On 7 October 2024, the Ministry of Finance issued a press release that India and the UAE had executed a new Bilateral Investment Treaty (BIT) on 13 February 2024, which came into force from 31 August 2024.
India's tryst with BITs
International investment agreements, which include BITs and investment chapters in free trade agreements, are entered into between two or more States, with an aim to facilitate and protect foreign investments made by their investors in each other's territories. BITs create legal obligations between a State (Host State) and foreign investors in its territory from the other State (Home State). BITs provide foreign investors with a framework of rights, which they can rely on to protect their investment from interference by the Host State. In case the Host State commits a breach of the BIT, the foreign investors can directly sue the Host State by commencing an arbitration before an independent tribunal, comprising of arbitrators appointed by the parties to the dispute.
Over the last sixty years, BITs have become one of the key building blocks of the international legal framework governing Foreign Direct Investments (FDI). Since 1959, when Germany and Pakistan concluded the first BIT, over 3,000 such treaties have been signed. Between 1994 and 2010, in its liberalization phase, India entered into over 80 BITs with a view to increase the inflow of FDI.
In 2011, India faced its first adverse award against White Industries, an Australian investor, under the Australia – India BIT. This opened the floodgates for more claims by investors over the next ten years – several of which resulted in adverse awards worth millions of dollars. In this backdrop, India terminated over 75 BITs between 2017 and 2021, and began fresh negotiations on the basis of a new Model BIT, published in 2016, which as per the Government, contains a better balance of rights of both the investors and States.
Since 2017, only a handful of countries such as Brazil, Belarus and Kyrgyzstan have agreed to sign new BITS, based on the Model BIT. To address this, it was reported earlier this year that the PMO has requested the Commerce Ministry to re-examine the Model BIT and recommend modifications to improve the ease of doing business in India. The 2024 India - UAE BIT comes in the wake of this renewed focus.
The 2024 India - UAE BIT
Historically, the UAE has been a crucial economic partner for India, having invested approximately US$ 19 billion in India between 2000 - 2024. Similarly, India also sees a large amount of outward investment in the UAE, amounting to US$ 15.26 billion between 2000-2024. The new BIT is therefore an important step forward to foster this economic relationship.
The 2024 India - UAE BIT replaced the erstwhile BIT between the two nations signed in 2014 (2014 BIT). It provides that the 2014 BIT shall cease to have effect from 12 September 2024, and any claim under the previous treaty must be brought within five months from this date. This is a relatively short period of time and investors who have made qualifying investments under the prior treaty should closely review their rights to evaluate if they wish to bring claims.
Some key features of the 2024 India – UAE BIT are discussed below.
- Fair and equitable treatment: Most BITs generally contain a provision ensuring fair and equitable treatment (FET) of the investments, which has been interpreted to include a host of measures such as protection against breach of legitimate expectations and failure to offer a predictable legal framework. The India - UAE BIT omits this provision and provides a narrower list of protections against: (a) denial of justice in any judicial or administrative proceedings; (b) fundamental breach of due process; (c) targeted discrimination on manifestly unjustified grounds; and (d) manifestly abusive or arbitrary treatment. These protections are far narrower than the wide scope of the standard FET clause.
- Most favoured nation clause: Unlike the 2014 BIT, the 2024 India-UAE BIT does not contain a most favoured nation (MFN) clause. An MFN clause is typically present in BITs and protects an investor against less favourable treatment when compared to investments of other foreign investors from a different State. In essence, it aims to provide a uniform standard of treatment across investors from different States – and was therefore frequently invoked by investors to "import" more favourable substantive and procedural provisions from other BITs.
- National treatment: The India - UAE BIT contains a 'National Treatment' clause, which guarantees that the Host State shall not accord less favourable treatment to foreign investors than it accords to its own investors. However, this clause is restricted to treatment accorded by the 'Sub-national Government', e.g. a state or union territory. This restriction recognises the federalist structure of both countries, where states and emirates enjoy autonomy in policy making. Therefore, an investor would need to show that the treatment accorded by a specific state (e.g. Maharashtra) to its investment is less favourable than accorded by the same state to a domestic investor.
- Right to repatriate funds: The BIT provides investors with a right to freely repatriate funds related to an investment (e.g. dividends, royalties, etc.) to their Home State. However, the Host State may restrict or prohibit a transfer through a good faith application of the law, including actions relations to insolvency, taxation, recovery of proceeds of crime, requirements to lock-in initial capital investments under the FDI policy, etc.
- Taxation measures: In line with the Model BIT, the 2024 India-UAE BIT also provides several policy exceptions to the Host State. For example, State measures relating to taxation are excluded from its scope. This stems from India's loss in several investment treaty arbitrations in the last decade, wherein the investors such as Cairn and Vodafone successfully raised claims in respect of retrospective taxes levied by the Indian Government.
- Investor obligations: The BIT also imposes reciprocal obligations on foreign investors to ensure compliance with local laws. Investors are also encouraged to voluntarily incorporate international standards of corporate social responsibility obligations in their practices and policies.
- Procedural requirements: In order to invoke a claim under the BIT, investors must first pursue local remedies in the local courts of the Host State for atleast three years, before commencing investor state arbitration under the BIT. Further, an investor must commence a claim before local courts within one year of the date on which the investor had knowledge of the breach, regardless of whether a longer limitation period is available under domestic laws.
- Third party funding: In a departure from industry practice, the BIT does not permit investors to use third party funding for disputes under the treaty. This is a significant impediment for investors, as investment treaty arbitration is a long-drawn and expensive process and investors are often able to bring claims only with the help of third party funding.
Overall, the India – UAE BIT offers mixed signals to investors. On the one hand, it marks a significant advancement in the framework governing foreign investments between these two nations. By retaining the core principles of the Model BIT and implementing strategic modifications to the 2014 BIT, the new treaty aims to bolster investor confidence while safeguarding sovereign interests. These changes reflect an attempt to create a more balanced investment environment.
However, the dilution of certain key substantive rights such as FET and MFN, and the procedural hurdles to bringing claims, such as the mandatory recourse to local courts and prohibition on third-party funding, will leave the investors feeling shortchanged. While these changes are favourable to States while defending claims, they significantly restrict investor rights – which will impact both foreign investors looking to invest in India and Indian investors looking to make outbound investments in the UAE. Given India's targeted efforts to boost FDI, a robust and pro-investor BIT policy is critical to ensure foreign investors that their investments in India are covered by international protections.
The authors would like to thank Kevin Santhosh, Aassociate at Shardul Amarchand Mangaldas, for his assistance with this article".
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