INTRODUCTION
In furtherance of the commitment to promote a stable and transparent investment climate, India and the United Arab Emirates ("UAE") executed a new Bilateral Investment Treaty ("India-UAE BIT") on August 31, 2024, marking a significant milestone in their economic relations. This treaty supersedes the Bilateral Investment Promotion and Protection Agreement ("BIPPA") executed in December 2013, which remained in force until its expiry on September 12, 2024. The growing economic and legal ties between India and the UAE are exemplified by rising bilateral trade, cross-border investments and evolving treaty frameworks, reflecting the nations' shared objective to strengthen their investment landscape.
The India-UAE BIT embodies a progressive framework aimed at inspiring greater credibility and certainty among foreign investors, by incorporating key elements of India's Model BIT, which was adopted in 2016 ("Model BIT"), as part of a broader policy recalibration. An official statement from the Ministry of Finance, Government of India underscores that the treaty is expected to enhance investor confidence by ensuring investor protection, non-discrimination, minimum standard of treatment, and access to an independent arbitral forum for dispute resolution, while preserving the State's regulatory autonomy for public interest measures.1 While the treaty provides investors with critical safeguards, including protection against expropriation and access to arbitration, it simultaneously reinforces the host state's regulatory autonomy, aligning with India's broader investment policy objectives.
By crafting a balance between investment protection and sovereign regulatory autonomy, the India-UAE BIT seeks to encourage bilateral investment across key sectors such as infrastructure, renewable energy, healthcare, logistics, and artificial intelligence. The India-UAE BIT incorporates significant departures from BIPPA and the Model BIT, underscoring India's strategic reformulation of its investment treaty framework. These refinements are poised to shape India's approach to future investment treaty negotiations, with far-reaching implications for its broader investment policy.
FROM BIPPA TO INDIA-UAE BIT: A STRATEGIC SHIFT IN POLICY
India's BIT framework has undergone some transformation, wherein a more balanced approach has been adopted giving due weightage to host state's regulatory autonomy. Under its earlier BITs including the BIPPA, India offered extensive protections to foreign investors with limited regulatory safeguards for the host state. However, the India-UAE BIT which derives its structure from India's Model BIT adopted in 2016, demonstrates the transition from India's initial liberal and investor-centric approach, as embodied in BIPPA, to a more cautious approach. The same can be gathered from the following key differences between BIPPA and the new India-UAE BIT:
- Encouragement of Investments vs. Right to Regulate: Article 3 of BIPPA (Encouragement of Investments) contained sweeping protections for investors and their investments. However, Article 3 of the India-UAE BIT (Right of State to Regulate), which is a novel addition even to the Model BIT, introduced a more measured approach, reflecting India's revised stance. This underscored the state's prerogative to regulate investments in furtherance of legitimate public policy objectives.
- Standard of Treatment: BIPPA included the traditional and widely accepted Fair and Equitable Treatment ("FET") standard and the Most-Favored Nation ("MFN") clause. The India-UAE BIT omits the FET standard and MFN clause, but introduces a set of other guarantees, protecting investors from measures that are "manifestly arbitrary, abusive, coercive, or discriminatory" unless such actions are taken in pursuit of legitimate policy objectives.
- Expropriation Standards: BIPPA provided broad protection against expropriation, requiring full compensation based on the fair market value of the investment. While the India-UAE BIT continues to safeguard investments against expropriation, it explicitly excludes certain state measures from being categorized as expropriatory. These include non-discriminatory regulatory actions taken for public purposes, such as public health, safety, environment or land acquisition done in accordance with the Indian laws or non-discriminatory measures in the public interest (Article 6).
- Local Remedies Requirement: BIPPA did not require investors to exhaust or pursue local remedies before initiating arbitration, facilitating easier access to international dispute resolution. However, the India-UAE BIT mandates investors to pursue local remedies for three years before resorting to international arbitration (Article 17), following the Model BIT.
These departures from BIPPA stem from India's recalibrated approach towards investment treaty formulation, as adopted in its Model BIT in 2016. The India-UAE BIT underscores this shift in policy by safegaurding the regulatory autonomy of the host state while maintaining a calibrated level of investor protection.
NOTABLE FEATURES OF THE INDIA-UAE BIT 2024: A COMPARATIVE ANALYSIS WITH INDIA'S MODEL BIT
As stated previously, India's earlier BITs, were characterized by a liberal and investor-friendly approach. However, in light of its negative experience with international investment arbitration and rising domestic concerns, India undertook a fundamental restructuring of its investment treaty framework by adopting the Model BIT in 2016, replacing the 2003 version. This marked a significant policy shift, aimed at striking an equilibrium between investor protection and the regulatory autonomy of the state and its sovereign right to take measures in the public interest. Against this backdrop, the analysis of the key feature of the India-UAE BIT, highlighting the extent to which the treaty adheres to or deviates from the principles of the Model BIT, is provided below:
A. Scope of Protected Investments
The Model BIT limits protection to only those investments which are made by investors "in accordance with the applicable laws and regulations" of the host State "with the necessary approvals in the relevant economic sector" (Article 1.4). This requirement is meant to discourage investments that circumvent or breach the host state's laws. In this context, the India-UAE BIT departs from the Model BIT in as much as it omits the requirements for investments to have a 'certain duration' and 'significance for the development' of the host State.
Further, akin to the Model BIT, the India-UAE BIT limits the scope of protections for investors as it excludes from protection any law or measure related to taxation (Article 2.4(ii)). However, many experts have indicated that this express reservation is likely a response to India's losses in the Vodafone2 and Vedanta3 arbitrations; both arising out of tax-related disputes.4
B. Inclusion of Portfolio Investments
An important highlight of the India-UAE BIT is the inclusion of portfolio investment within the scope of protected investments covering shares, stocks and other forms of equity participation along with bonds, debentures, loans and other debt instruments (Article 1.4.B and 1.4.C). This inclusion acknowledges the evolving nature of capital flows and aims to encourage both long-term FDI and short-term capital through portfolio investments. This provision is in stark contrast with the Model BIT, which expressly excludes portfolio investments from the scope of 'investment.'
This raises concerns regarding India's potential exposure to disputes involving financial instruments that may not meaningfully contribute to its economic development. However, such risks may be mitigated by the treaty's requirements for an investment to possess certain characteristics in order to be protected. These include (i) a commitment of capital or other resources, (ii) an expectation of gain or profit, and (iii) the assumption of risk (Article 1.4). This criteria mirrors the test laid down in Salini v. Morocco,5 according to which 'financial instruments' not contributing to the 'economic development' of the host state would not qualify as protected investments.
C. Access to Arbitration and Conditions Precedent
Similar to the Model BIT, the India-UAE BIT obligates the investors to comply with 'conditions precedent' before initiating a claim in arbitration (Article 17).While the Model BIT required investors to 'exhaust' all local remedies for a minimum of five years, the India-UAE BIT reduces this period, requiring investors to 'pursue' local remedies for three years. After lapse of the said period, the investors shall have an absolute right to submit their claim to arbitration, irrespective of any pending proceedings.
This is indeed a step towards greater flexibility and accessibility, although it still requires foreign investors to subject themselves to domestic courts and administrative bodies of the host state within one year of becoming aware of the disputed measure and its resulting damage, i.e., the knowledge date (Article 17.1). However, the requirement to seek local remedies may be waived if the investor can demonstrate that there are no domestic legal remedies reasonably capable of providing the desired relief against the alleged breach of treaty obligations. This raises a natural question that who should determine the availability of effective local remedies, a question that investors argue must be reserved for the arbitral tribunal.6
D. Prohibition on Third Party Funding of Investors
Another feature of the India-UAE BIT isthe express prohibition on third-party funding for investors in ISDS proceedings (Article 16). This provision marks a significant departure not only from India's Model BIT but also from its recent BITs with Belarus, Brazil, and Kyrgyzstan, none of which address or restrict third-party funding. This prohibition is particularly striking given that Indian law neither prohibits nor regulates third-party funding in litigation or arbitration.
This blanket ban presents a significant challenge for investors, as investment arbitration is typically a lengthy and costly process that many investors pursue only with the support of third-party funding. From an investor's perspective, such a prohibition raises concerns regarding access to justice.
E. Powers of the Arbitral Tribunal to award damages
Both the Model BIT (Article 26) and the India-UAE BIT (Article 27) restricts arbitral tribunals to awarding monetary damages only, explicitly excluding punitive, moral damages, and injunctive relief. However, they differ in calculating such damages. The Model BIT caps damages at the investor's actual loss, adjusted for any prior compensation. However, the India-UAE BIT goes further by restricting compensation strictly to the investor's actual loss, excluding incidental or consequential damages like future profits. This marks a departure from Customary International Law ("CIL"), which typically includes both actual losses and lost profits as part of "full reparation".7
F. Exceptions and Carve-outs for Regulatory Measures
A noteworthy inclusion in the India-UAE BIT is the express recognition of the host state's "right to regulate" (Article 2). This provision allows each state to adopt or maintain measures to pursue legitimate public policy objectives, such as environmental protection, health, and safety. The treaty explicitly states that regulatory actions affecting investments or investor expectations, including profit expectations, do not constitute treaty violations.
In addition to the above, the India-UAE BIT affords regulatory flexibility and autonomy to both nations by envisaging broad general (Article 33) as well as security exceptions (Article 34), preserving their right to enact measures that may otherwise breach their respective treaty commitments. The treaty specifically exempts certain measures from the its scope, including those by local governments, or pertaining to taxation and related enforcement, intellectual property rights under WTO rules, government procurement, subsidies, and non-commercial governmental services (Article 2). Notably, decisions by a host State, deemed as a measure related to taxation are excluded from arbitral review, reinforcing the State's control over such matters.
G. Standards of Treatment
Mirroring the Model BIT, the India-UAE BIT does not provide investors with the well-recognized standards of protection like Fair and Equitable Treatment (FET) or a Most-Favored Nation (MFN) clause. Instead, it extends other set of standard protections like; protection against denial of justice in judicial or administrative proceedings; fundamental breaches of due process; targeted discrimination on manifestly unjustified grounds, such as gender, race or religious belief; or from manifestly abusive or arbitrary treatment, unless such measures are undertaken for legitimate public policy objectives (Article 4.1).
In further consonance with the Model BIT, the India-UAE BIT extends 'Full Protection and Security' ("FPS") standard to investments, however, the same is expressly restrictedto physical security of the investor, excluding legal or commercial security (Article 4.2). Similarly, Article 4.3 affirms that breaches of other treaty provisions or international agreements do not automatically constitute a breach of the standards of treatment clause.
Apart from the above, investors are guaranteed national treatment, ensuring treatment no less favourable than that accorded to domestic investors (Article 5); protection against both direct and indirect expropriation, with compensation based on the fair market value of the investment prior to the measure (Article 6). However, certain expropriatory claims are excluded, including inter alia, measures taken for public purposes (Article 6.1); measures taken by the host state in a commercial capacity (Article 6.4); non-discriminatory regulatory measures (Article 6.5); judicial awards protecting legitimate public interest or public policy objectives (Article 6.5).
H. Enforcement Under the India-UAE BIT
Although, India is a signatory to the New York Convention, which serves as the primary framework for enforcing foreign arbitral awards, it is not a party to the ICSID Convention. It has adopted the reciprocity reservation under Article I (3) of the New York Convention, limiting its application to awards made in the territory of other contracting states. Additionally, India has applied the commercial reservation,8 enforcing awards only if they arise from legal relationships deemed commercial under Indian law. These reservations are relevant for understanding enforcement of awards under the India-UAE BIT (Article 28.4).
The India-UAE BIT emphasizes the need for a national legal framework to enforce treaty awards (Article 28). In this context, even though Part II of India's Arbitration and Conciliation Act, 1996 ("the 1996 Act") provides such a mechanism, Section 44 of the Act requires India to notify a country as a reciprocating territory through a Gazette notification. The first sentence of Article 28.4 in the India-UAE BIT aligns with the Model BIT (Article 27.4) and other post-2015 BITs signed by India. However, the second sentence marks a unique departure from the Model BIT as it mitigates this requirement, by stipulating that enforcement under the New York Convention is permissible irrespective of a notification, provided the award originates from a New York Convention signatory state.
Section 44(b) of the 1996 Act serves as a procedural rule for identifying contracting states, rather than a barrier to enforcement. Article 28.4 appears to endorse this interpretation, reinforcing that a lack of Gazette notification should not preclude the enforcement of awards from New York Convention signatory states. In essence, Article 28.4 of the India-UAE BIT reflects India's evolving stance on arbitration, balancing statutory requirements with a pragmatic approach to facilitate the enforcement of treaty awards.
Notably, the UAE is not notified as a reciprocating territory under Section 44 of the Act, precluding the direct enforcement of UAE-seated arbitral awards in India. However, this procedural limitation can be circumvented by way of the Ministry of Law and Justice's Notification,9 whereby the UAE was declared a reciprocating territory for the purposes of Section 44A of the Civil Procedure Code, 1908 ("CPC"). Under Section 44A of CPC, decrees passed by certain UAE courts are recognizable and enforceable in India. Accordingly, arbitral awards rendered in UAE-seated arbitrations can be ratified and converted into decrees by the relevant UAE courts for their enforcement in India under the CPC .
CONCLUSION AND ANALYSIS
The India-UAE BIT, represents a thoughtfully structured framework that harmonizes the dual imperatives of fostering foreign investment and upholding regulatory sovereignty. Rooted in India's Model BIT, the treaty reflects India's measured approach towards investment governance, recalibrating investor rights while preserving the State's prerogative to regulate in public interest. By incorporating provisions that facilitate portfolio investments and streamline local remedies requirements, the treaty demonstrates a considered flexibility aimed at enhancing investor confidence. At the same time, mechanisms such as the prohibition on third-party funding and narrower standards for expropriation and treatment of investors are indicative steps towards mitigating potential treaty disputes.
By striking an equilibrium between investor protection and state sovereignty, the treaty reinforces India's ability to engage in BIT negotiations while maintain policy space in alignment with its evolving domestic priorities.
In a broader context, the India-UAE BIT sets a precedent for India's future investment treaty negotiations, signalling towards a carefully calibrated and policy-driven approach. The treaty demonstrates and attempt to align investment protection with domestic policy imperatives and long-term economic stability. By reinforcing investor confidence while preserving regulatory discretion, the treaty strengthens India-UAE economic cooperation, providing a structured framework for foreign investment positioning India as a formidable global investment destination.
Footnotes
1. Press Release dated 07.10.2024, Ministry of Finance 'Bilateral Investment Treaty between India and the United Arab Emirates, giving continuity of investment protection to investors of both the countries, comes into effect', available at https://pib.gov.in/PressReleasePage.aspx?PRID=2062692.
2. Vodafone International Holdings BV v. India (I) (PCA Case No. 2016-35), 2014.
3. Vedanta Resources PLC v. The Republic of India (PCA Case No. 2016-05), 2016.
4. Investment Treaty Arbitration: India, Global Arbitration Review, https://globalarbitrationreview.com/insight/know-how/investment-treaty-arbitration/report/india.
5. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco [I], ICSID Case No. ARB/00/4, 2001.
6. Ambiente Ufficio S.p.A. and others (formerly Giordano Alpi and others) v. Argentine Republic (ICSID Case No. ARB/08/9), 2008.
7. Flemingo DutyFree Shop Private Limited v. Republic of Poland, PCA Case No. 2014-11.
8. India will apply the Convention only to recognition and enforcement of awards made in the territory of another contracting State. India will apply the Convention only to differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law.
https://newyorkconvention1958.org/index.php?lvl=cmspage&pageid=11&menu=581&opac_view=-1
9. Ministry of Law and Justice's Notification dated January 17, 2020 https://egazette.gov.in/WriteReadData/2020/215535.pdf.
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