A typical BIT should balance two competing objectives: protecting foreign investments and safeguarding the state’s right to regulate in the public interest. India’s older BITs prioritised investment protection, while the 2015 Model BIT shifted too far towards state interests, neglecting foreign investors. We need a comprehensive overhaul of the Model BIT to find a middle ground. The following key changes should be implemented.

First, the most concerning aspect of the Model BIT is the requirement that foreign investors must exhaust local remedies for a period of five years before they can pursue treaty-based claims in international arbitration tribunals, also known as investor-State dispute settlement (ISDS). Given the strain on India’s judiciary, it is unlikely that disputes will be resolved within this five-year timeframe, which could lead to significant delays for foreign investors. This mandatory five-year waiting period should be eliminated, allowing foreign investors the option to choose between litigating claims in domestic courts or pursuing international treaty-based arbitration. Once a choice is made, it should be final and irrevocable.

Second, the Model BIT should simplify the entire ISDS mechanism given in Chapter IV of the Model BIT. There should not be undue restrictions imposed on the jurisdiction of ISDS tribunals such as barring them from reviewing the “merits” of a decision made by the domestic court without defining what “merits” means. Likewise, the timelines available to foreign investors to approach an ISDS tribunal should be reasonable.

Third, the new Model BIT should include a clearly defined fair and equitable treatment (FET) provision to replace the current Article 3 in the 2015 Model, which references customary international law (CIL) in foreign investment. The lack of a universally accepted CIL definition in the treatment of foreign investment grants ISDS tribunals significant discretion. A narrowly defined FET provision, similar to that in the European Union’s new-generation investment treaties, would better balance investor and state rights by outlawing arbitrary state behaviour.

Fourth, another disquieting feature of the Model BIT is the exclusion of the most-favoured nation (MFN) provision, which is a core non-discrimination standard in international investment relations. This omission means that investors lack recourse against state discrimination under the BIT. This hugely dampens the spirit of foreign investors. If India fears misuse of the MFN provision for treaty shopping, it can address this by limiting its scope, as other countries have done. Rather than excluding the MFN provision entirely, Model BIT 2.0 should include it with appropriate qualifications.

The fifth change needed is to remove the exclusion of tax-related regulatory measures from the BIT, as stated in Article 2.4(ii) of the 2015 Model BIT. While governments want to maintain control over tax measures, excluding them undermines foreign investor confidence, particularly given the number of tax-related disputes between foreign investors and the Indian government. There’s no need for India to unduly worry on this front because ISDS tribunals generally show deference to states in tax disputes, intervening only when tax measures are abusive or discriminatory.

The 2015 Model BIT was drafted with a very defensive approach, granting limited rights to foreign investors. The objective seems to be to minimise the risk of ISDS claims. However, for a nation aiming to achieve developed status by 2047, there should be a greater sense of confidence in its legal framework. Instead of focusing solely on minimising ISDS claims, the emphasis should be on enhancing good governance and reinforcing the rule of law. This approach would naturally decrease the likelihood of ISDS claims.

Thus, a new Model BIT 2.0 is urgently needed, and the finance minister deserves recognition for initiating this reform. It is now crucial to see this initiative through to its logical conclusion. Assembling a team of independent international investment law experts to advise the government in this matter will be a critical first step.

Prabhash Ranjan is professor and director, Centre for International Investment and Trade Laws, Jindal Global Law School. The views expressed are personal