Why in News?

• After terminating several bilateral investment treaties (BITs) in 2016–17, India is revamping its investment treaty framework to attract sustained foreign direct investment (FDI) while safeguarding its regulatory autonomy.
• Following the announcement in the Union Budget 2025–26 to review the 2016 Model BIT, the government is preparing a revised template, with four to five investment agreements expected to be finalised by the end of 2026.
• India has already concluded agreements with countries such as Saudi Arabia, Israel and the UAE, reflecting a gradual shift towards a more investor-friendly approach.

What’s in Today’s Article?

• What is a Bilateral Investment Treaty (BIT)?
• India’s Evolving Approach to Investment Treaties
• Investor Rights versus State Sovereignty
• Importance of Domestic Dispute Resolution
• Conclusion

What is a Bilateral Investment Treaty (BIT)?

• A BIT is an agreement between two countries that establishes the rules for protecting and promoting investments made by investors of one country in the territory of the other.
• Key objectives:
  • Provide legal certainty and protection against discriminatory or arbitrary treatment.
  • Build investor confidence and encourage cross-border investment.
  • Establish mechanisms for resolving investment disputes.
  • Balance investor protection with the host country's right to regulate in the public interest.
• Evolution of India’s BIT framework:
  • 1993 Model BIT: India began concluding BITs under its original model, subsequently amended in 2003.
  • 2016 Model BIT:
    • India adopted a revised framework emphasising the State's right to regulate and imposing stricter conditions on access to ISDS - Investor-State Dispute Settlement.
    • ISDS allows foreign investors to bring claims against host governments for alleged violations of investment treaty obligations.
    • India had signed BITs with 83 countries, of which 74 were ratified (as per data presented in Parliament in March 2023).
  • 2016–17: India issued termination notices to numerous treaty partners (~68 countries) and sought renegotiation under the revised model.
• Recent developments: India has signed BITs with countries including Belarus, Kyrgyz Republic, Brazil, UAE, Uzbekistan, and Taiwan.

India’s Evolving Approach to Investment Treaties:

• Relaxation of the Exhaustion of Local Remedies (ELR) requirement:
  • ELR requires foreign investors to approach the host country's domestic courts or administrative authorities before initiating international arbitration.
  • India’s 2016 Model BIT introduced a five-year local-remedies requirement, which was criticised by investors for delaying access to international dispute settlement.
  • Recent agreements indicate greater flexibility -
    • UAE: The 2024 BIT reduced the local-remedies period to three years.
    • Saudi Arabia: The recently concluded agreement provides for a two-year period before investors can approach international arbitration.
  • Some trading partners have sought a one-year period, but India has not accepted such demands so far.
  • The Saudi agreement is particularly significant amid expectations of investment in India's refinery sector.
  • The government argues that the revised approach improves investor access to dispute settlement while preserving the State's regulatory authority.
• Need for a Consistent Treaty Framework:
  • India should adopt a more uniform approach to ELR provisions.
  • A period of one to two years for pursuing domestic remedies could improve investor confidence.
  • The overall limitation period for initiating investor-state claims should also be practical rather than excessively restrictive.

Investor Rights versus State Sovereignty:

• India's decision to terminate several BITs followed concerns that adverse international arbitral awards could constrain domestic policymaking.
• Developing countries like South Africa and Indonesia have also withdrawn from or restructured investment treaty arrangements to preserve regulatory autonomy.
• Key concerns associated with BITs and ISDS:
  • Erosion of policy space: Treaty obligations may constrain governments' ability to regulate in the public interest.
  • High litigation costs: Defending international investment claims can impose a substantial financial burden on governments.
  • Regulatory chilling effect: Governments may hesitate to introduce legitimate regulations for fear of costly arbitration.
  • Constraints on technology transfer: Treaty protections may limit the policy instruments available to developing countries seeking to strengthen domestic productive capabilities through FDI.
  • These concerns have fuelled demands for reforming the international investment regime, particularly in the Global South.
• Changing international practices:
  • The debate is not confined to developing countries. For example,
    • The European Union has withdrawn from the Energy Charter Treaty amid concerns about compatibility with its climate objectives.
    • The US and Canada removed ISDS provisions from the United States–Mexico–Canada Agreement (USMCA).
    • New Zealand has opted out of ISDS provisions in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
  • These developments illustrate growing scrutiny of the balance between investment protection, climate action and domestic regulatory autonomy.

Importance of Domestic Dispute Resolution:

• Requiring investors to exhaust domestic remedies can give governments an opportunity to understand grievances and resolve disputes before they escalate to international arbitration.
• However, this approach will work only if investor disputes are resolved efficiently. A treaty provision alone cannot compel domestic courts to prioritise foreign investors over Indian investors.
• A possible way forward is to establish a statutory, time-bound grievance-redressal mechanism accessible to both domestic and foreign investors.
• Faster dispute resolution could prevent disputes from escalating, reduce litigation costs and improve India's investment climate.

Conclusion:

• India's investment treaty reform must strike a careful balance between investor confidence and sovereign regulatory autonomy.
• A predictable, transparent and time-bound dispute-resolution framework, supported by a modern and consistent Model BIT, can help attract long-term FDI without compromising legitimate public-interest regulation.