BIT by bit: How new India-UAE trade pact may reset future investment talks

India's revised approach to bilateral trade now includes a three-year local remedy clause in the UAE pact which could impact future investment

When India lost the arbitration case with Australian mining company White Industries in 2011, the first such defeat, it prompted a reassessment of its approach towards investment treaties, then known as Bilateral Investment Promotion Agreements (BIPAs).

India subsequently came up with a model Bilateral Investment Treaty (BIT) document in December 2015 and unilaterally terminated BIPAs with 77 countries, asking them, including the European Union, to renegotiate based on the model BIT.

The key contentious issue was the investor-state dispute settlement (ISDS) mechanism, under which an investor can drag a country to international arbitration if it finds the rules in the host country discriminatory or in violation of the investment agreement between the two countries.

Under India's earlier BIPAs, foreign investors had broader and more direct access to international arbitration for resolving disputes, as in the case of White Industries, bypassing the country’s judicial system. However, under the model BIT, investors must first exhaust all domestic legal remedies, typically requiring them to go through Indian courts for at least five years before resorting to international arbitration. This was designed to protect the state's regulatory sovereignty and minimise frivolous or premature international claims.

The model BIT didn’t take off, with only four countries—Belarus, Kyrgyzstan, Taiwan, and Brazil—which are not major FDI sources for India, signing investment treaties with India.

 

A fresh departure

In a departure from the model BIT, India has now concluded a BIT with the United Arab Emirates (UAE), reducing the local remedy time period to three years from five years, after which foreign investors can seek international arbitration if the Indian judicial system is unable to resolve a dispute.

While the treaty was signed on February 13 in Abu Dhabi and came into force on August 31, the details of the pact were made public on October 7. India has also included shares and bonds as protected investments in its investment deal with the UAE, unlike the model BIT, which only gives protection to foreign direct investment (FDI). However, as in the model BIT, taxation issues and granting most-favoured-nation (MFN) status have been excluded from the India-UAE BIT.

Prabhash Ranjan, professor at the Jindal Global Law School, said it seems the government has realised they are not able to sell the model BIT, especially to countries that want to export capital to India. “They have realised that we need to soften our stance. Also, as part of talks for trade deals, India is negotiating a BIT with the UK and an investment protection agreement with the European Union. It appears that the UK and EU have a problem with this five-year local remedy requirement. That could have played a role. Whether they will be happy with the three-year provision remains to be seen,” he added.

Ajay Srivastava, founder of the Delhi-based think tank Global Trade Research Initiative, said the India-UAE BIT signals a shift towards a more open investment environment at the expense of some regulatory sovereignty. “While it may attract more UAE investment, it also raises the risk of higher arbitration claims against India,” he added.

Srivastava also believes that broadening the definition of investment under the India-UAE BIT to include bonds and shares increases India’s exposure to disputes over financial instruments, even those that don’t contribute significantly to economic development, moving away from the model BIT's focus on long-term investments.

Ranjan, however, believes the broader investment definition was needed as investors no longer have to worry about subjective interpretation of whether their investments contribute to the host economy or not. “This would not mean every single share or bond would be included as a protected investment, as it has to satisfy other criteria like assumption of risk. So even if portfolio investment is included, I don't think that would lead to every fly-by-night operator trying to take advantage of the investment treaty,” he added.

Capital rules

India’s FDI equity inflows dipped 3.5 per cent in FY2024 to $44.4 billion. There has also been a substantial jump in repatriation of profits by existing foreign investors. India now aims to attract at least $100 billion in gross FDI per annum as many investors and multinational companies are looking to diversify away from China, Rajesh Kumar Singh, secretary in the Department for Promotion of Industry and Internal Trade, said in April this year. In FY24, gross FDI dipped marginally to $70.9 billion. India has also signed a trade deal with European Free Trade Association (EFTA) countries with the expectation that the latter will invest $100 billion in India over the next 15 years.

“If you're expecting so much investment, and if you don't want to offer treaty protection, it would deter countries from investing in India,” Ranjan said.

While Switzerland and India have also started exploring negotiations for a BIT, the former considers India’s insistence on a local remedy of five years too lengthy. “We don’t have a problem with the fact that we have to first exhaust the national mechanism if those mechanisms are working. Either the five-year period should be shorter or there should be an extremely efficient justice system that expedites such cases,” an EFTA official said before the India-UAE BIT came into force.

With Indian corporate houses expanding their wings globally, India has also become a substantial investor in other countries, and such investments require protection under BITs. According to UNCTAD data, outward FDI from India increased from $1.7 billion in 2013 to $13.3 billion in 2023.

“India is no longer only the destination for capital, but also the exporter of capital. With recent developments in Sri Lanka and Bangladesh, our investors would require protection in those countries rather than the other way around. So BITs should not be one-dimensional,” Ranjan pointed out.

However, it is not yet clear whether the India-UAE BIT is a one-off, or if it will become a permanent fixture in future negotiations. “To send a firm signal, India should amend the model BIT, incorporating the three-year local remedy provision. That would give a clearer signal to the outside world that this change is not just a one-off, but a change of heart,” Ranjan said.

Changing course

1994: India signed its first BIPA with the United Kingdom (UK)
 

2009:  India started negotiating an investment treaty with the US. Talks remain dormant due to different positions on key issues.
 

2011:  India received its first adverse award in relation to a BIPA in the White Industries Australia Limited V. Republic of India Case
 

2015: ndia adopted model BIT and terminated most of existing BIPAs
 

2018: India signed BITs with Taiwan and Belarus based on model BIT
 

2024: India signs BIT with the UAE giving major concessions in ISDS and investment protection