Boosting confidence: International arbitration can drive more investment

In a relief for investors from the United Arab Emirates (UAE), India has relaxed certain provisions in its bilateral investment treaty (BIT), which includes a reduction in the period for investors to exhaust local remedies for any dispute to three years from the usual five. This means that investors can now resort to international arbitration if the Indian judicial system is unable to resolve a dispute within this shortened period. This is a major departure from India’s model BIT, which has a five-year exhaustion of local remedies clause, and is clearly a step towards boosting investor confidence. Moreover, the India-UAE BIT also brings in portfolio investment such as stocks and bonds within its ambit. This is expected to broaden the scope of the treaty, allowing investors with passive financial holdings to use the Investor-State Dispute Settlement (ISDS) mechanism for dispute resolution. The UAE invested a cumulative $19 billion from April 2000 to June 2024 in India, accounting for 3 per cent of the country’s foreign direct investment (FDI) inflows.

A number of unfavourable arbitration rulings against India over the years involved a tangible threat of investors seizing the host state’s overseas assets, including those of state-owned entities. For instance, India declined to accept some of the adverse arbitration verdicts, resulting in at least two companies, Devas and Cairn, moving to seize the overseas assets of the then government-owned Air India to give effect to the awards. In another high-profile controversy, a capital gains tax claim was sought from Vodafone after it bought the Indian mobile service provider from Hutchison in 2007. Retrospective changes in the tax law only complicated the matter. Ultimately, concerns surrounding the ISDS arbitration mechanism favouring investors over the host state’s regulations led India to adopt the model BIT framework in late 2015. It requires foreign investors to pursue local remedies for at least five years before going for arbitration against India, exclusion of any taxation measures imposed, and an exclusion of the Most Favoured Nation (MFN) clause.

Data from the United Nations Conference on Trade and Development shows that, out of 1,332 known cases of international dispute settlement, 361 were ruled in favour of states as against 268 rulings in favour of investors, refuting the commonly held perception that international arbitration favours investors over governments. Several countries in the past have expressed discomfort with the exhaustion of the local remedies provision in the model BIT. In fact, attempts to reduce arbitral discretion have rendered the model BIT unsuccessful in reconciling the interests of foreign investors. Policy intrusions by the government complicate matters further. Policies must be stable and predictable. Frequent changes can affect the business environment. The amended provisions in the India-UAE BIT are expected to increase the risk of higher arbitration claims against India in the short term but will help boost investor confidence and must be extended to other countries. Further, India must reform its judicial system to enable faster dispute resolutions. This will help improve overall investor confidence and ease of doing business.