Review of India’s Model Bilateral Investment Treaty (BIT)

Bilateral Investment Treaty (BIT) Latest News

• The Union Finance Ministry is reviewing India’s 2015 Model Bilateral Investment Treaty (BIT) to make it more investor-friendly while safeguarding India’s sovereign interests.
• The revised Model BIT is expected to be placed before the Union Cabinet soon. 
• The review gains significance amid rising Overseas Direct Investment (ODI) by Indian firms, changing global investment patterns, and declining net Foreign Direct Investment (FDI) into India.

Why the Model BIT is Being Reviewed

• The government is reassessing the 2015 Model BIT based on the –
  • Experience from past investment treaty negotiations.
  • Global best practices in investment protection.
  • Increasing outward investments by Indian companies.
  • Need to attract higher-quality FDI without compromising regulatory autonomy.
• Unlike earlier years when India primarily sought to protect foreign investors, negotiations must now also safeguard Indian companies investing abroad.

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A New Dimension – Protecting Indian Investors Overseas

• According to the Economic Affairs Secretary, rising Overseas Direct Investment (ODI) has fundamentally changed India’s negotiating priorities.
• Key implications:
  • Indian companies are increasingly investing in foreign markets.
  • Future BITs must provide investment protection for Indian enterprises abroad.
  • Certain investor-protection clauses, earlier viewed cautiously, may now be retained to secure Indian investments overseas.
• This marks India’s transition from being primarily a capital-importing economy to one that is also a significant capital exporter.

What is a Bilateral Investment Treaty (BIT)?

• A BIT is an agreement between two countries to – 
  • Promote and protect investments made by investors of each country.
  • Guarantee fair and equitable treatment.
  • Protect against unlawful expropriation.
  • Enable Investor-State Dispute Settlement (ISDS) through international arbitration when disputes arise.
• BIT vs trade agreement:
  • Under BIT, an investor can directly sue the host government through arbitration. However, disputes under trade agreements are settled between governments (State-to-State).
  • BITs focuses on investment protection, while trade agreements focuses on trade in goods and services.
  • BITs involve greater legal exposure for sovereign governments, while trade agreements provide greater diplomatic flexibility.

Key Issues in the Existing 2015 Model BIT

• One of the most debated provisions is the Local Remedies Clause, which requires foreign investors to exhaust domestic legal remedies for five years before approaching international arbitration.
• Concerns:
  • Considered restrictive by several developed countries and foreign investors.
  • Has slowed India’s ability to conclude new BITs.
  • Many countries have been reluctant to accept the existing Model BIT.
• The government is now reviewing not only this provision but several other clauses and is considering a negative-list approach.
  • Under this, only critical sovereign concerns would remain non-negotiable while greater flexibility is offered elsewhere.

FDI and ODI Trends

• Gross FDI: Increased from $82 billion (2020-21) to a record $95 billion (2025-26).
• Net FDI: Declined sharply to nearly $44 billion (2020-21), and less than $1 billion (2024-25), while recovering to about $7 billion (2025-26).
• ODI: Indian companies’ overseas investments increased substantially. For example, from $11 billion (2020-21) to $28 billion (2024-25), and further to $34 billion (2025-26).
• The fall in net FDI has also been driven by large-scale repatriation of foreign investments, exceeding $105 billion during 2024-25 and 2025-26.

Reasons Behind Declining Net FDI

• According to Chief Economic Adviser V. Anantha Nageswaran,
  • Global supply-chain localisation has intensified.
  • Developed countries are promoting onshoring of manufacturing.
  • Indian firms increasingly invest abroad to establish a local presence rather than export alone.
  • Rising ODI reflects the growing competitiveness and global expansion of Indian businesses.
• Government’s stand on enforcement agencies:
  • Responding to concerns that agencies such as the Enforcement Directorate (ED) discourage investment, the government stated –
    • Gross FDI has continued to reach record levels.
    • Enforcement actions are becoming more transparent and procedure-driven.
    • Frivolous or excessive actions are being curtailed.
    • Investors primarily seek stable policies, predictable regulation and attractive returns, all of which India aims to provide.
  • The government also emphasised the need for greater investor outreach to address any remaining concerns.

Significance and Challenges for India

• Significance of revision:
  • Helps modernise India’s investment treaty framework.
  • Improves India’s attractiveness as an investment destination.
  • Protects growing overseas investments by Indian companies.
  • Supports India’s long-term Balance of Payments (BoP) stability.
  • Balances investor confidence with regulatory sovereignty.
  • Strengthens India’s integration into global investment and production networks.
• Challenges ahead:
  • Balancing investor protection with sovereign regulatory powers.
  • Making BITs acceptable to developed countries while safeguarding national interests.
  • Preventing excessive investor litigation under ISDS.
  • Reversing the decline in net FDI amid changing global investment patterns.
  • Ensuring policy certainty without compromising public-interest regulation.

Source: IE