Bilateral Investment Treaty (BIT)

Posted 16 Apr 2025

Updated 22 Apr 2025

4 min read

Why in the News?

An announcement was made in the Union Budget 2025 regarding the revision of the model Bilateral Investment Treaty (BIT) text to make it more investor-friendly.

About Bilateral Investment Treaties (BITs)

Also referred to as International Investment Agreements (IIAs), they are a tool for providing assurance to foreign investors against measures that may adversely impact their investments while assuring state's sovereign right to regulate.
Concept: They provide rights to investors (through the investor-state dispute settlement) or to home states like investing state like US (through state-state dispute settlement), to bring a claim against a host state (receiving foreign investment, e.g., India).
India approved new Model BIT Text in 2015, which replaced Indian Model BIT, 1993.
- Since then, Model text 2015 is used for (re)negotiations of BITs and investment chapters of Comprehensive Economic Cooperation Agreements (CECAs)/ Comprehensive Economic Partnership Agreements (CEPAs) / Free Trade Agreements (FTAs).
Recent countries with which BITs were signed: Uzbekistan (2024), UAE (2024)

Key Features of Model BIT 2015

"Enterprise" based definition of investment: It means an enterprise that has been constituted, organised, and operated in good faith by an investor in accordance with the domestic laws of the country
Non-discriminatory treatment through due process: Each Party shall accord full protection and security to the investments and investors.
National Treatment: Treating foreign investors at par with domestic companies.
Protection from expropriation: Limits country's ability to dominate foreign investments in its territory.
Exclusion of matters to preserve the regulatory authority: Such as government procurement, taxation, subsidies, compulsory licenses and national security.
Investor State Dispute Settlement (ISDS) mechanism: A foreign investor should first exhaust local remedies at least for a period of 5 years before going for ISDS mechanism.

Know the term explaining the terms Most Favoured Nation and Fair and Equitable treatment.

Issues with India's present BIT Architecture

Ambiguity: It lacks clarity in terms such as "investment," "customary international law (CIL)" etc. leading to disputes and challenges in treaty interpretation by ISDS tribunal.
- E.g., India has received 37 notices of dispute, with 8 still active at various arbitration stages. (Committee on External Affairs (2021-22))
Mandatory waiting period to exhaust local remedies: Given India's overburdened judiciary, this requirement could delay dispute resolution and increase legal uncertainties for investors.
Restrictions on the jurisdiction of ISDS tribunals: They are barred from reviewing the "merits" of a decision made by the domestic court without defining what "merits" means.
Limited rights to foreign investors: Due to following issues in model BIT -
- Exclusion of Most Favoured Nation (MFN) provision and the Fair and Equitable Treatment (FET) standard.
- Exclusion of tax-related regulatory measures reduces investor confidence.
- Tribunals cannot mandate policy changes, restricting awards to monetary compensation.
Exclusion from ICSID Convention: India is not a member of International Centre for Settlement of Investment Disputes (ICSID), which limits options for investors seeking enforcement within India.
- ICSID, established in 1966 by the ICSID Convention, is a World Bank institution that provides facilities for conciliation and arbitration of investment disputes between contracting states and nationals of other contracting states.

Way forward

Providing greater clarity of terminologies for states and investors and curbs arbitral discretion.
- E.g., India-UAE BIT specifically lists when state action will amount to a treaty violation instead of linking it to terms like customary international law (CIL).
Eliminating/Reducing mandatory waiting period and allowing investors to choose between domestic courts or international arbitration upfront.
Including MFN provision with appropriate qualifications to prevent "treaty shopping" while ensuring non-discrimination.
- Treaty shopping typically involves the attempt to indirectly access the benefits of a tax treaty between two jurisdictions by a person who is not a resident of one of those jurisdictions, often through complex structures and arrangements.
Adopting a narrowly defined FET provision, similar to that in the European Union's new-generation investment treaties, to better balance investor and state rights by outlawing arbitrary state behaviour.
Becoming a signatory to the ICSID Convention to enhance investor confidence by providing a globally recognized enforcement mechanism.
Removing the blanket exclusion of tax measures, while allowing ISDS tribunals to review abusive or discriminatory tax actions while deferring to national authorities on policy matters.
Developing Domestic architecture in Investment Arbitration to reduce reliance on foreign legal firms and control arbitration costs.
- Promote and develop the New Delhi International Arbitration Centre (NDIAC) to make India a global hub for investment arbitration.
- Create a pool of domestic lawyers and law firms specialized in international investment arbitration.