INDIA-UAE, BIT BY BIT

• The Bilateral Investment Treaty (BIT) between India and the United Arab Emirates (UAE) came into effect on August 31, 2024, replacing the previous Bilateral Investment Promotion and Protection Agreement (BIPPA) that expired on September 12, 2024.
• This treaty aims to strengthen economic cooperation with the UAE, a significant investor in India, contributing approximately 3% of total foreign direct investment (FDI) receipts and cumulative investments of $19 billion from 2000 to 2024.

Background and Context

• India’s recent treaties have faced challenges, particularly since the introduction of the model BIT in 2016. This model was criticized for being a one-size-fits-all approach, leading to the termination of 68 out of 74 BITs previously in force as of 2015.
• Additionally, India has encountered issues with BIT claims and has faced adverse outcomes in high-stakes disputes with international tribunals. As a result, the renegotiation of terms under the 2016 model has contributed to a decline in FDI, with government data indicating a 24% drop in FDI equity inflows from April 2023 to September 2024.
• In pursuit of its goal to become a $5 trillion economy, the Indian government has promised renewed efforts to strengthen economic ties with trading partners. The India-UAE BIT represents a crucial step in this direction.

Key Features of the India-UAE BIT

Amendments to Local Remedies Requirement:

• The BIT has modified the requirement for investors to exhaust local remedies before seeking international arbitration. Under the model BIT, this period was set at five years; however, it has been reduced to three years in the India-UAE BIT (Article 17.1). This change may serve as a precedent for future negotiations, especially in ongoing talks with the UK regarding a free trade agreement.

Prohibition of Third-Party Funding:

• The BIT includes a negative covenant that prohibits investors from seeking third-party funding for disputes. Historically, this funding has been viewed as contravening public policy in India.
• However, recent developments, including the Supreme Court's stance in Bar Council of India v AK Balaji (2018), have recognized the evolving acceptance of third-party funding. The outright ban in the BIT may conflict with this trend.

Broadened Scope of Trade:

• The treaty expands the definition of covered investments to include portfolio investments (Article 1.4), which were excluded in the model BIT. This change enables investors with financial holdings to utilize the investor-state dispute settlement mechanism (ISDS) under the BIT, potentially increasing India's exposure to disputes related to financial instruments.

Implications and Future Prospects

• The effectiveness of the India-UAE BIT in balancing foreign investment promotion and the state’s regulatory rights remains to be seen. The treaty comes at a time when India is actively negotiating Free Trade Agreements (FTAs) with several countries, including the UK, EU, Hong Kong, Australia, Oman, Saudi Arabia, and Russia.
• Despite ongoing challenges, including India's lower ratings in contract enforcement and complex geopolitical dynamics, the India-UAE BIT is a positive step toward establishing a more robust cross-border economic ecosystem.
• The treaty reflects India's willingness to adapt its approach to international investment agreements, potentially setting a template for future negotiations with other nations. Time will reveal whether these adjustments will effectively foster greater foreign investment while maintaining the necessary regulatory framework.