Time will judge whether the treaty has managed to strike a fine balance between promoting foreign investment and the state’s right to regulate. (PTI/File)
The Bilateral Investment Treaty (BIT) between India and the United Arab Emirates came into force from August 31, 2024. Replacing the earlier Bilateral Investment Promotion and Protection Agreement (BIPPA) which lapsed on September 12, 2024, the BIT marks a significant move to bolster economic cooperation with the UAE, a country which accounts for 3 per cent of the total FDI receipts in India and cumulative investments of $19 billion between 2000-24.
This announcement comes at a time when India’s bilateral treaties have dried up, more so, since the adoption of the model BIT in 2016. Despite having contested several BIT claims and suffering adverse awards in multi-billion dollar disputes from international tribunals, the model BIT was seen more as a knee-jerk reaction, a one-size-fits-all measure rather than a nuanced and calibrated approach towards cross-border trade. This resulted in the termination of 68 of the 74 BITs which were in force as of 2015. The difficulty in renegotiating terms with other countries under the 2016 model led to a decline in FDI. According to government data, between April 2023 and September 2024, FDI equity inflows declined 24 per cent whereas the total FDI, which also includes reinvested earnings and capital inflows, contracted by 15.5 per cent.
Harbouring aspirations of a $5 trillion economy, the Indian government, in its 2024 Interim Budget promised a renewed push to re-energise economic ties with its trade partners. The India-UAE BIT is an important step towards fulfilling that promise. It is interesting to note from the text of the treaty, India’s softened and flexible stance in amending or dispensing with certain covenants from the model BIT. For instance, under the model BIT, an investor was mandated to first resort to local remedies under the Indian legal system for five years before taking recourse to international arbitration. This has been watered down to three years under the India-UAE BIT (Article 17.1). The issue relating to exhaustion of local remedies has been an Achilles heel for India in its negotiations with the UK for the free trade agreement which long awaits a breakthrough. One will have to wait and watch whether the amendment to this clause will provide a template for other countries which are also seeking similar concessions.
Another noteworthy addition is the inclusion of a negative covenant prohibiting investors from availing third-party funding for contesting disputes. Historically, third-party funding in common law jurisdictions such as India was viewed in contravention of public policy under the colonial doctrines of champerty and maintenance. However, these have been significantly diluted to embrace modern economic realities. Even the Supreme Court, in Bar Council of India v AK Balaji (2018), held that financial assistance from an unrelated party to a dispute would not ipso facto be deemed in contravention of public policy. A recently constituted expert committee by the Ministry of Law and Justice in its report (February, 2024) has even recommended the inclusion of third party funding in our arbitration regime. In that light, a blanket prohibition of third-party funding for investor-state disputes runs against the domestic tide which has started to embrace the concept.
The India-UAE BIT broadens the scope of trade by including portfolio investments (Article 1.4) which were specifically excluded in the model BIT. This would allow investors with financial holdings to take recourse under the BIT and make any disputes arising therefrom amenable to the investor-state dispute settlement mechanism (ISDS) under the BIT. The Global Trade Research Initiative has rightly flagged this issue by stating that it may increase India’s exposure to disputes over financial instruments, even those that don’t significantly contribute to economic development, moving away from the model BIT’s focus on long-term investments.
Time will judge whether the treaty has managed to strike a fine balance between promoting foreign investment and the state’s right to regulate. The discussions on the proposed FTAs with the UK and the EU are at an advanced stage. Negotiations with other countries such as Hong Kong, Australia, Oman, Saudi Arabia and Russia are also active. Notwithstanding what ensues, for the time being, given India’s disappointing ratings in contract enforcement and current geo-political conundrums, these steps should be viewed in the right spirit which hopefully pave the way for a robust cross-border economic ecosystem, BIT by BIT.
The writer, a lawyer, is partner at Numen Law Offices
