How India’s 2015 Model BIT Hurt Investor Confidence

India’s external sector is once again beginning to show signs of strain. The rupee remains under sustained depreciation pressure. The current account deficit is widening under the combined weight of elevated energy imports, slowing exports and geopolitical uncertainty. At the same time, net foreign direct investment inflows have weakened sharply as repatriations and outbound investments increasingly offset fresh inflows.

None of this yet amounts to a full-blown balance-of-payments crisis. But the direction of movement is sufficiently concerning to demand policy attention before vulnerabilities deepen.

India’s growth ambitions — manufacturing expansion, infrastructure creation, clean energy transition and supply-chain integration — require stable, long-duration foreign capital. These objectives cannot be financed indefinitely through volatile portfolio inflows or rising external debt. An economy of India’s scale requires patient capital rather than speculative capital.

This is why the weakening of net FDI matters.

From Investor Protection to Investor Activism
India’s older generation Bilateral Investment Promotion and Protection Agreements, or BIPAs, were heavily tilted in favour of investors. Modelled on first-generation OECD-style treaties, they contained broad and open-ended protections. Expansive formulations of “fair and equitable treatment”, sweeping Most-Favoured-Nation clauses and unrestricted investor-state dispute settlement mechanisms exposed the sovereign to a growing number of arbitral claims and inconsistent treaty interpretations.

The definition of investment itself was extraordinarily wide. It covered immovable property, portfolio investments, contractual claims and a broad range of intangible financial interests. This enabled investors to invoke treaty protection even where the underlying economic relationship with India was tenuous or largely financial in character.

Following disputes involving taxation, telecom licences and regulatory interventions, concerns grew that investment treaties were increasingly being used not merely to protect investors against arbitrary state action, but also to challenge sovereign regulatory decisions in areas of legitimate public policy.

A recalibration was therefore necessary. The important question, however, is whether the eventual 2015 Model Bilateral Investment Treaty (BIT) moved beyond recalibration into overcorrection.

The More Balanced 2012–14 Approach
The initial direction of India’s BIT reform process during 2012–14 sought to reconcile two objectives: preserving sovereign regulatory authority while maintaining India’s attractiveness as a destination for long-term productive investment.

That approach had already addressed many of the structural weaknesses in the earlier BIPA regime. It narrowed the definition of investment, diluted expansive interpretations of fair and equitable treatment, restricted the abuse of Most-Favoured-Nation provisions, and strengthened the sovereign’s regulatory space in matters relating to taxation, public policy, and the national interest.

The treatment of investment definition is particularly important because it reveals the philosophical difference between the 2012–14 approach and the final 2015 treaty.

The earlier reform approach moved away from the broad asset-based definition toward an enterprise-based definition designed to distinguish genuine productive investment from speculative or purely financial exposure. Portfolio investments, government securities and transient commercial transactions were progressively excluded from treaty protection. Treaty protection was intended to apply primarily to enterprises with a real economic presence in India rather than to passive financial claims.

The rationale behind this approach was sound. It aligned treaty protection more closely with India’s developmental priorities by privileging investments generating manufacturing capacity, employment, infrastructure and long-term participation in the domestic economy.

Crucially, however, the earlier framework still sought to preserve investor confidence. The objective was to narrow treaty protection, not to make such protection appear inaccessible or structurally adversarial.

Sovereignty Without Isolation

The most sophisticated aspect of the earlier framework lay in its treatment of dispute resolution.

It recognised an important constitutional principle: international investment tribunals are not supra-national appellate courts sitting over the Supreme Court of India.

Under that framework, investors retained access to international arbitration for treaty breaches, but tribunals could not overturn Supreme Court judgments, invalidate sovereign legislation or reinstate cancelled licences. Their role was confined to awarding monetary compensation where treaty obligations had been violated.

Constitutional supremacy, therefore, remained intact. Domestic courts retained final authority over Indian law, while investors retained access to neutral international remedies in cases involving discriminatory or arbitrary treatment.

The framework also sought to prevent parallel proceedings by requiring investors to choose between pursuing domestic remedies and international arbitration for the same measures. Matters conclusively settled by Indian courts would not be reopened before international tribunals.

This represented a workable constitutional compromise. It preserved sovereign authority without signalling distrust of international adjudicatory mechanisms. However, before the draft could be approved, the government changed.

The Shift in the 2015 Model BIT

The final 2015 Model BIT moved significantly beyond this balance.

While retaining legitimate safeguards for the sovereign state, it also substantially increased the procedural threshold for accessing international arbitration. The treaty imposed prolonged exhaustion requirements for domestic remedies before arbitration could be initiated. Protections for fair and equitable treatment were sharply narrowed. Most-Favoured-Nation provisions were eliminated altogether. The definition of investment became progressively restrictive, while extensive carve-outs insulated large areas of sovereign conduct from treaty scrutiny.

Individually, many of these provisions could be defended. Collectively, however, they altered the signalling environment. The cumulative message conveyed by the treaty architecture was that sovereign insulation had become the dominant policy objective.

This has important economic implications because investment treaties are not merely legal instruments. They also shape perceptions regarding the broader investment climate.

Countries competing for global manufacturing and strategic capital are increasingly judged not merely by labour costs or incentive schemes but by legal predictability and enforceability. Vietnam, Indonesia, the UAE and Saudi Arabia are all aggressively competing for manufacturing relocation and long-duration investment flows.

Following the adoption of the 2015 Model BIT, many existing BITs lapsed or were terminated pending renegotiation under the new framework. Negotiations for replacement agreements became slower and more difficult. Over time, a perception emerged that India sought foreign capital while simultaneously distrusting the international legal frameworks through which such capital secures confidence.

At a moment of growing external sector pressure, such signalling imposes economic costs.

Reclaiming the Middle Path
None of this implies that India should return to the older generation of highly investor-friendly treaties. Sovereign regulatory authority is entirely legitimate.

The 2012–14 reform approach demonstrated that a more balanced middle path is possible. It protected constitutional sovereignty while preserving access to neutral dispute resolution. It recognised the dangers of arbitral excess without creating the perception that international investment protection itself had become suspect.

At a time when India urgently requires stable external capital to manage widening external imbalances, revisiting that balanced approach may well have become a macroeconomic necessity.

For an economy seeking to become a global manufacturing and investment hub, treaty design cannot become an exercise in sovereign defensiveness alone. The challenge is not choosing between sovereignty and investment protection. It is constructing a framework credible enough to secure both.