7 PM Editorial |What ails India’s Model BIT?| 29th June 2020

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What ails India’s Model BIT?


The COVID-19 pandemic has forced the economies worldwide to transform and re-orient their policies, so as to save themselves from the impending economic recession. And, India is no exception.

The suspension of economic activities due to the unprecedented 82-day lockdown has further accentuated the economic deceleration in India. Even before Covid-19 pandemic, the GDP already plummeted to 4.5% and macroeconomic indicators were estimated to fall to multi-year and decadal lows.

Thus, India cannot ill-afford to lose the emergent opportunities to attract foreign direct investments (FDIs) looking to relocate away from China. India also needs to look for alternatives for China to attract FDI’s. But its 2016 Model Bilateral Investment Treaty is protectionist in scope.

What do you understand by Bilateral Investment Treaty (BIT)?

A BIT is an agreement between two countries that sets up “rules of the road” for foreign investment in each other’s countries. BITs typically serve to protect investments made by investors on a reciprocal basis, specifying conditions on regulatory oversight of the host state and limiting interference with the rights of foreign investors.

Importance of Bilateral Investment Treaty (BIT)
  • Protection to country’s foreign investment: When countries (X and Y) enter into a BIT, both countries agree to provide protections for the other country’s foreign investments that they would not otherwise have.
  • Attracting FDI’s: BITs have always played a critical role attracting FDI inflows.
    • Case Study: India

BITs have been one the major drivers of FDI inflows into India. A 2016 study by Niti Bhasin and Rinku Manocha suggests that by providing substantive protection and commitment to foreign investors, BITs indeed contributed to rising FDIs in the 2001-2012 period.

  • Right of National Treatment: A BIT ensures that foreign governments (X) will treat investors from Y the same as domestic companies; this right is known as “national treatment.”
  • Most favoured Nation (MFN): BITs also guarantee that investors from Y are given the same types of preferences that other foreign investors are given in a market (X), also called “most-favoured nation” treatment.
  • Fair and Equitable basis: Under a BIT, governments also commit to treat each other investors on a “fair and equitable” basis in accordance with international law.
  • Prevents expropriation: BITs limit foreign governments’ (X) ability to take over Y investments in their country. If such an expropriation does happen, BITs ensure governments compensate investors in a fair and timely manner.
What is the need to have an attractive Bilateral Investment Treaty (BIT) during this pandemic?

India’s economy has four major drivers — people’s spending on consumption, government spending, investment and external trade.

  • Consumption Expenditure: For every 100 rupees in incremental GDP, ₹60 to ₹70 comes from people’s consumption spending.
    • The government’s response has arguably been constrained by the lack of fiscal headroom to augment real budgetary support to households.
  • Government Expenditure: Central government revenues for this year were budgeted at 10% of GDP which will not be achieved. Revenues will likely fall short by two percentage points of GDP.
  • External Trade: Even prior to COVID-19 when the global economy was robust, India’s trade levels had fallen from 55% of nominal GDP in 2014 to 40% in 2020. Now, with the global economy in tatters, trade is not a viable alternative to offset the loss from consumption.

Despite being among the top 10 global destination for FDI in 2019 and leapfrogging to 63rd rank in World Bank’s Ease of Doing Business rankings, the inflows have remained at sub-2 per cent of GDP.

FDI-equity inflows to India during 2019-20 were $49.9 billion, substantially lower than the annual flow of remittances of $83 billion in the same period. Therefore, India must overcome the investment hurdle by relooking at the Model BIT in order to boost the fourth driver i.e. investment.

Journey of India’s Bilateral Investment Treaty (BIT)

India signed its first BIT in 1994 with United Kingdom (UK). The India-UK BIT served as the base template for India to negotiate further BITs. The Indian model of BIT, 2003 contained close semblance with the India-UK BIT. From 1994 to 2011, India had signed more than 80 BITs and ratified over 70.

However, India framed a Model BIT in 2016. Since its adoption, India has unilaterally terminated 66-odd BITs between 2016 to 2019. It had sent negative signals to the global investor community on the grounds of being protectionist. This is evident as no country has shown an inclination to re-negotiate based on the Model BIT. Since 2016, India has signed just three treaties, none of which is in force yet.

What led India to frame a new Model BIT in 2016?

The penalty awarded by an Investor-State Dispute Settlement (ISDS) tribunal in the White Industries case in 2011, and subsequent ISDS notices served against India in a wide variety of cases involving regulatory measures (for example, imposition of retrospective taxes, cancellation and revocation of spectrum and telecom licences) led to a review of the BITs.

Important features of Model Bilateral Investment Treaty (BIT) 2016
  • Enterprise based definition of investment: The Model BIT has adopted an ‘enterprise-based’ definition of investment. Under it, investment is treated as the one made by an enterprise incorporated in the host state. The earlier ‘asset-based’ definition of investment included intellectual property and other assets, which are not considered under the new definition.
  • Exclusion of MFN Treatment: The exclusion of MFN treatment status (previously provided) is one of the most important feature.
  • Full protection and security (FPS): FPS means obligations would be related to physical security of investors and their investments.
  • State government as stake holders: Actions of state are included under the Model BIT.
  • Expropriation: Model BIT prevents nationalization of assets of foreign companies except “for reasons of public purpose” in accordance with the procedure established by law and on payment of adequate compensation.
  • Non-discriminatory treatment: The Model BIT includes a new clause on non-discriminatory treatment. Under the new clause, investors can avail non-discriminatory just compensation in circumstances like armed conflict, natural disasters and in the state of national emergency.
  • Corporate social responsibility: The Model BIT mandates foreign investors to voluntarily adopt internationally recognized standards of CSR.
  • Conditions for initiating arbitrations at international platforms: The Model BIT stipulate that the aggrieved investor should use all local remedies available before initiating international arbitration. Investor can use outside remedies only five years after resorting to all domestic arrangements.
  • Excludes matters related to taxation: It was configured in the context of excess legal arbitration against the state.
Issues with the Model Bilateral Investment Treaty (BIT), 2016
  • Narrows down the definition of investment: Adoption of enterprise-based definition contains vague criteria such as the requirement of enterprises to satisfy ‘certain duration’ of existence without specifying how much, or, investments having ‘significance for development of the party in whose territory the investment is made’ without specifying what amounts to ‘significant’ contribution. It leaves room for uneven interpretation by judicial bodies.
  • Clause mandating exhaustion of domestic remedy prior to initiating international arbitration proceedings: According to the ‘Ease of Doing Business 2020’ report, India currently ranks 163 out of 190 countries in ease of enforcing contracts, and it takes 1,445 days and 31 per cent of the claim value for dispute resolution. This new clause puts extra burden on the investors.
  • Model BIT has done away with the ‘Fair and Equitable Treatment’ clause: Model BIT included a detailed ‘Treatment of Investments’ clause with a broadly-worded undertaking that neither party shall subject investments to measures that are manifestly abusive, against norms of customary international law and to un-remedied and egregious violations of due process.

The Model BIT simplistically assumes that a foreign investor shall have complete confidence on domestic judicial interpretations and mechanisms.


The looming economic recession triggered by the Covid pandemic has made attracting FDI an urgent imperative for improving economic outcomes. Make in India 2.0 and liberalization of FDI are steps in the right direction. But, Government must adopt a more pragmatic and balanced approach in the 2016-Model BIT on the lines of the US-Korea BIT, CPTPP, CETA, MERCOSUR Protocol to name a few.

Regulatory activism will do more harm than good as in retaliation foreign jurisdictions may reduce protection for Indian companies exporting capital goods. As global companies contemplate moving their investments away from China, it is an opportune time to review and revise the Model BIT from the present inward-looking protectionist approach, to a more pragmatic one.


Source: TheHinduBusinessline


How is Model Bilateral Investment Treaty (BIT) 2016 different from its previous model? Highlight the issues plaguing the Model BIT 2016 and also suggest measures to strengthen it. (15 Marks)

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