India’s Model BIT Reform: Balancing Investor Confidence with Regulatory Autonomy

Context

India is revisiting its 2015 Model Bilateral Investment Treaty (BIT), with the revised framework reportedly expected to be placed before the Union Cabinet. The exercise seeks to address concerns that the existing model gives extensive protection to the State’s regulatory authority but has not generated sufficient confidence among foreign investors or resulted in many new investment treaties.

What is a Bilateral Investment Treaty?

A Bilateral Investment Treaty is an agreement between two countries that lays down the legal framework for investments made by investors of one country in the territory of the other. It seeks to reduce investment-related uncertainty by providing safeguards against arbitrary government action.

Important protections generally include:

• Fair and Equitable Treatment – Provides investors with protection against arbitrary, discriminatory or unpredictable governmental conduct.
• Protection against Expropriation – Restricts nationalisation or seizure of investments unless undertaken for a legitimate public purpose, through due process and with appropriate compensation.
• Transfer of Funds – Enables investors to repatriate profits, dividends and invested capital, subject to treaty conditions.
• National Treatment – Seeks to ensure that foreign investors are not treated less favourably than comparable domestic investors.
• Dispute Settlement – Provides mechanisms through which treaty-based investment disputes can be resolved, including international arbitration in applicable cases.

India’s Approach to Investment Treaties

India’s 2015 Model BIT emerged against the backdrop of several high-profile investor-state disputes. The experience of cases involving companies such as Vodafone, Cairn Energy and White Industries contributed to India’s preference for a more cautious treaty framework.

The model attempted to preserve considerable policy space for the government while offering a defined set of protections to foreign investors. India subsequently sought to use this framework while renegotiating or replacing older investment treaties.

However, the model has produced relatively limited results in terms of concluding new agreements with major investment partners. India has therefore been considering whether its treaty architecture requires greater flexibility.

India has nevertheless entered into newer investment arrangements with countries including Uzbekistan, Brazil, Kyrgyzstan, the UAE and Israel. These agreements also indicate that India has been experimenting with provisions that differ from the original 2015 template.

Major Features of the 2015 Model BIT

The Indian model differs from many conventional investment treaties in several important respects:

• Enterprise-oriented investment definition – Protection is concentrated largely on investments associated with an established enterprise rather than covering every form of financial asset.
• Local-remedy requirement – Investors are generally expected to pursue remedies through Indian courts before initiating international arbitration.
• Limited MFN protection – The model does not contain a conventional Most-Favoured-Nation clause, reducing the possibility of investors importing favourable provisions from India’s other treaties.
• Restricted FET protection – Fair and Equitable Treatment is not framed as an unrestricted and broad investor guarantee.
• Taxation exclusion – Tax-related measures are largely kept outside the investment dispute mechanism.
• National Treatment – Foreign investors receive protection against discriminatory treatment, subject to specified exceptions.
• Greater regulatory space – The framework expressly seeks to preserve the government’s ability to legislate and regulate in areas of public interest.

Concerns Surrounding the Existing Framework

The 2015 model was designed to prevent excessive challenges to sovereign policy decisions, but several of its provisions have also become sources of concern for investors.

Long Route to International Arbitration

The requirement to pursue domestic remedies before approaching international arbitration can substantially increase the time and cost involved in resolving investment disputes. The original framework provided for a lengthy period, while newer treaty negotiations have considered shorter periods, including proposals around two years.

Limited Investor Safeguards

The absence of an MFN clause and the narrower formulation of FET reduce the range of protections available to investors. From an investor perspective, this can make India appear comparatively riskier than jurisdictions offering broader treaty safeguards.

Narrow Investment Coverage

The model does not provide comprehensive protection to several categories of assets, including certain portfolio investments, government debt instruments and some intangible interests. This can limit the treaty’s relevance for modern forms of international investment.

Tax Disputes

Keeping taxation outside investment arbitration strengthens India’s ability to pursue independent tax policy. At the same time, uncertainty surrounding tax-related treatment can create concerns for multinational companies when assessing long-term investment decisions.

Enforcement and Institutional Issues

India is not a member of the International Centre for Settlement of Investment Disputes (ICSID). This does not prevent India from participating in international arbitration, but it can affect the institutional route available for resolving and enforcing investment disputes.

Limited Treaty Traction

One of the strongest arguments for reform is the limited adoption of the 2015 model. A treaty framework that offers extensive protection to government policy space but struggles to secure agreements with major capital-exporting economies may require recalibration.

Why Reform is Important?

The central challenge is to move beyond the earlier binary choice between investor protection and sovereign regulatory authority.

India needs investment treaties that can:

• provide credible safeguards against arbitrary state action;
• maintain the government’s ability to regulate for public welfare;
• reduce unnecessary procedural delays;
• offer clearer standards for investor protection;
• facilitate predictable dispute resolution;
• encourage long-term foreign investment;
• incorporate investment facilitation alongside investment protection.

Such reforms are particularly important as India seeks greater foreign capital for manufacturing, infrastructure, technology, energy transition and other sectors associated with economic transformation.

Making the Revision Process More Inclusive

The legitimacy and effectiveness of the revised model would depend not only on its provisions but also on how it is drafted.

India could adopt a wider consultation mechanism by:

• establishing an independent expert group involving international investment lawyers, economists, academics and researchers;
• engaging industry bodies, arbitrators, legal practitioners and civil society organisations;
• releasing the proposed Model BIT for public consultation;
• making responses and major concerns received during consultation transparent;
• placing the framework before Parliament and relevant committees for wider scrutiny.

India followed a consultative exercise while preparing the earlier model, including public comments and subsequent examination by the Law Commission. The Law Commission’s 260th Report made several recommendations, although not all were incorporated into the final framework. A fresh review provides an opportunity to revisit these recommendations in light of developments in international investment law.

Way Forward

India should adopt a balanced and evidence-based treaty framework rather than simply moving towards either greater investor protection or greater state control.

The revised model could introduce clearer investment definitions, reasonable timelines for domestic remedies, predictable standards of treatment and more effective dispute-resolution mechanisms while retaining safeguards for legitimate public-interest regulation.

At the same time, treaty negotiations should remain flexible enough to reflect the economic relationship and investment profile of individual partner countries. Greater transparency, stakeholder participation and parliamentary scrutiny can further improve confidence in the process.

Conclusion

Revising the Model BIT offers India an opportunity to correct the limitations of the 2015 framework without compromising its sovereign policy space. The objective should be a credible middle path—one that protects genuine investments, discourages frivolous claims and gives the government adequate room to pursue legitimate public policies. A transparent and participatory revision process would make the new framework not only more effective in attracting investment but also more institutionally legitimate.

Source : The Hindu