India’s Model BIT — a decade later, amid changes

A Bilateral Investment Treaty (BIT) is an agreement between two countries setting the terms and conditions for private investment by nationals and companies of one country in the other. It is designed to encourage Foreign Direct Investment (FDI) by providing a stable and predictable regulatory environment. The 2015 Model Bilateral Investment Treaty was formulated after a series of adverse Investor-State Dispute Settlement (ISDS) awards against India, most notably the White Industries vs Republic of India (2011) case, which led to significant financial liabilities for the state. Consequently, the 2015 model adopted a defensive posture, narrowing the definition of 'investment' from an asset-based approach to an enterprise-based approach (requiring the investment to have characteristics of an enterprise, like capital commitment and risk). It also introduced a mandatory requirement to exhaust local judicial and administrative remedies for at least five years before initiating international arbitration. The current revamp is crucial as India seeks to attract higher FDI to fuel its economic growth, requiring a delicate balance between reassuring foreign investors through robust protections and preserving the state's regulatory space (the government's ability to enact laws for public interest, health, and environment without facing exorbitant compensation claims from foreign investors). The evolution seen in recent treaties, such as reducing the local remedies exhaustion period to three years (as in the India-UAE BIT and India-Israel BIA), indicates a shift towards a more pragmatic approach to attract capital.

The evolution of India's BIT framework mirrors broader shifts in international economic law. The global trend, as highlighted by bodies like UNCTAD and UNCITRAL, is moving away from traditional, highly protective ISDS mechanisms that often favoured investors at the expense of state sovereignty. Modern treaty practices increasingly focus on investment facilitation, sustainable development, and precisely defined investor protections to prevent frivolous claims. A critical aspect of BIT negotiations is the Most Favoured Nation (MFN) clause, which ensures that investors from a treaty partner receive treatment no less favourable than that granted to investors from any third country. India's 2015 model notably excluded the MFN clause to prevent the 'importation' of more favourable provisions from other treaties, a tactic used by investors in past disputes (e.g., Maffezini vs Spain). If reinstated in the new model, its scope must be explicitly defined, particularly to exclude dispute settlement procedures, to prevent 'treaty shopping'. Furthermore, the incorporation of investor obligations (such as compliance with environmental and labour standards) and the state's right to assert counterclaims against investors (seen in the India-Uzbekistan BIT) represents a shift towards a more equitable and reciprocal investment regime, aligning with India's stance as a 'rule-shaper' rather than just a 'rule-taker' in international law.

From a governance perspective, a BIT directly intersects with the state's sovereign right to regulate. Substantive protections offered in a BIT, such as protection against expropriation (the state taking private property for public use) and the guarantee of Fair and Equitable Treatment (FET), must be carefully drafted to avoid overly broad interpretations by international tribunals. Ambiguous wording can lead to 'regulatory chill', where governments hesitate to enact necessary public interest laws (e.g., environmental regulations or public health measures) due to the fear of multi-billion dollar arbitration claims. The 2015 model sought to address this by explicitly listing regulatory measures that do not constitute expropriation (e.g., non-discriminatory measures for public interest). The revised model must ensure that concepts like sustainable development are translated into legally binding terms, not just policy declarations. This requires precise legal drafting to safeguard the constitutional mandate to regulate for the public good, while still providing a predictable legal framework that satisfies the legitimate expectations of foreign investors. The ongoing reforms at UNCITRAL Working Group III regarding ISDS, which India is engaged in, highlight the need for a balanced governance framework that promotes investment while maintaining accountability and state sovereignty.