Reforming India’s BIT Regime

Context

The government of India is updating its 2015 Model Bilateral Investment Treaty (BIT) to become investor-friendly and increase foreign capital inflows. The framework of 2015 was very strict, because of the high cost of international arbitration cases such as Vodafone and Cairn, which slowed the trade pacts. The draft’s forthcoming section called attention to the importance of maintaining a democratic balance to sovereign regulatory space in the process of negotiating treaties.

Background and Context

• 2015 Model BIT Shift: Adopted after multiple Investor-State Dispute Settlement (ISDS) claims against India, prioritizing state regulatory power by mandating local remedies first.
• Budget 2025 Announcement: Finance Minister Nirmala Sitharaman announced plans to revamp the model during the Union Budget speech to encourage sustained foreign direct investment.
• Recent Progress: India inked new investment agreements with the UAE and Israel, reducing the time for litigation to three years from five.

Key Structural Challenges of the 2015 Model

• Exhaustion of Local Remedies (ELR): The 2015 framework required foreign investors to exhaust local remedies for five years before initiating international arbitration. This proved to be a sticking point for countries that export capital.
• Narrow Investment Definition: It was changed from an asset-based to an enterprise-based definition, which did not include aspects such as IP rights or pre-investment capital.
• Taxation Exclusions: It excluded taxation issues altogether, thereby limiting the protection of investors against retrospective tax changes.
• Consequence: India’s absolute attitude slowed up the pace of the ongoing mega Free Trade Agreement (FTA) talks with important economic groups such as the UK, the European Union (EU) and Canada.

Key Elements Under Revision

• Exhaustion of Local Remedies: The current mandatory five-year domestic litigation requirement before international arbitration is proposed to be cut down to two or three years.
• Expanding the scope of protection: Overcoming rigid limits on taxation and limiting the definition of investment to exclude the major capital exporters.
• Sovereign Safeguards: An approach that protects key public policy, security and tax areas on a list, with flexibility elsewhere.

Democratic Deficit and Institutional Concerns

• Executive Discretion: Treaties do not have to be laid before Parliament before they can be executed, but may be executed through executive discretion.
• No Formal Scrutiny: Stakeholder consultation is at the discretion of the legislature, and calls are being made for a new treaty-scrutiny statute to enhance the accountability of parliamentarians.
• Bargaining Asymmetries: During bilateral negotiations, bargaining partners with greater leverage often get themselves to bargain away clauses that restrict rights.

Way Forward

• Adopt a Treaty Scrutiny Statute: An institutional law which requires the executive to submit draft treaties for committee review in Parliament before they are formally ratified in the country should be adopted in India.
• Structured Stakeholder Consultations: Ensure that formalized institutional pathways for consultation with State governments, legal experts, industry bodies and civil society exist, since state legislation is frequently affected by BIT provisions.
• A strategic balancing act: India should fine-tune its “First Develop India” (FDI) policy to provide clear and transparent legal certainty for foreign companies, while ensuring that it maintains its sovereign powers to intervene for the public good.

Source: The Hindu

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