India’s Model BIT: A Decade Later, Amid Changes

Why in news?

Revised Model Bilateral Investment Treaty awaits Cabinet approval; experts urge lessons from a decade of India’s treaty experience.

UPSC Relevance

Mains GS-III: Indian economy and issues of mobilisation of resources; investment models; FDI and its role in growth, infrastructure and employment.

What is a Bilateral Investment Treaty?

A BIT is an agreement between two countries to protect and encourage investments made by investors of one country in the other. It is a promise from the host state: you will not be treated unfairly, your property will not be taken without compensation, and if there is a dispute you can go to a neutral forum.

• Usual protections: national treatment, fair and equitable treatment (FET), protection against expropriation, free transfer of funds and access to arbitration.

Features of the 2015 Model BIT 

• Narrow definition of investment: It gave an enterprise-based definition. Portfolio investment and pure financial instruments were left out.
• Carve-outs: Taxation, government procurement, subsidies, compulsory licences under IPR rules and some national security matters were kept outside the treaty.
• No MFN clause: an investor could not claim better terms given to investors of a third country under the Most Favoured Nation clause.
• Exhaust local remedies: the investor had to go through Indian courts and administrative bodies for at least five years before starting treaty arbitration.
• Limited tribunal powers: a tribunal could not review the merits of a decision by Indian courts, and its remedy was mainly monetary compensation.
• Right to regulate: the state’s power to act for public health, environment and welfare was clearly protected.
• Investor duties: anti-corruption, truthful disclosure and legal compliance were written as obligations of the investors. 

Why a revision ?

Budget 2025–26: announced that the Model BIT would be revamped and made more investor-friendly.

• Present model BIT is hostile to investors: Critics said the model went too far in protecting the state. Investors and capital-exporting partners found it hard to accept. Several negotiations, including with the UK and EU, stalled partly for this reason.
• Investment need: India wants large capital for Viksit Bharat 2047. Gross FDI inflows are high, but net FDI has dropped sharply in recent years because of repatriation and Indian firms investing abroad.
• Trade deals: India is now signing wide trade and investment agreements (EFTA TEPA, UAE CEPA, UK CETA). Investors want a clear investment protection framework to go with them.
• Recent Investment treaties show a more flexible approach that needs to be standardised.
  • India–UAE BIT (2024): local remedies period cut to three years (from five).
  • India–Uzbekistan BIT (2024): allows a state to bring a counterclaim against an investor or investment.
  • India–Israel BIA (in force July 2026): also provides a three-year local remedies period.
  • The new model should reflect this flexibility.
• India as a capital exporter too: Indian companies invest abroad in a big way. A balanced treaty protects them as well.
• Experience of a decade: India has actually used new-generation BITs since 2015 and can see what works.

The core debate: protection or policy space?

Argument for stronger investor protection

• Predictable rules attract long-term capital and technology.
• It signals that India is a reliable destination after the retrospective tax episode.
• Protection helps Indian investors abroad, and supports trade deals.

Argument for retaining policy space

• Broad clauses (FET- fair and equitable treatment, MFN, indirect expropriation) were used by tribunals to challenge regulation in public interest, as the Indian cases showed.
• Arbitration is costly and the tribunals are seen as lacking accountability. Many countries, such as South Africa, Indonesia and some EU states, have exited or rewritten treaties.
• Developing states need room for health, environment and welfare policy.

Way ahead

• Clear text: define FET, expropriation and MFN scope tightly.
• Better local remedies: fix delays at home. Faster commercial courts and quicker contract enforcement reduce the need for arbitration (and improve Ease of Doing Business).
• Dispute prevention: set up a grievance and mediation mechanism so that problems are solved before they become claims.
• Two-way obligations: investor duties and counterclaim rights, as in the Uzbekistan BIT.
• Follow global reform: keep the text open to a future appellate mechanism under UNCITRAL.
• Consultation: involve states, industry and legal experts before Cabinet finalises the text.

Investors need certainty, and the state needs room to govern. A good treaty has to give both.

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