The Indian government, led by prime minister Narendra Modi, has taken a major step in the direction of rewriting the rules regulating foreign investment in the country by discontinuing bilateral investment treaties (BITs) with major trade and investment partners.

The move aims to introduce a new, standardised BIT model where Indian courts regain supremacy over international arbitration courts and foreign investors are no longer able to resort to other protection mechanisms such as the most favoured nation provision.


Delhi’s decision to scrap its existing BITs, which follows in the footsteps of other fast-growing countries such as Indonesia, comes as the Indian government is locked in a tense arbitration case with telecommunications powerhouse Vodafone over a multibillion-dollar tax claim.  

Mr Modi’s government has widely publicised its efforts to liberalise the Indian market and make it a global manufacturing hub by opening it up to foreign capital. Bold measures such as the automatic route for foreign investment, demonetisation and the Goods and Services Tax (GST) are historic reforms improving the local business environment across the board. However, the government’s turnaround on existing BITs contradicts its vocal liberalisation agenda, and there are early signs that foreign investment is retreating from the peaks touched in 2016.

Once bitten

India signed dozens of BITs with partner countries since then prime minister Narasimha Rao spearheaded the first liberalisation reforms in the early 1990s. The country had only a handful of BITs in force in the 1990s, a number that grew to as many as 66 active BITs by the end of 2016. However the government decided not to renew 58 expiring BITs on April 1, in a bid to introduce the standardised model as a base for future BIT negotiations envisaging major changes, particularly with respect to investment protection provisions.

“The government decided to do that because a lot of foreign investors have brought BIT claims against India,” says Prabhash Ranjan, assistant professor at the faculty of law of the South Asian University in New Delhi. “Therefore it opted for a drastic measure, and this new BIT model is very much in favour of the host country, and not the investor.”

The first time India had to come to terms with the guarantees offered by its numerous BITs to foreign investors was in 2011, when an arbitration court found the country guilty of violating the India-Australia BIT and awarded Australian firm White Industries A$4m ($2.98m).

Although the exact magnitude of the phenomenon is unknown, as many BIT arbitration settlements are not publicly disclosed, the Indian press has reported that another 17 companies have brought BIT claims against India since then, including telecoms companies Telenor and Vodafone. The latter has locked horns with the government, which is de facto preventing an arbitration process from starting, and filed a second arbitration claim on May 16 against a Rs221bn ($3.4bn) tax claim following a retroactive tax law passed in 2012. 

Regaining control

BITs give foreign investors a chance to raise disputes with host states before an international arbitration court, thus bypassing the local justice system. The provision, initially conceived as a protection against risks such as arbitrary expropriations, retroactive changes and other political risks, has become increasingly contentious, particularly in developing countries, since the international arbitration system is perceived as largely opaque and skewed towards investors from Western countries.

Mr Modi’s government is now trying to regain partial control over investor-state disputes, with the new BIT model reasserting the supremacy of Indian courts over international arbitration courts, thus forcing foreign investors to refer to Indian court first.

The final reach of the provision is limited to a five-year rule period. This means that foreign investors will still have a chance to bring India before an international arbitration court five years after proceedings in local courts are initiated. A first draft of the new BIT model asked investors to fully exhaust local proceedings before going to arbitration, regardless of their length, but the government eventually backtracked on this and introduced the five-year limit.

“There’s been a lot of alarming reactions to part of the new BIT model,” says Laugue Poulsen, senior lecturer in international political economy at University College London. “But even if you are a supporter of the investment treaty regime, I don’t think it is inherently outrageous to suggest that foreign investors, like everyone else, should at least try to go through domestic courts before taking their disputes elsewhere.”

Business as usual

The impact of BITs on India’s capacity to attract foreign investment remains a matter of debate. A December 2016 study by Indian university professors Niti Bhasin and Rinku Manocha points out that more than two-thirds of investment inflows between 2001 and 2013 came from BIT partners, and eventually concluded that BITs “have contributed to rising FDI inflows by providing protection and commitment to foreign investors contemplating investment in India”.

What is certain is that the new BIT model has yet to be tested, and it will be an uphill road for India to make it a base for negotiation for future agreements with partners such as the EU or Canada, which have taken a very different approach to issues such as investment protection in their latest Comprehensive Economic and Trade Agreement. Meanwhile, any new foreign investment project, except for those originated in the handful of countries whose BITs with India were not terminated, will not rely on the investment protection provisions typically offered by BITs.

“If there is no international legal framework that an investor can use to hold the host accountable, that might jeopardise the interest of the investor in the long run, particularly in sectors such as infrastructure, where investments have long gestation periods,” says Mr Ranjan.

Some early signs of a weakening investment environment have already emerged. India posted record FDI figures in 2016 but inflows trailed off in the last two months of the year after Mr Modi’s draconian demonetisation on November 8, which scrapped 86% of the rupee banknotes in circulation. In 2017, total inbound greenfield investment announced in the first quarter amounted to just $3.3bn in 107 projects, the weakest performance since Mr Modi took office in May 2014, according to global investment monitor fDi Markets.

Temporary blip?

However, it remains to be seen whether this contraction, which coincides with a broader reform push that goes much further than BITs, will continue.

“It would take me by surprise if this leads to significant divestment or a considerable reduction of inward investment into India,” says Mr Poulsen. “If the market is right, if the project looks right, and investors can protect their investment through other means, there is no major concern from the absence of a BIT for the vast majority of firms. It would be very surprising if this has a tangible impact on most investment decisions into India in the next couple of years, unless these reforms reflect some underlying changes in the Indian investment regime becoming more protectionist over the coming years.”

Mr Modi’s government is still exerting efforts to promote the country as a manufacturing hub for the domestic and global markets through initiatives such as the Make in India campaign. Additionally, approval for FDI projects across most sectors has been streamlined through the so-called 'automatic route'. Demonetisation and GST reform are expected to increase the country’s ease of doing business for both local and foreign investors.

A new BIT model may possibly make investors more uneasy about doing business in India, but it is unlikely to taint the appeal of a fast-growing and changing market of 1.3 billion – at least, not overnight.