Treaty norms eased, threshold for arbitration reduced to 3 years

India has relaxed certain provisions in its bilateral investment treaty (BIT) with the UAE, which include a reduction in the period for investors to exhaust local remedies for any dispute to three years from the usual five years and bringing in the typically short-term portfolio investments under its ambit.

The new India-UAE BIT, which was signed in February 2024, came into effect from August 31 and replaced the earlier Bilateral Investment Promotion and Protection Agreement, the finance ministry said on Monday.

The earlier investment agreement between the two economies was signed in December 2013 and was to expire on September 12, 2024.

Experts said the relaxed provisions granted to the UAE under the new treaty could spur similar demands from other countries, complicating New Delhi’s future negotiations of such investment treaties.

“While this makes the treaty more investor-friendly, it also weakens India’s ability to settle disputes domestically, increasing the likelihood of arbitration cases that could challenge India’s regulatory decisions,” the Global Trade Research Initiative said.

India’s model BIT usually mandates foreign investors to try and resolve disputes through the country’s legal system in at least five years before resorting to global arbitration, the experts said.

Also, portfolio investments, which are short term in nature, are covered by the treaty with the UAE, on top of the usual, longer-term foreign direct investments (FDI).

“While providing investor and investment protection, balance has been maintained with regard to the state’s right to regulate and thereby provides adequate policy space,” the finance ministry said in a statement.

The new investment treaty would bolster the confidence of investors by “assuring minimum standard of treatment and non-discrimination while providing for an independent forum for dispute settlement by arbitration”, the ministry said.

The UAE is India’s seventh-largest FDI source, having a 3% share totalling $19 billion in such inflows since April 2000. About 5% of India’s overseas direct investments, or $15.26 billion, have been in the UAE during this period.

Under the treaty, there are obligations for both the parties for “no denial of justice, no fundamental breach of due process, no targeted discrimination and no manifestly abusive or arbitrary treatment”, the ministry said.

There is scope for carve-outs for measures such as those relating to taxation, local government, official procurement, subsidies or grants and compulsory licence, and there are general and security-related exceptions as well.

The state’s right to regulate remains intact, and no investor claim would be entertained if investments involve corruption, fraud, round tripping, etc.

As per the treaty, locally-produced goods and imported ones once they enter the domestic market will be treated equally under a so-called National Treatment provision, a tool for trade liberalisation.

The treaty also assures protection to investments from expropriation and provides for transparency, transfers and compensation for losses.