Revising India’s Bilateral Investment Treaty (BIT)

UPSC Syllabus: Gs Paper 2- Indian economy

Introduction

India is reviewing its Model Bilateral Investment Treaty (BIT) to make the investment regime more attractive while protecting its regulatory space. The review follows difficulties in concluding new BITs, concerns over investor protection and declining net foreign direct investment (FDI). The revised framework is expected to be placed before the Union Cabinet, with consultations currently underway.

What is India’s BIT Framework?

1. Purpose of BITs: BITs are agreements between two countries that establish rules for protecting investments and defining the rights of foreign investors.
2. Core protections: BITs cover non-discrimination, expropriation, Fair and Equitable Treatment (FET), fund transfers and Investor-State Dispute Settlement (ISDS).
3. 2015 Model BIT: India adopted the 2015 Model BIT after reviewing its investment treaty policy following disputes raised by foreign investors.
4. Shift in treaty policy: The review resulted in unilateral termination of BITs and adoption of a new model as the basis for future treaty negotiations.
5. Regulatory objective: India’s model seeks to protect its right to regulate, including through exclusions and safeguards in sensitive policy areas.

Limitations of India’s Existing BIT Framework

1. Regulatory imbalance: The 2015 Model BIT places greater weight on the State’s right to regulate, creating doubts about legal protection available to foreign investors.
2. Limited treaty adoption: India concluded only a handful of BITs under the stricter framework, including agreements with Belarus, Kyrgyzstan, Brazil, Taiwan and Uzbekistan, showing limited acceptance by investment partners.
3. Investment uncertainty: High regulatory risks, less-developed governance models and a slow judicial system increase concerns about the investment environment.
4. Restricted arbitration access: Foreign investors must exhaust domestic legal remedies for five years before seeking international arbitration for treaty disputes.

Why is India Reconsidering Its BIT Framework?

1. Need for a competitive regime: India wants a more predictable and competitive investment framework that can provide greater certainty to foreign investors.
2. Declining net FDI: Average annual net FDI fell from nearly US$40 billion in FY20-FY22 to around US$7.65 billion in FY26; India received $7.7 billion in the year ended March 2026, against $20.2 billion for Vietnam and $24.2 billion for Indonesia in 2024.
3. Recent treaty experience: BITs with Israel and the UAE show greater flexibility in some areas, including dispute-resolution arrangements and investment coverage, while retaining important safeguards.
4. Changing purpose of BITs: Indian companies are increasingly investing abroad, making investment treaties relevant not only for inbound foreign investment but also for protecting Indian investors overseas.
5. International developments: The European Union (EU) has moved towards an Investment Court System while retaining non-discrimination protections, showing changes in global investment-treaty practice.

Proposed Reforms to India’s BIT Framework

1. Qualified MFN: India may introduce a qualified MFN clause that applies only to clearly specified treaty provisions instead of allowing investors to import protections broadly from other treaties.
2. MFN safeguards: The provision could define its treatment of retrospective claims, settled disputes and covered categories, reducing the scope for wider MFN-based claims.
3. Shorter ISDS period: The domestic-remedies requirement could be reduced from five years to one year, allowing unresolved disputes to move towards international arbitration sooner.
4. Longer post-treaty protection: Protection after a BIT expires could increase from five years to 10 years, extending treaty protection for covered investments.
5. Wider investment coverage: The revised framework could include portfolio investments and other financial assets, including certain shares and minority holdings, depending on the final wording.
6. Ban on third-party funding: Third-party funding of investment disputes could be prohibited to provide an additional safeguard in the dispute-resolution process.
7. Retained safeguards: India would continue excluding open-ended MFN and full FET protection, so the proposed changes would not restore the earlier broad treaty approach.

Way Forward

1. Strike a balanced approach: Bring the framework closer to the middle ground between investor protection and the State’s regulatory autonomy.
2. Strengthen domestic dispute resolution: A shorter domestic-remedies period makes efficient domestic institutions even more important.
3. Create an external expert group: Include experts in international investment law and foreign investment, such as international lawyers and economists from universities, research institutions and think tanks, to act as a sounding board for the government.
4. Ensure wider stakeholder consultation: Seek views from industry bodies, arbitrators, law firms and civil society organisations.
5. Release the draft for public consultation: Place the revised Model BIT in the public domain and invite comments, as India did with the draft Model BIT in March 2015.
6. Ensure parliamentary scrutiny: Place the draft before Parliament for discussion and involve relevant department-related parliamentary committees.
7. Address the democratic deficit: Since investment treaties can affect citizens, greater public and parliamentary participation can improve democratic legitimacy.
8. Make consultation meaningful: The process should not become a mere box-ticking exercise; it should genuinely engage with different and dissenting views.

Conclusion

India’s revised BIT framework should balance investor protection with the State’s regulatory autonomy. A carefully limited MFN clause, faster dispute resolution and wider investment coverage can improve investor certainty and competitiveness. Strong safeguards can preserve policy space. Meaningful consultation and parliamentary scrutiny can further strengthen the framework’s credibility, transparency and effectiveness.

Question for practice:

Discuss the need for revising India’s Bilateral Investment Treaty (BIT) framework and the key reforms proposed for balancing investor protection with the State’s regulatory autonomy.

Source: The Hindu