model-BIT.[2]
Since 2016, just eight IIAs have challenged India’s unilateral termination of 77 BITs, however more than 68 states have urged the renegotiation of new BITs based on the Indian Model BIT. Under the new paradigm, India has signed just five BITs with Belarus, Taiwan, Kyrgyzstan, Brazil, and, most recently, the UAE. However, it released joint declarations with countries such as Bangladesh and Colombia to close interpretation gaps in previous BITs.
India’s host-state-centric approach to BITs raises worries about its continuing discussions with 37 other states on further BITs/IIAs. For example, European Union (EU) members are unwilling to consider BITs/IIAs until the EU Commission approves an India-EU agreement. Thus, while India-EU FTA talks have resumed, India’s desire to replace terminated BITs with new agreements based on the Indian Model-BIT has decreased. According to the Parliamentary Committee on External Affairs (CEA), India has encountered an unwelcome stumbling block in the form of onerous exchanges that impede future BITs.
Most recently, India signed the Comprehensive Economic Partnership Agreement (CEPA) with the UAE on May 1, 2022, the India-Australia Economic Cooperation and Trade Agreement (ECTA) with Australia on December 29, 2022, and the Indo-Pacific Economic Framework for Prosperity Agreement on Supply Chain Resilience on February 24, 2024. Other BIT/IIA conversations are now underway with 37 nations or blocks.
Conclusion
To save the taxpayer money, investment disputes should be handled as quickly as feasible by pre-arbitration discussions or conversations. The Model BIT 2016 should be revised and examined on an ongoing basis in light of BIT dispute experiences. Continuous incorporation of best practices and clauses from BITs adopted by advanced countries based on an examination of their implementation and results. Domestic legal competence must be developed through training for attorneys, firms, and government officials in order to prepare and represent BITs successfully in investment arbitration. India’s ongoing BIT negotiations reflect its attempts to establish a balanced investment system that protects international investors while also maintaining the country’s right to regulate in the public interest. The new Model BIT serves as a framework for these conversations, reflecting India’s cautious stance toward investment treaties. While significant challenges remain, particularly among wealthier countries, India’s active engagement in BIT negotiations reflects its commitment to building an investment climate that is both fair and conducive to sustainable development. As these conversations progress, India’s ability to find a balance between investor protection and policy flexibility will be crucial in developing its investment environment, and it may serve as a model for other countries wishing to reform their investment treaty systems. [3]
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[1] Report No. 260, Law Commission of India, examination of the 2015 Draft Model Indian Bilateral Investment Treaty, August 2015.
[2] https://www.orfonline.org/expert-speak/chasing-new-horizons-sunset-clauses-in-india-s-revamped-bit-regime.
[3] https://www.brookings.edu/wp-content/uploads/2018/08/India%E2%80%99s-Model-Bilateral-Investment-Treaty-2018.pdf.
