India’s Strategy to Safeguard Investor Rights in the UAE-India BIT

Bilateral Investment Treaties (BITs) constitute a cornerstone of international economic law, facilitating cross-border investment by providing reciprocal protections to investors from one state who invest in another (“host states”). These treaties establish a legal framework that balances the interests of both investors and host states, ensuring that foreign investors are treated fairly and equitably in accordance with international standards.

BITs play a crucial role in fostering international trade and investment. While BITs aim to create a favourable investment climate, disputes between investors and host states may arise. International arbitration offers a specialised dispute resolution mechanism that can address these conflicts impartially and effectively, ensuring that investors' rights are protected.

India and the United Arab Emirates (UAE) have recently formalised their economic partnership through the signing of a Bilateral Investment Treaty (BIT), which entered into force on August 31, 2024. This agreement represents a significant milestone in the ongoing economic cooperation between the two countries, building upon a historical trade relationship that has contributed to mutual development. India has also concluded a BIT with Uzbekistan on September 27, 2024, which is expected to enter into force at a later date. Historically, India dates back to its origin of signing BITs in 1994 with Russia and the United Kingdom.

Since the start of the 21st century, India has embarked on a concerted effort to attract foreign direct investment (FDI) by entering into a multitude of bilateral investment treaties (BITs) with nations around the globe. Over eighty such agreements were concluded in the last two decades. Furthermore, India actively pursued free trade agreements that included dedicated chapters on investment protection, further enhancing the country's investment climate.

Investors-state dispute against India as respondent:

India, being the largest democracy and lack of political instability, has emerged as a significant challenge for investors. Given India's diverse political environment, characterised by frequent elections and shifting government policies, long-term investments often involve a degree of uncertainty. A notable example is the multiple investor disputes stemming from the Dabhol power project in Maharashtra in the early 2000s. In this case, investors exercised their rights, alleging breaches of bilateral investment treaties (BITs), which ultimately led to arbitration proceedings against India.

India has faced a significant number of investor-state disputes, with over twenty arbitration cases on record to date. While a few cases, such as V.N. Dastur and others v. India, LDA v. India, and White Industries Ltd. v. India, have been decided in favour of the state, the majority have favoured the claimants (investors), resulting in substantial financial losses for India.

Promote Investment and Protect Investor’s Interest: 

To foster greater investment opportunities, India revised its Model Treaty in 2015 to introduce a more flexible framework. The Model Treaty 2015 presented certain challenges, as its state-centric provisions placed notable restrictions on investors' ability to initiate legal action against the state. These aspects raised concerns among investors and prompted careful consideration before committing to investments.

 Obstacles in Model Treaty 2015: 

1. Article 15 - has a requirement that foreign investors must pursue local remedies in the host state for at least five years before commencing a BIT arbitration against Inda.

2. Article 2.4 (ii) - excludes any taxation measures imposed by India from the

3. Article 1.4 - narrows the scope of protected “investments”

4. Absence of Most Favoured Nation (“MFN”) clause.

However, India amended its 2015 Model BIT, focusing “on both the investor’s right to get protection and also sovereign interest and the State’s right to regulate.” It can be seen in recent BIT between India and the United Arab Emirates (UAE).

Key Features of the 2024 India-UAE BIT:

1. Definition of Investment (Article 1.4): The treaty adopts an asset-based definition of investment, notably including portfolio investments, which were excluded in India's 2015 Model BIT.

2. Investor-State Dispute Settlement (Article 17.1): The BIT requires investors to exhaust local legal remedies in the host state for three years before initiating international arbitration, a reduction from the five-year requirement in the 2015 Model BIT.

3. Right to Regulate (Article 2): The agreement acknowledges the host state's right to regulate in the public interest, balancing investment protection with sovereign regulatory autonomy.

4. Exclusion of Third-Party Funding (Article 16): The treaty expressly prohibits third-party funding in investor disputes, reflecting a cautious approach towards external financing in arbitration proceedings.

5. Compensation Limitations (Article 27.3): The BIT stipulates that compensation awarded by arbitral tribunals shall not exceed the actual loss suffered by the investor, explicitly excluding incidental and consequential damages, including future profits.

6. Full Protection and Security: The treaty limits the obligation of full protection and security to the physical security of investors and their investments, aligning with the minimum standard of treatment under customary international law.  

The 2015 Model Treaty, while a foundational document, exhibited certain limitations. Although amendments have been implemented, the revised Model BIT still presents several areas requiring further deliberation and consensus among stakeholders. 

Points of Concern for Investors:

1. Regulatory and Policy Ambiguity: Investors might remain concerned about how India will interpret and implement provisions related to its right to regulate, especially in light of past treaty disputes.

2. Limited Scope for Compensation: Excluding consequential damages and future profits in arbitration could deter long-term investments, as it limits recourse for significant financial impacts stemming from state actions.

3. ISDS Mechanism Hurdles: The mandatory exhaustion of local remedies might create delays and uncertainty for international investors, particularly in jurisdictions where the judicial process can be protracted.

Conclusion:

The India-UAE BIT reflects India’s efforts to strike a balance between investor protection and safeguarding its sovereign rights. While the treaty represents a move towards creating a predictable and investor-friendly framework, some clauses, such as the restriction on third-party funding, procedural requirements for dispute resolution, and limited compensation provisions, may remain points of concern for investors. For India and the UAE to realise the full potential of this treaty, these areas might require clarity, amendments, or supplementary agreements to address investor concerns effectively.

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