Introduction
Amid escalating US-China trade tensions, India is signaling a shift in its Bilateral Investment Treaty (BIT) framework to attract more international investors. The proposed changes aim to offer enhanced protections for foreign investors, especially in light of growing trade and investment shifts. As India seeks to capitalize on a global change in investment flows—particularly from China—these changes could have significant implications for trade partners, particularly in the West.
Revamping India’s 2016 Model Bilateral Investment Treaty (BIT)
In the Union Budget 2025, the Indian government proposed a revamp of its 2016 Model Bilateral Investment Treaty (BIT). The 2016 model had been conservative, prioritizing state interests in disputes over those of investors. Several Western trade partners criticized the existing norms for being burdensome during treaty negotiations. This revamp aims to usher in a more investor-friendly approach to BITs, ensuring India remains competitive in changing global dynamics.
Ajay Seth, Secretary of the Department of Economic Affairs (DEA), confirmed that groundwork for this BIT revamp has already begun. The first signs of the 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 adopt a similar approach, offering better protection to foreign investments in India.
Bilateral Investment Treaties and Foreign Investor Protection
India is currently negotiating Bilateral Investment Treaties (BITs) with multiple trade partners, including the UK and the European Union (EU). The European Free Trade Association (EFTA), 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 enhanced protections for foreign investments, especially through an approach that allows greater asset-based protections.
Prabhash Ranjan, Vice Dean at Jindal Global Law School, emphasized the importance of these measures to attract more investment. Foreign investors have often faced regulatory risks in India, as demonstrated in cases such as Nestlé, where Swiss investors encountered a tax dispute due to changes in tax laws.
Challenges and Regulatory Risks for Investors in India
India’s regulatory environment has often posed significant challenges for foreign investors. For instance, in the Nestlé case, Switzerland suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA), following a Supreme Court ruling that could impose higher taxes on Swiss companies. Other disputes, like the controversial Vodafone tax case, also highlight the risks faced by investors in India, particularly when laws change retroactively or when due process is not followed, as seen in the Devas issue.
To attract more investment, experts argue that India must offer stronger protections against such risks. These protections would help avoid prolonged and costly disputes, especially in cases of retroactive tax law changes or business license cancellations.
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 was a significant hurdle in negotiations with Western countries, who found it overly lengthy and complex.
The UAE BIT, however, only requires investors to attempt local remedies for three years before seeking international arbitration. Despite this, many experts, including Prabhash Ranjan, argue that this clause should be removed entirely. He suggests introducing a “fork-in-the-road” clause, which would allow investors to choose between domestic courts and international arbitration. Their choice would then be final and irrevocable.
Negotiations with the UK and EU: A Delayed Process
India has been negotiating trade agreements with the UK for over two years, but a deal has yet to be finalized. Similarly, the EU has been slow in concluding a comprehensive trade and investment agreement with India, whereas it has signed deals with competitors like Vietnam. This delay has created a competitive challenge for India.
Experts recommend that India act more decisively in these negotiations. Streamlining the process and offering more attractive terms could help India remain competitive in the evolving global trade environment.
Conclusion
As the US-China trade war escalates, India is positioning itself to capitalize on the potential shift in global investment flows. By revamping its Bilateral Investment Treaty (BIT) framework and offering enhanced protections for foreign investors, India aims to create a more investor-friendly environment. However, challenges remain, particularly in regulatory risks and the 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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