A model BIT?

More than 10 years ago, India unveiled a Bilateral Investment Treaties (BITs) framework that governs investment pacts with about 20 countries. Economists have been critical of this investment treaty framework of late, saying it is outdated and hurting the country’s ability to attract foreign capital. The Modi government is now set to roll out a new one, believing that it will boost the flagging FDI inflows. The new BITs framework is awaiting Cabinet approval, replacing the old one.

The push to overhaul India’s BIT regime comes at a time when the framework has drawn public attention. Besides, the revamp is unfolding against a backdrop of heightened geopolitical uncertainty, with the government keen to position India as a stable, predictable destination for foreign capital even as global trade and investment flows face disruption from tariff actions and shifting supply chains.

A BIT is an agreement between two countries, which spells out the rules governing private investment in either nation from companies in the other. As such, they help promote, protect and provide clarity to foreign investments. The instrument provides legal safeguards and, where disputes cannot be resolved locally, access to independent arbitration.

The 2016 model has come under fire from various quarters, particularly because it mandated that domestic legal processes be pursued for five years to resolve disputes before international arbitration is sought. This clause, which did not exist prior to the 2016 model BIT, was seen as a hurdle for foreign investors.

This period may not be reduced to two years. Already, the government has shown a willingness to reduce the length of time for which local remedies must be pursued before international arbitration is sought. For instance, the BIT signed with the UAE in 2024 mandated that local legal remedies be pursued for three years, lower than the five years in the 2016 model BIT.

Above global norms

But some experts believe that even the proposed two-year window is far above global norms. They cited Indonesia’s model – which scrapped its old BITs in 2014 and restarted with a 12-month cooling period, a three-judge panel and a presiding judge agreed upon by both parties, who cannot be a national of either country.

The first 1993 model of BITs allowed foreign investors to go directly to international arbitration without exhausting domestic remedies first. A turning point came when global companies like Vodafone and Cairn Energy filed international arbitration cases against India in tax disputes – and won. These cases exposed India to significant financial liability and raised concerns about regulatory sovereignty.

India responded by overhauling its BIT framework. The 2016 BIT model introduced a major change: foreign investors must now exhaust all domestic remedies before initiating international arbitration. 

Of the 74 ratified BITs, India issued termination notices to 68 countries and asked them to renegotiate based on the 2016 model. The new model will not have a most favoured nation (MFN) clause. The MFN clause in investment treaties requires a country to extend to the treaty partner whatever favourable treatment it gives to any third country. If India signs a more liberal BIT with Country B, Country A can use the MFN clause to claim the same benefits.

Removing MFN gives India flexibility to negotiate different terms with different countries, based on the nature of bilateral engagement – without being locked into automatic extension of better terms across all treaties. “We will be finalising many bilateral investment treaties soon,” a source in the finance ministry said, confirming the development. “We have told teams to expedite BITs with many countries and have also asked them to revive negotiations.” Discussions are ongoing with Canada, the UAE, Qatar and Oman and the government expects to sign BITs with these countries once the new framework is in place.

The new framework will keep taxation out of its ambit – and this will be a red line similar to the one incorporated into the 2016 model. The government’s reluctance to bring tax matters under BITs stems from a longstanding worry: doing so opens the door to international arbitration over sovereign tax decisions.

“It is the government’s prerogative to deal with tax matters,” affirmed a senior official of the finance ministry. “There are a couple of red lines that we will not touch under the new BIT framework”.

But can the new BITs turn the tide for our flagging FDI? V Anantha Nageswaran, Chief Economic Adviser, has responded to this debate by pointing out that academic research shows weak or no relationship between individual BIT signings and FDI inflows. What matters is the cumulative stock of treaties – which signals an overall regime of investor protection. He also acknowledged that the investment climate needs continuous improvement. Wise words. But is anybody hearing?