India’s Revised Model Bilateral Investment Treaty Explained
Why in the news
Finance Minister Nirmala Sitharaman announced a fresh model Bilateral Investment Treaty (BIT). With free trade agreements with the UK and the EU nearing conclusion, the existing model needs to become friendlier to investors.
Key facts
- Trigger: adverse arbitration outcomes over retrospective taxation, notably the Vodafone and Cairn Energy cases, after assets were seized.
- India terminated BITs with over 75 countries during 2016-2021.
- The 2016 model BIT was essentially defensive, protecting the state from arbitration risk more than protecting investors.
- The local remedies clause asked investors to go through domestic courts for five years before arbitration.
Gaps in the 2016 model
| Issue | Problem | Suggested fix |
|---|---|---|
| Core protections | Most favoured nation and fair and equitable treatment left out | Bring both principles back |
| Tax disputes | Outside the treaty; government held wide discretion | Transparent, even-handed procedure |
| Local remedies | Five-year wait, slow courts | Reconsider the waiting period |
| Scope | Narrow investment coverage | Include portfolio and indirect investments |
Progress so far
- India has signed BITs with the UAE, Brazil and Taiwan, and these depart from the model text.
- Some shortened the period for exhausting local remedies; the UAE deal covers portfolio investments.
- They show India can be flexible, hinting at what the new model may contain.
Way forward
- Shift from a defensive stance to one that actively welcomes foreign capital.
- Adopt global best practices with flexible terms and fair dispute resolution.
- Cut government discretion in tax-related disputes.
Exam angle
- Year of the current model BIT: 2016.
- Terms to know: MFN, fair and equitable treatment, local remedies, retrospective taxation.
- Recent BIT partners: UAE, Brazil, Taiwan.