Revamping Model Bilateral Investment Treaty 2016

Context: India is revisiting its 2016 Model Bilateral Investment Treaty (BIT) amid trade and investments shifting away from China, following the US-China trade war. The move comes as India negotiates BITs with countries like the UK, UAE and the EU, balancing investor protection with national interests.

Relevance of the Topic:Prelims: Model Bilateral Investment Treaty 2016; Challenges 

What are Bilateral Investment Treaties (BITs)?

• Bilateral investment Treaties (BITs) are agreements between two countries for the reciprocal promotion and protection of investments in each other's territories by individuals and companies situated in either State. 
• BITs encourage foreign investors to invest in a State and there by contributing towards overall developments and advancements of the economy. 

Key provisions of  Model Bilateral Investment Treaty, 2016

• National Treatment: Foreign investors should be treated at par with the domestic investors.
• Expropriation (taking over property): Prohibits the state from expropriating the foreign investments, except under exceptional circumstances, in a non-discriminatory manner. 
• Enterprise-based definition of investment: 
  • Asset-based definition of the investment under the earlier BITs has been replaced by Enterprise based definition under the model BIT. 
  • Asset-based definition considers every kind of asset – both movable and immovable including the IPRs as investment and gives protection under treaties. 
  • Moving away from an asset-based approach to an enterprise-based approach aims at narrowing the scope of investments to be protected and thus seeks to reduce the number of BIT claims that can be brought against India.
• Exclusion of MFN treatment:
  • In recent years, some foreign investors have sued India arguing that they have to get the same beneficial treatment given to companies from other countries. 
  • Accordingly, India has dropped Most Favoured Nation (MFN) Clause from the Model BIT.
• Conditions for initiating arbitrations at international arbitrations:
  • Model BIT stipulates that the aggrieved investor should use all local remedies as well as negotiations and consultations before initiating arbitrations against the host State.
  • Investors can use outside remedies only five years after resorting to all domestic arrangements.
• Corporate Social Responsibility: Model BIT mandates foreign investors to voluntarily adopt internationally recognized standards of corporate social responsibility. 

Need for Revamping 2016 Model BIT

• Narrow definition of Investment:
  • India proposes a narrow ‘enterprise-based’ definition for investment, whereby only direct investments are protected under the treaty.
  • Definition of investment in Model BIT also contains a negative list, which precludes portfolio investments, interest in debt- securities, intangible rights, etc. from the definition of investment.
    • Thus, the new definition does not take into account the increased scope of foreign investments in the modern era.
• Exhaustion of Domestic Remedy Clause:
  • 2016 model BIT provided that an investor must exhaust local remedies before taking recourse to international arbitration. This surely does little to increase confidence in foreign investors.
• Changing Global Scenario:
  • The latest US-China trade war has prompted trade and investments to shift away from China. India is aiming to attract these investments.
• Concerns raised by Western trade partners:
  • Multiple Western trade partners cited burdensome norms during ongoing treaty negotiations. 
  • India has been involved in trade negotiations with the UK for over two years and is yet to reach even close to signing a deal with the EU.
  • The West may not even be willing to accept the three-year clause and would prefer easier norms.
• Prospects of new Investment treaties:
  • India is currently in talks with the UK and the European Union for an investment treaty.
  • India is also expected to negotiate a BIT with the European Free Trade Association (EFTA) region.
    • EFTA has committed to invest $100 billion in India over a 15-year period.
• Competition from other countries:
  • E.g., The EU has signed a deal with India’s competitors such as Vietnam giving it an advantage over India.
• Previous cases of regulatory risks:
  • Higher Taxes on Dividends: For instance, Nestle case.
    • Switzerland suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) originally signed between India and Switzerland in 1994. 
    • This decision followed a ruling by the Supreme Court last year, which determined that DTAA cannot be enforced unless it is notified under Income Tax Act. 
    • As a result, Swiss companies such as Nestlé face higher taxes on dividends.
  • Retrospective Taxation: E.g., Vodafone case.
  • License cancellations without due process: E.g., Devas case.
  • Lengthy judicial proceedings on arbitration awards.

Reforms Suggested

• New approach of UAE BIT:
  • UAE BIT introduces asset-based protection, moving beyond the earlier entity-based definition of investment. In entity-based protection, an entity has to be registered in India.
  • Foreign Portfolio Investors (FPIs) now qualify for BIT protection, indicating a pro-investor shift in policy.
• Flexible dispute resolution: Introducing a fork-in-the-road clause instead of rigid waiting periods.
  • If an investor has a dispute with the state, they choose whether to submit the dispute to domestic courts or pursue international arbitration.
    • Once that choice is made, it is final and irrevocable.
  • With this approach, India is neither stopping investors nor forcing them to go through domestic courts.
    • Some investors may still opt for domestic courts because they do not want to antagonise the state by pursuing international arbitration.

India’s BIT revamp signals a shift towards pro-investor policies while maintaining strategic state control. By adopting a balanced approach, India can attract FDI while ensuring its economic sovereignty and policy flexibility.