India Overhauls BIT Model to Shield FPIs, Guaranteeing Faster Arbitration Access

India Overhauls BIT Model to Shield FPIs, Guaranteeing Faster Arbitration Access​

A significant shift is underway in India's bilateral trade framework as new Bilateral Investment Treaties (BITs) are being redesigned to specifically incorporate safeguards for Foreign Portfolio Investors (FPIs). This move aims to substantially enhance the ease of doing business and boost investor confidence by addressing concerns regarding portfolio asset treatment. The revised BIT model, expected in the coming months, seeks to eliminate gaps that previously existed between long-term direct investments and more sensitive FPI portfolios.

A BIT serves as a crucial pact between two nations designed to protect and promote investments. These treaties provide assurances such as non-discrimination, protection against expropriation (the seizure of assets by state authorities), and guaranteed access to international arbitration for investors operating within the signatory countries.

Guaranteeing Fair Treatment for Portfolio Investors​

Under existing models like the Model 2015 BIT, portfolio investments were often excluded from the treaty's core protections. The new approach directly tackles this deficiency, ensuring that FPI concerns are addressed head-on.

The concept of "treatment" within a BIT mandates that India must not implement any measures that unfairly disadvantage foreign investors compared to domestic ones. Essentially, the government must maintain a level playing field for all investors regardless of their origin. This certainty is vital given that portfolio investments can be acutely sensitive to changes in taxation and regulation.

The recently signed BITs with Israel and UAE provide early proof of concept for this change. Article 8 of the treaty with Israel guarantees that all funds related to an investment—including profits, dividends, capital gains, interest, and sale proceeds—can be freely transferred back across borders on a non-discriminatory basis. This agreement effectively ensures that foreign investors have a guaranteed exit door.

Accelerating Dispute Resolution and International Arbitration​

A key feature of the forthcoming BIT revisions is the push towards faster access to global arbitration. Currently, accessing international arbitration typically requires that domestic legal remedies be exhausted first for five years. This waiting period can be significant for any investor seeking redress.

The existing pacts with Israel and UAE already mandate a three-year exhaustion period before investors can seek international arbitration. However, the goal of the new negotiated BITs is to dramatically reduce this timeline to two years. Experts suggest that shortening this local remedy period is a highly practical and pragmatic step toward global market acceptance.

Expert View and Ministerial Commitment​

As Rajnish Gupta, Partner at EY India, notes, portfolio investments are inherently different from stable, long-term direct investments. Therefore, it is crucial that the revised BITs sharply define what constitutes a covered portfolio asset and precisely outline any treaty breach. These changes must be complemented by faster and more efficient domestic dispute resolution processes within India itself.

The movement aligns with the proactive stance set by Finance Minister Nirmala Sitharaman during her Budget 2025 speech. She confirmed that the current BIT model will be revamped to be more investor-friendly, encouraging sustained foreign investment in line with the mandate to "first develop India."

India is currently pursuing negotiations for these enhanced BITs with several key nations, including Saudi Arabia, Bahrain, Maldives, and the European Union.