Bilateral Investment Treaty: Challenges & Need for Reformation

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Recently, CEA V. Anantha Nageswaran, addressing the Post-Budget Webinar 2025, announced that India is revising its model Bilateral Investment Treaty (BIT) to be more attuned to modern global investment demands while safeguarding sovereign regulatory autonomy. This move follows FM Nirmala Sitharaman’s commitment to make BITs more investor-friendly under the “First Develop India” vision.

About Bilateral Investment Treaty (BITs)

Bilateral Investment Treaties (BITs) are agreements between two sovereign nations to promote and protect private cross-border investments by ensuring fair treatment and safeguarding investor rights.
BITs provide protections against expropriation and offer access to impartial dispute resolution mechanisms to boost investor confidence.

India’s BIT Journey: From 1993 to Present

Model BIT 1993 (Legacy Framework)

India’s first Model BIT, adopted in 1993, established agreements with 83 countries, with 74 remaining in force by 2015, fostering a liberal, investor-friendly environment.
However, it did not sufficiently protect India’s regulatory autonomy, leading to multiple international arbitration cases against the nation.

Model BIT 2016 (Revised Framework)

In 2016, India introduced a revised Model Bilateral Investment Treaty (BIT) to address rising legal vulnerabilities, which was approved in late 2015.
This revised BIT requires exhaustion of local remedies before resorting to international arbitration & safeguards India’s sovereign regulatory authority in areas such as health, environment, & public order.

Need for a Modernised BIT Framework

Attracting Sustainable FDI: India secured $70.9 billion in FDI during FY23. A reformed BIT could further enhance growth, supporting India’s $5 trillion economy goal.
Safeguarding Indian Outbound Investments: With $236 billion in outbound investments, a strong BIT is essential for safeguarding Indian businesses globally.
Minimising Costly Arbitration: India has faced over 25 Investor-State Dispute Settlement (ISDS) cases. A revised BIT can minimise disputes by clarifying investor rights and state obligations.
Restoring Treaty Network Credibility: Terminating 58 BITs has led to gaps. A new BIT will reestablish consistency and improve India’s global standing.
Balancing Investor Rights and Sovereignty: The BIT model of 2015 was excessively restrictive. A new model should protect investor rights while maintaining India’s regulatory autonomy.

Challenges in India’s Current BIT Architecture

Ambiguity in Key Terms: Terms like “investment” & “customary international law” are vague, causing frequent disputes. India has received 37 dispute notices, with 8 still active at various arbitration stages.
Delays Due to Local Remedy Exhaustion: Mandatory exhaustion of local remedies causes delays, especially with India’s overburdened judiciary, leading to uncertainties & discouraging foreign investment.
Unclear ISDS Jurisdiction: ISDS tribunals are barred from reviewing the “merits” of domestic court decisions, but the term “merits” remains undefined, creating ambiguities and inconsistent rulings.
Limited Investor Protections: Excluding MFN and FET provisions and tax-related exclusions weakens foreign investor protections and undermines investor confidence.
Compensation Limits: ISDS tribunals are restricted to awarding only monetary compensation, not policy changes, limiting the scope and effectiveness of dispute resolution.
Non-Membership in ICSID: India’s non-membership in ICSID restricts options for enforcing international arbitration awards within the country, further discouraging investment.

Way Forward

Adopt a Flexible, Tiered BIT Model: Replace uniform templates with differentiated ones tailored to partner countries’ development status and investment roles for better strategic alignment..
Clarify Legal Language and Limit Arbitral Overreach: Define terms such as ‘investment,” “CIL,” and “merits” (e.g., India–UAE BIT); shorten dispute resolution waiting periods; allow early investor choice between domestic or international forums.
Balance Investor Protection with Sovereignty: Reintroduce MFN and FET safeguards to prevent treaty shopping and arbitrary claims, while maintaining regulatory flexibility in sensitive areas like health, environment, and taxation.
Strengthen Dispute Resolution and Legal Infrastructure: Promote cost-effective solutions like mediation and regional forums; enhance domestic capacity through the NDIAC and skilled legal professionals.
Enable Regular Review and Global Integration: Establish stakeholder-driven treaty reviews and consider joining the ICSID Convention to boost enforcement credibility and investor confidence.

India’s evolving BIT framework must strike a balance between attracting quality FDI and protecting sovereign policy space. A clear, flexible, and investor-friendly treaty model will enhance legal certainty, reduce disputes, and support India’s global economic ambitions.

Reference: The Hindu

PMF IAS Pathfinder for Mains – Question 167

Q. India’s BITs must evolve to reflect changing global investment dynamics. Discuss the need for reform in India’s BIT policy in light of recent investor-state disputes. (150 words) (10 Marks)

Approach

Introduction: Begin by defining BITs & highlighting the recent decline in FDI inflows & surge in disputes.
Body: Discuss the challenges in India’s current BIT policy with examples of recent investor-state disputes.
Conclusion: Write measures to be taken and emphasise the need for a balanced, modern BIT regime.