Will a new model investment treaty boost India’s FDI?

India’s investment regime is under stress from its new bilateral investment treaty (BIT) framework. Spurred by a flood of claims from foreign investors against India in the recent years, the new BIT framework was approved by the cabinet in December 2015 after a four-year review. According to the United Nations Conference on Trade and Development, India is one of the most frequent respondent-states in the investor-state dispute settlement (ISDS) arbitrations, forcing the Indian government to rethink its existing framework.

All of the BITs that India signed post-liberalisation were prepared by capital-exporting countries with the aim of protecting their investors abroad. India used to enter into such agreements and also offered several concessions to foreign investors to attract FDI. But huge settlement claims brought by foreign investors meant that this was not a sustainable strategy.

The new approach to BITs includes an enterprise-based definition of investment, non-discriminatory treatment through due process, protections against expropriation, a refined ISDS provision and limits on the power of the tribunal to awarding monetary compensation. The new ISDS provision requires investors to exhaust local remedies before commencing international arbitration. The treaty excludes areas such as government procurement, taxation, subsidies, compulsory licenses and national security to preserve the regulatory authority of the government. But there is concern that this could discourage foreign investors with long-term interests in India.

The new model indicates the government still believes that BITs send a positive signal to foreign investors. But it simultaneously attempts to ensure that investment protection does not impair the state’s regulatory power. India has sent notices to over forty countries informing them about their intention to terminate the existing BITs and negotiate new ones on the basis of the approved model. This has led to backlash, with several countries expressing concerns over the provisions in the new model.

One of the biggest concerns with the new BIT framework is the requirement for all local remedies to be exhausted. Given the endemic delays in the Indian judicial system and heavy backlog faced by the courts, an aggrieved investor’s claim could take years to litigate locally, even before any BIT claim could commence. The text of India’s new BIT model limits the scope of protected foreign investments by adopting a narrow, enterprise-based definition of an investment. By doing away with the predominant practice of an asset-based definition of an investment, it excludes portfolio investments and goodwill from the scope of the treaty.

Another salient feature of the approved treaty is the absence of a most favoured nation clause. This clause is typically used to counter discrimination among foreign investors and can be found in both the US BITs and the recently signed Trans-Pacific Partnership.

The new BIT model is biased towards safeguarding India’s interests and has raised scepticism with India’s partners with whom BITs are already in force. Undoubtedly it would be a tedious and complex task for the government to renegotiate India’s existing BITs. There is also concern over whether the investment chapters in India’s FTAs and CEPAs with Japan, South Korea, Singapore and Malaysia may need re-renegotiation. The Indian government is yet to clarify these issues.

Given that most major sources of investment into India have lauded recent reform initiatives, the new BIT model is unlikely to hurt India’s interests in the short run. But in the medium and long term, green field investments into India are likely to be affected by the new BIT framework which focuses more on the host country’s interests.

Several countries have managed to get more FDI than India in recent years in spite of the fact that they don’t have any BITs with their partner countries. Brazil is a case in point. India needs to continue to focus on its domestic reforms and promote its various initiatives including ‘Make in India’ and ‘Digital India’ to consistently attract foreign investment.

India is now also a major investor of capital in other countries, so the government will need to consider what provisions in the new model BIT provide for support to India’s FDI outflows and protect its foreign investments. It is a difficult task and only time will tell whether the new BITs will be successful.

This article first appeared in the East Asia Forum on November 4, 2016. Like other products of the Brookings Institution India Center, this article is intended to contribute to discussion and stimulate debate on important issues. The views are of the author(s). Brookings India does not have any institutional views.