Skip to main content
Two trade ships sailing in the ocean.

Will new BIT help promote India’s FDI? Here’s why investments may get affected

Financial Express

Long term investments may get affected by the new Bilateral Investment treaty, which is more in favour of India’s interests

India’s investment regime is under a bit of stress because of the new Bilateral Investment treaty (BIT). The new BIT was approved by the cabinet in December 2015 after a four-year review. The revised model BIT is being used for renegotiation of existing BITs and negotiation of future BITs and investment chapters in Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs) etc. The reason behind the new BIT model is the result of the flood of claims brought by foreign investors against India in the recent years, which according to UNCTAD makes India one of the most frequent respondent-state in the investor-state dispute settlement (ISDS). Hence, the government was forced to rethink its existing investment treaty obligations.

The BITs that India signed post-liberalisation were mostly prepared by capital exporting countries with the intention to protect their investors abroad. India offered several concessions to the foreign investors to attract FDI, but gradually realised that the model was proving to be detrimental to its interests because of the huge settlement claims brought in by the foreign investors.

The essential features include an “enterprise” based definition of investment, non-discriminatory treatment through due process, protections against expropriation, a refined ISDS provision requiring investors to exhaust local remedies before commencing international arbitration, and limiting the power of the tribunal to awarding monetary compensation alone. The model excludes matters such as government procurement, taxation, subsidies, compulsory licenses and national security to preserve the regulatory authority for the government. Although the BIT is framed by the government as a “balance between the investor’s rights and the government’s obligations”, it could cause a bit of worry to the foreign investors with long term interests.

The new Model indicates the government still believes that BITs send a positive signal to foreign investors; however, it is simultaneously trying to ensure that investment protection does not impair the state’s regulatory powers. In fact, the new model BIT departs substantially from investor protection standards frequently found in BITs worldwide, by excluding provisions such as fair and equitable treatment clauses and most-favoured nation clauses which have formed the basis and incentive for foreign investment coming to India. India has sent notices to over 40 countries informing about the government’s intention to terminate the existing BITs and negotiate new ones on the basis of the approved Model. This has led to huge furore, with several countries expressing concerns over the provisions contained in the new model.

Perhaps one of the biggest concerns with the Model BIT is the requirement for all local remedies to be exhausted. Given the endemic delays in the Indian judicial systems and heavy backlog faced by the courts, it would often mean that an aggrieved investor’s claim could take years to litigate locally, even before any BIT claim could commence. The text of India’s Model agreement limits its scope of protected foreign investments by adopting a narrow enterprise-based definition of an ‘investment’; as per this definition the investor not only makes a substantial and long term commitment of capital and engages a substantial number of employees in the territory of the host country, but also makes a substantial contribution to the development of the economy and engages in transfer of technological know-how where applicable. By giving away with the predominant practice of industrial countries which favour an asset-based definition of an investment, it excludes portfolio investments or goodwill from the scope of the treaty. Another salient feature of the approved Model is the absence of MFN clause, which is intended to counter discrimination among foreign investors. In fact, both the US Model BIT as well as recently signed TPP agreement provide for a broad MFN clause which is missing from the Indian model.

It is obvious that the new BIT model is biased towards safeguarding India’s interests and has raised scepticism with India’s partners with whom the BIT’s are already in force. Undoubtedly, it would be a tedious and complex task for the government to renegotiate India’s existing BIT’s which could take a long time to conclude. Further, there is also a concern on the investment chapters in India’s FTAs and CEPA’s with Japan, Korea, Singapore and Malaysia. Will the investment protection measures in these agreements need re-renegotiation is also a matter of concern to these countries. The government is yet to come out clearly on all of these issues.

However, the important question is whether adoption of the new BIT model hurt FDI flows? Given that most major investors have lauded India’s recent reform initiatives including the GST Bill, Bankruptcy Bill and widening up of FDI in defence, banking and insurance sectors, opening of India’s FDI to e-commerce etc., the new BIT model may not hurt India’s interests in the short run. However, the medium and long term green field investments in India are likely to get affected. However, it is also observed that several countries have managed to get more FDI than India in recent year’s in spite of the fact that they don’t have any BIT’s with their partner countries. Brazil is a case in point. It is evident that India needs continued focus on its domestic reforms and continue to promote its various initiatives including “Make in India”, “Digital India”, etc., to consistently attract foreign investment. Moreover, India is now a major investor of capital in other countries and the government would need to consider whether the provisions in the new BIT model provide for any support to India’s FDI outflows and protection of its investment outside India. It is a tough initiative by the government and only time will tell whether the BIT’s would help promote India’s FDI in a positive manner.

This article first appeared in the Financial Express on 28 October 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) and discussants(s). Brookings India does not have any institutional views.

Get daily updates from Brookings