Govt. to consider redrafting Model BITs to boost FDI inflow

India’s Model Bilateral Investment Treaties (BITs) 2015 was aimed at offering a framework to negotiate individual agreements with other nations while protecting India’s national interests. However, it yielded only limited success in negotiating new BITs.

Foreign investors are reluctant as they see various risks in the new model. The resultant deceleration in FDI inflow has prompted the Government of India (GOI) to re-evaluate the model. 

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As the Indian economy opened up in 1991, the country entered into Bilateral Investment Treaties (BITs) with other countries. The BITs were aimed at boosting investors’ confidence and increasing foreign investment in the country.

Bilateral Investment Treaties (BITs) essentially refer to the terms and conditions for private investments made by individuals and business entities of one sovereign country, in another sovereign nation. BITs are usually negotiated as part of a larger trade agreement between two countries. They offer certain guarantees to investors from a country. These include fair and equitable treatment, protection from expropriation, and the free transfer of funds. They also provide investors the option to arbitration, under the aegis of the International Centre for Settlement of Investment Disputes (ICSID), in case of any dispute with the host country.

The Bilateral Investment Treaties (BITs) by India were negotiated on the basis of the Indian Model BIT 1993, and India signed its first BIT in 1994 with the United Kingdom.

Model BITs- 2015

By 2015, India had signed BITs with 83 countries. The BITs with other nations had succeeded in attracting a steady flow of foreign direct investment (FDI) in India. Of the 83 BITs that India had signed till 2015, 74 were implemented.

Though FDI inflows increased from US$97 million in 1990-91 to US$ 70.97 billion in FY 22-23, the government of India felt that these treaties were turning out to be ‘unsatisfactory’.  The reason was, that although these BITs granted rights to foreign investors and imposed responsibilities on the states, they stated nothing regarding the obligations of the foreign investors.

It was also felt that the reputation and position of India as an investment destination was getting adversely impacted. There were some cases of international disputes over the claims where multinationals had pulled India to the international courts of arbitration. 

For instance, the cases filed by Vodafone and Cairn Energy over the government’s decision to enforce retrospective taxation. Such events went on to hurt investor sentiment about India in the international arena. Devas, had sued India in an international court and won the case. According to the United Nations Conference on Trade and Development (UNCTAD) by 2015, about 17 investor-state dispute settlement (ISDS) cases had been filed against India.

In view of such challenges, the Government of India decided to revise the BITs model, which was amended in 2003. The model was revised in December 2015. Of the 74 implemented BITs, India has unilaterally suspended BITs with 68 countries/regions. India requested these countries to re-negotiate BITs, based on the Model BIT 2015. (Six BITs are still in force).

The new model envisaged the dual objectives:

• First, to give appropriate protection to foreign investors in India while maintaining a balance between investors’ rights and the government’s obligations; and 
• Second, terminating the old BITs where initial duration had concluded, or issuance of joint interpretative notes/statements for renegotiation on the basis of the Model BIT where the BIT’s initial term was valid.

The new Model BIT (2015) is significantly different from the earlier model BITS (1993). 

It adequately secures India’s sovereign investment rights. It provides for the setting up of an arbitral tribunal. This tribunal is to be governed by the United Nations Commission on International Trade Law (UNCITRAL). As per the new BITS model, the arbitral tribunal will be constituted only when all the domestic remedies are exhausted. It also prohibits the arbitral tribunal from reviewing those judicial matters that have already been decided.

The new model of BITs also states that India or any other country cannot nationalise or expropriate any asset of a foreign company unless the law is followed, it is done for a public purpose, and fair compensation is paid. 

Though the term ‘Public purpose’ has not been defined in any treaty that India has signed with other countries, the new model ensures foreign entities that dispute-resolution tribunals including foreign tribunals can question ‘public purpose’ and re-examine a legal issue settled by Indian judicial bodies.

Here it also needs to be noted that model BITs 2015 has re-defined the term ‘investments’, which is ‘enterprise-based’.

New model BITs have raised diverging views while inhibiting FDI inflows

India feels that it is important to curb litigations and mitigate events of enormous penalties from international tribunals. Although in the view of investing countries the Indian legal system is not only corrupt but also slow. As such there is hardly any taker for the new model BITs 2015 from major foreign investors.

The foreign investors have raised certain other concerns like-

• The Model BIT has not reconciled the interests of foreign investors with the state’s right to regulate. 
• It contains a narrow definition of investment
• It has excluded the Most Favoured Nation (MFN) clause
• It also excludes taxation measures from the purview of the BIT
• The expropriation provision in the Model BIT has rendered the line between lawful and unlawful expropriation unclear
• The new model provides for a complicated and sequential Investor-State Dispute Settlement (ISDS), that makes it difficult for a foreign investor to use it effectively.
• The model BITs law also does not mention time-bound deadlines for finalising negotiations with various countries.

Major investing countries especially the European Union, United States and Japan have raised concerns, especially over the domestic arbitration clause. 

FDI from the US, the third largest source of FDI into India, has remained uncertain after the United States trade representative objected to the model BIT. Trade and investment deals with the US, the United Kingdom and Australia are held up on this issue. According to the foreign investors the current model BIT fails to outline India’s earnestness in offering a ‘predictable legal and taxation framework’.

European Union member nations were among the major sources of FDI flows to India. The Netherlands ranked fourth while Germany was the seventh-largest source of FDI in 2021. Negotiations on broad-based trade and investment agreements with the European Union have been on hold since the existing BITs with 23 European countries were suspended.

Moreover, the investment hubs with somewhat liberal financial rules like Mauritius and Cayman Islands, have also objected to the domestic arbitration clause. These countries have earlier facilitated routing of Indian money, to be ‘reinvested’ (often illegally) to India.

Pressing need to re-examine the model BITs

Declining foreign direct investment (FDI) inflows have impelled India to re-evaluate the model BITS 2015. According to RBI data, the gross FDI inflows were worth US$ 71 billion in 2022-23, declining by 16.3% (year-on-year), from US$ 84.8 billion in FY22. There has been a sharp decline in equity flows from major sources like the US, Mauritius, Netherlands and Cayman Islands. 

Taking note of the decelerating FDI inflows, the government is considering ‘re-drafting’ the text of model Bilateral Investment Treaties (BITs). 

The revised draft may allow the first resort to “international arbitration within India”. The process suggested may be under the administrative supervision of the Permanent Court of Arbitration (PCA), at Hague in the Netherlands. It is also expected to focus on such issues related to land acquisition, and the Insolvency & Bankruptcy Code.

Need of the hour- To get practical

The booming manufacturing and infrastructure sectors are making India the fastest-growing G-20 economy. However, some policy barriers might restrict the inflow of foreign direct investment into the country. Several Indian projects have been hit by the slowing pace of contract enforcement, land acquisition and other issues. 

At a time when foreign investors are contemplating relocation of their factories/businesses from China and are in search of avenues to make fresh investments, India cannot afford to lose these emerging opportunities. It must address various concerns of foreign investors related to risks to their money, risks emanating from the regulatory discrimination on investments or repatriation of the profits they earn. 

Further, India has to strike a balance between protecting sovereign rights and allowing international arbitration for dispute resolution. The government of India setting up ‘international arbitration and mediation mechanisms’ in India, like the UK and Singapore, would offer greater comfort for investor countries entering into BIT with India. 

As India is negotiating Free Trade Agreements (FTAs) across the globe, the underpinned Bilateral Investment Treaties (BITs) would be complementary and support the objective of attracting investments into the country.