Introduction
Amid escalating US-China trade tensions, India is signaling a shift in its foreign investment protection norms to attract more international investors. This change comes as part of a broader revamp of the country’s Bilateral Investment Treaty (BIT) framework. The aim is to offer enhanced protections for foreign investors. As India looks to capitalize on a potential shift in global trade and investment flows, especially from China, these changes to investment treaties could have significant implications for trade partners, particularly in the West.
Revamping India’s 2016 Model BIT
In the Union Budget for 2025, the Indian government proposed a revamp of its 2016 Model Bilateral Investment Treaty (BIT). The 2016 model was conservative, favoring state interests over those of investors in disputes. Several Western trade partners have criticized the existing norms as burdensome during treaty negotiations. The revamp aims to usher in a more investor-friendly approach, helping India remain competitive in changing global dynamics.
Ajay Seth, Secretary of the Department of Economic Affairs (DEA), confirmed that groundwork for this BIT revamp has already started. The first signs of this shift are visible in the India-UAE BIT, which offers protection to foreign portfolio investors and includes entity-based protections. This marks a departure from India’s previous, more restrictive approach. Seth emphasized that future BITs could follow a similar approach, offering better protection to foreign investments in India.
Bilateral Investment Treaties and Foreign Investor Protection
India is currently negotiating with multiple trade partners, including the UK and the European Union (EU), about new investment treaties. Additionally, the European Free Trade Association (EFTA) region, which plans to invest $100 billion in India over the next 15 years, may also be part of these negotiations. These treaties are expected to offer better protection for foreign investments, particularly through an approach that allows greater asset-based protections.
Prabhash Ranjan, Vice Dean at Jindal Global Law School, argued that such measures are necessary to attract investment. Foreign investors have faced significant regulatory risks in India. A notable example is the Nestlé case, where Swiss investors faced a tax dispute due to changes in tax laws.
Challenges and Regulatory Risks for Investors in India
India’s regulatory environment has often posed challenges for foreign investors. In the Nestlé case, Switzerland suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA). This suspension followed a Supreme Court ruling that could impose higher taxes on Swiss companies like Nestlé. Other disputes, such as the controversial Vodafone tax case, highlight the risks investors face in India, especially when laws change retroactively or when due process is not followed in cases like the Devas issue.
Experts believe that to attract more investment, India must offer stronger protections against these risks. Such protections would help avoid prolonged and costly disputes, particularly in cases of retroactive tax law changes or the cancellation of business licenses.
Addressing the ‘Exhaustion of Local Remedies’ Clause
One of the most contentious aspects of the BIT revamp is the ‘exhaustion of local remedies’ clause. The 2016 model BIT required investors to exhaust India’s legal remedies for at least five years before seeking international arbitration. This requirement has been a significant hurdle in negotiations with Western countries, who find it lengthy and complex.
The UAE BIT, in contrast, requires investors to attempt local remedies for only three years before pursuing international arbitration. However, many experts argue that this clause should be removed altogether. Prabhash Ranjan suggests introducing a “fork-in-the-road” clause. This would allow investors to choose between domestic courts and international arbitration, with their choice being final and irrevocable.
Negotiations with the UK and EU: A Delayed Process
India has been involved in trade negotiations with the UK for over two years, but a deal has not yet been finalized. Similarly, the EU has been slow to conclude a comprehensive trade and investment agreement with India. In contrast, the EU has signed deals with competitors like Vietnam, creating a competitive challenge for India.
This delay in negotiations has led experts to suggest that India should act more decisively in its trade and investment agreements. Streamlining the process and offering more attractive terms could help India compete with other countries in the region.
Conclusion
As the US-China trade war escalates, India is positioning itself to capitalize on a potential shift in global investment flows. By revamping its Bilateral Investment Treaty (BIT) framework and offering enhanced protections to foreign investors, India aims to create a more investor-friendly environment. However, challenges remain, particularly in regulatory risks and lengthy negotiations with key trade partners. If India addresses these concerns and streamlines its processes, it could become a major beneficiary in the shifting global trade and investment landscape.
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