Cabinet to soon decide on new bilateral investment treaty template to ease dispute settlements
The Union Cabinet is expected to soon decide on a new Model Bilateral Investment Treaty (BIT) template for India
The proposed template would shorten the mandatory period during which a foreign investor must pursue domestic litigation before seeking international arbitration, compared with the existing 2015 Model BIT template
The existing 2015 template requires exhaustion of local remedies for five years before an investor can bring a claim to international arbitration
The revised template is intended to make India's BIT framework more attractive to foreign investors while continuing negotiations with several partner countries
India's Model Bilateral Investment Treaty (2015) and Exhaustion of Local Remedies
A Bilateral Investment Treaty (BIT) is an agreement between two countries setting out the terms and protections for private investment by nationals or companies of one country in the other. India's Union Cabinet approved a new Model BIT text in 2015-16, replacing the earlier 1990s-era template, largely in response to a wave of adverse international arbitration awards against India (including the White Industries and Vodafone-linked disputes).
Key Details
- The 2015 Model BIT requires a foreign investor to exhaust domestic judicial remedies for a minimum of five years before initiating investor-state arbitration
- It narrowed the definition of "investment" to exclude portfolio investment and purely contractual claims, focusing protection on enterprise-based investment
- It excludes taxation measures from the scope of the treaty, preserving India's sovereign right to tax
- It replaced the broader "fair and equitable treatment" standard found in many international BITs with a narrower standard tied to denial of justice and due process violations
The proposed new template reportedly retains the local-remedies-first principle but substantially shortens the five-year window, addressing investor complaints that the current requirement causes excessive delay given India's overburdened judiciary.
Investor-State Dispute Settlement (ISDS)
ISDS is a mechanism under investment treaties that allows a foreign investor to bring a claim directly against the host government before an international arbitration tribunal, bypassing domestic courts, typically under rules such as those of the International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL).
Key Details
- India is not a member of the ICSID Convention; India-related investment arbitrations are typically conducted under UNCITRAL Arbitration Rules or ad hoc mechanisms
- Global criticism of ISDS centres on its perceived "chilling effect" on legitimate public-interest regulation (health, environment, taxation) and the lack of an appellate mechanism in most cases
- India terminated many of its old-template BITs starting 2016-17 after adverse rulings, seeking to re-negotiate them under the new 2015 template
- The Law Commission of India examined the 2015 Draft Model BIT and flagged concerns, including the exhaustion-of-local-remedies clause, which it argued could be excessively investor-unfriendly
The Cabinet's move to shorten the local remedies period reflects a recalibration of India's ISDS approach — balancing the sovereign policy space the 2015 template was designed to protect against the need to remain competitive for foreign direct investment.
Bilateral Investment Treaties vs Free Trade Agreements
BITs and Free Trade Agreements (FTAs) are distinct instruments — a BIT governs protection and treatment of existing/incoming investment, while an FTA (or a Comprehensive Economic Partnership/Cooperation Agreement) governs trade in goods and services, tariffs, and market access, and may or may not include an investment chapter.
Key Details
- India has historically preferred negotiating investment protection through standalone BITs rather than folding investment chapters into FTAs
- India's recent FTAs (e.g., India-UAE CEPA 2022) have generally not included investor-state arbitration clauses, consistent with the post-2015 cautious approach to ISDS
- A revamped, more investor-friendly Model BIT could support India's ongoing FTA negotiations with other partners by addressing investor protection concerns separately
The new BIT template is explicitly linked in policy discussion to boosting foreign capital inflows and supporting India's parallel FTA negotiations, showing how investment and trade policy instruments are being coordinated.
- Existing Model BIT: approved in 2015-16, mandates 5-year exhaustion of local remedies before arbitration
- India is not a party to the ICSID Convention; disputes typically proceed under UNCITRAL rules
- India began terminating old-template BITs from 2016-17 onward for renegotiation
- Taxation measures are excluded from the scope of India's Model BIT
- The new template is reported to already be under negotiation with four to five countries even before Cabinet approval