Revamping India's Model Bilateral Investment Treaty (BIT)
The announcement by Union Finance Minister Nirmala Sitharaman regarding the revamp of the model Bilateral Investment Treaty (BIT) aims to improve India's unfavorable foreign direct investment (FDI) climate.
Background and Issues with the 2016 Model BIT
- The 2016 model BIT was developed after several adverse rulings against the Indian government, such as in the cases involving Vodafone and Cairn Energy.
- Consequently, India terminated BITs with approximately 75 countries between 2016 and 2021.
- The 2016 BIT aimed to protect foreign investors but primarily shielded the Indian government from international arbitration risks.
- Key omissions and limitations in the 2016 model BIT include:
- Absence of “most favoured nation” and “fair and equitable treatment” doctrines.
- Narrowed definition of investment from asset-based to “enterprise”.
- Exclusion of tax issues and granting the state wide discretion over such disputes.
- Requirement for investors to exhaust all domestic legal remedies for five years before arbitration, discouraging investment.
- This requirement also poses challenges for Indian companies investing overseas.
New Developments and Agreements
- Since 2016, India has entered into new BITs with countries like the UAE, Belarus, Taiwan, Brazil, and Kyrgyzstan.
- Recent agreements show deviations from the 2016 model BIT:
- The agreement with Brazil excludes the local remedies clause.
- The UAE agreement includes portfolio investment.
- Some agreements have reduced the time frame for exhausting legal remedies.
Future Directions
Revamping the model BIT requires shifting from a control-oriented approach to one that facilitates foreign investment, ensuring India remains attractive for FDI amid global economic changes.