Centre Prepares to Overhaul Model Bilateral Investment Treaty to Attract Global Investors

The central government is preparing to overhaul its model bilateral investment treaty (BIT) to address longstanding concerns raised by overseas investors, according to people familiar with official discussions reported by The Times of India. Under the planned changes, foreign investors may be permitted to pursue international arbitration just one year after exhausting local legal remedies, a substantial reduction from the five-year requirement introduced in the previous model framework.

What Happened

The Union Finance Ministry has moved a cabinet note proposing key amendments to India’s model BIT, which was established approximately a decade ago. The draft proposal seeks to significantly shorten the timeline foreign businesses must spend pursuing domestic legal remedies before initiating international arbitration proceedings.

Alongside the revised timeline, the proposal aims to broaden the definition of an investment from an enterprise-based approach to an asset-based classification. This shift would include assets such as shares and equity instruments, provided they are maintained for five years or more. Furthermore, the revised framework contemplates specific carveouts to protect state policy space, covering areas such as subsidies, local government measures, and compulsory licensing provisions utilized to waive patent rights during public health emergencies and other situations.

Economic Affairs Secretary Anuradha Thakur recently confirmed that the government would soon seek cabinet approval for amendments to the model BIT, adding that the framework will also seek to secure adequate protections for Indian entities investing abroad.

Key Highlights

• Arbitration Window: The proposed amendment cuts the waiting period required for exhausting domestic remedies before pursuing international arbitration from five years down to one year.
• Broadened Investment Scope: The framework proposes shifting from an enterprise-based definition to an asset-based model, incorporating shares and equity instruments held for five years or longer.
• Policy Carveouts: The draft treaty excludes specific domestic regulatory actions from arbitration, including government subsidies, local administrative measures, and compulsory patent licensing for public emergencies.
• Starting Point for Talks: Investor-state dispute settlement (ISDS) mechanisms can serve as the starting point for future bilateral treaty negotiations.
• Cabinet Note Advanced: The finance ministry has circulated the formal cabinet note after months of internal deliberations within the government.

Why This Matters

Bilateral investment treaties establish reciprocal terms and conditions for private cross-border investments, including post-investment national treatment and dispute resolution frameworks. India instituted its first model BIT in 1993 while liberalizing foreign direct investment rules. However, following a surge in ISDS claims and an adverse ruling involving Australian company White Industries, India revamped its model treaty in 2015 to safeguard sovereign interests.

That 2015 overhaul resulted in India unilaterally terminating the majority of its existing bilateral treaties, a posture that many partner nations found unacceptable. Consequently, several investment chapters linked with proposed free trade agreements stalled. According to data from the United Nations Conference on Trade and Development (UNCTAD), only six nations have signed BITs with India since 2018: Belarus, Kyrgyzstan, Brazil, the United Arab Emirates, Uzbekistan, and Israel.

Moreover, while some partner nations accepted modified timelines—such as the India-UAE BIT requiring three years and the India-Israel pact requiring four years to exhaust local remedies—other recent agreements with the UK, Oman, the India-Brazil BIT, and the European Free Trade Association (EFTA) nations led by Switzerland excluded investor-state arbitration entirely, restricting mechanisms strictly to state-to-state dispute settlement. The planned revisions aim to break these negotiating impasses by offering a more flexible starting framework.

What to Watch Next

The proposal is pending formal review and clearance from the Union Cabinet following the submission of the finance ministry’s note. If cleared, the revised framework will guide India’s upcoming investment treaty negotiations and shape dispute mechanisms for both foreign investors in India and Indian enterprises operating internationally.

Frequently Asked Questions

What is a Bilateral Investment Treaty?

A bilateral investment treaty is an agreement between two nations that sets binding terms, standards, and dispute resolution procedures for private investments made by nationals of one country in the territory of the other.

What is the proposed change to the arbitration timeline?

The proposed amendment reduces the mandatory waiting period for overseas investors to exhaust domestic remedies from five years to one year before they can initiate international arbitration.

Which countries have entered into BITs with India since 2018?

According to the UNCTAD database, six countries have finalized BITs with India since 2018: Belarus, Kyrgyzstan, Brazil, the UAE, Uzbekistan, and Israel.

Source: Based on reporting by The Times of India.