Introduction

In February 2024, during Prime Minister Modi’s visit to the United Arab Emirates (“UAE”), India and the UAE signed, among other things, a bilateral investment treaty (“BIT”, and such BIT, the “New India-UAE BIT”). Subsequently, the New India-UAE BIT was ratified by both sides and became effective on August 31, 2024 (the “Effective Date”). The previous BIT between India and the UAE, signed in December 2013 (the “Old BIT”), expired in September 2024. Earlier, in 2022, India had signed a comprehensive economic partnership agreement (CEPA) with the UAE in the form of a free trade agreement (“FTA”), which remains in force. The New India-UAE BIT is, therefore, timely.

The New India-UAE BIT supports broader efforts by both countries to stimulate investment in various sectors, including renewable energy, healthcare and food processing, as well as food parks, infrastructure (including digital infrastructure), logistics, data centers, and artificial intelligence. Over time, the UAE has emerged as one of India’s top FDI sources, ranking as the fourth-largest investor as of 2023 (and the seventh-largest overall) with an estimated investment of USD 18 billion across a wide range of sectors. In turn, Indian FDI into the UAE in 2023 exceeded USD 2 billion, making the UAE the fourth-largest destination for Indian investors.

The Indian bilateral and multilateral investment regime has undergone a significant transformation since 2016. Following the termination of almost all of its erstwhile BITs, India has sought to negotiate new international investment agreements based on the Model Text for the Indian Bilateral Investment Treaty (the “Indian Model BIT”). The Indian Model BIT was adopted in 2016 as a response to the increasing number of Investor-State Dispute Settlement (“ISDS”) claims brought against India.

As part of this effort, India has signed BITs with a few States such as Belarus (2018), Kyrgyzstan (2019), Brazil (2020) and Uzbekistan (2024). Among these, only the BIT with Belarus is in force. Additionally, other than the 2022 FTA with the UAE, India also signed FTAs with Mauritius (2021) and Australia (2022), as well as a historic trade and economic partnership agreement (“TEPA”) with the European Free Trade Association (EFTA) (2024). For an overview and analysis of the TEPA, please see our note here.

India is presently negotiating FTAs with other countries and economic blocs, including with the United Kingdom and the European Union (both such trade deals include separate investment protection agreements), as well as with Peru and the Gulf Cooperation Council. In addition, India is in the process of negotiating BITs with Russia, the United States, Argentina, and several other countries. Meanwhile, India’s FTA negotiations with Canada and Israel are currently on pause and are not expected to resume soon.

The Indian Model BIT is most often criticized for a provision which requires an investor to exhaust local remedies for a period of at least five years before taking recourse to the dispute resolution mechanism under the relevant BIT. The Indian Model BIT has been criticized for sending mixed signals to foreign investors and making potential treaty partners wary. According to a 2022 parliamentary committee report, certain provisions of the Indian Model BIT require additional review and improvement, including the provisions relating to ISDS and exhaustion of local remedies. According to media reports in April 2024, the Indian Prime Minister's Office had asked the Ministry of Commerce and Industry to examine the Indian Model BIT and suggest modifications for the purpose of improving the ease of doing business.

The New India-UAE BIT marks a significant step in terms of reshaping India's foreign investment regime. Notably, it diverges from the Indian Model BIT in several key areas. In this note, we analyze some of the main features of the New India-UAE BIT, including its significant deviations from the Indian Model BIT. Further, we explore the implications of such deviations for future investments by investors from both countries. We also assess the potential impact of the New India-UAE BIT on India’s negotiating power in ongoing and future investment treaty negotiations.

Key Features

Claims under the Old BIT must be made on or prior to January 31, 2025

The New India-UAE BIT superseded the Old BIT when it entered into force on the Effective Date (August 31, 2024). However, any claims arising under the Old BIT on or before such date must be initiated within five months from the Effective Date (i.e., by January 31, 2025). Accordingly, barely three months remain for initiating any investment claims arising under the Old BIT.

Protection limited to lawful investments

The New India-UAE BIT limits protection to investments made by investors from either State in the territory of the other, protecting only those made “in accordance with the applicable laws and regulations” of the host State “with the necessary approvals in the relevant economic sector”. This provision ensures that only lawful investments receive protection and deters investments which bypass or violate the municipal laws of the host State. Similar to the Indian Model BIT, the New India-UAE BIT requires assets to possess certain characteristics to qualify for investment protection (Article 1.4), such as (i) commitment of capital or resources; (ii) expectation of gain or profit; and (iii) assumption of risk, reflecting elements of the Salini test. However, it notably departs from the Indian Model BIT by excluding the requirements for investments to have (i) a ‘certain duration’; and (ii) significance for the development of the host State.

Inclusion of portfolio investments

A key highlight of the New India-UAE BIT is the inclusion of portfolio investment within the definition of ‘investment’ (Article 1.4). The treaty explicitly includes (i) shares, stocks and other forms of equity participation in an enterprise; and (ii) bonds, debentures, loans and other debt instruments issued by an enterprise. This represents a significant departure from the Indian Model BIT – which does not include such categories within its definition of ‘investment’ and explicitly excludes portfolio investments. A recent study analyzing over 2,800 BITs mapped by UNCTAD reveals that only 31 BITs excluded portfolio investments. The Indian Model BIT is more restrictive in its definition of ‘investment’ than several other BITs, which have typically permitted some degree of protection for portfolio investments. This shift in position under the New India-UAE BIT acknowledges the evolving nature of capital flows and aims to encourage not only long-term FDI but also short-term capital through portfolio investments.

No FET or MFN standard but includes other substantive protections available in most new-generation BITs

The New India-UAE BIT does not provide for certain well-recognized standards of protection, such as fair and equitable treatment (“FET”) or a most-favored nation (“MFN”) clause. Instead, the New India-UAE BIT guarantees that investments made in either State will not be subject to manifestly arbitrary, abusive, coercive or discriminatory measures by the host State unless taken in pursuit of ‘legitimate policy objectives’ by the State (Article 4). The New India-UAE BIT also does not require such measures to constitute violations under customary international law (“CIL”) to warrant protection. The New India-UAE BIT also provides for protection against (i) denial of justice in judicial or administrative proceedings, and (ii) a fundamental breach of due process (Article 4.1) and applies the full protection and security (“FPS”) standard to protection of investments, but limits such standard to physical security only (as distinct from ‘legal’ and ‘commercial’ security), aligning with the Indian Model BIT (Article 4.2).

Investors from each State are guaranteed national treatment (Article 5), meaning they will receive treatment no less favorable than that accorded to the host State’s own investors.

Under Article 6, the New India-UAE BIT protects investments from both direct and indirect expropriation, with compensation to be provided by the host State based on the fair market value of the investment prior to the expropriatory measure. However, it excludes the following claims based on expropriation:

1. measures taken for ‘public purpose’ (Article 6.1);
2. measures taken by the host State in its ‘commercial’ capacity (Article 6.4);
3. non-discriminatory regulatory measures (Article 6.5);
4. an award by a judicial body designed and applied to protect ‘legitimate public interest’ or ‘public policy objectives’ (Article 6.5); and
5. expropriatory measure taken by India for a public purpose relating to land, as long as such purpose satisfies Indian land acquisition law, and the compensation payable on account of such land acquisition is determined pursuant to such law (explanatory footnote number 5).

Exempted measures and exceptions safeguarding regulatory sovereignty

The New India-UAE BIT includes broad general (Article 33) and security exceptions (Article 34) which allow both countries to maintain regulatory autonomy, thereby safeguarding their right to implement measures that may otherwise conflict with their treaty obligations.

Additionally, Article 2 of the New India-UAE BIT states that the treaty will not apply to certain specified measures, including:

1. those adopted by local governments, and
2. those involving

• taxation and related enforcement;
• compulsory licensing with respect to, or the revocation/ limitation/ creation of, intellectual property rights in accordance with WTO agreements;
• government procurement;
• subsidies and grants;
• provision of services in exercise of governmental authority (as opposed to providing services on a commercial basis).

In addition, a host State’s decision that an alleged breach of its treaty obligations relates to conduct or measures in connection with taxation will not be subject to arbitral review.

Three-year exhaustion of local remedies requirement before initiating arbitration

ISDS tribunals have generally held that, under international investment law, any exhaustion of local remedies requirement (“Local Remedies Requirement”) is considered waived unless it has been expressly included in the underlying treaty. However, Article 17 of the New India-UAE BIT imposes a three-year Local Remedies Requirement before an investor is entitled to submit a notice of dispute in respect of an alleged breach of treaty obligations by the host State. Further, to satisfy such Local Remedies Requirement, disputing investors must file a claim before relevant domestic courts or administrative bodies of the host State within one year of becoming aware of the disputed measure and its resulting damage (such date, the “Knowledge Date”).

The Local Remedies Requirement under the New India-UAE BIT appears to represent a more flexible approach compared to the Indian Model BIT, which has a five-year Local Remedies Requirement. Such five-year Local Remedies Requirement has been incorporated in India’s BITs with Belarus (Article 15.2) and Kyrgyzstan (Article 15.2). Like the Indian Model BIT, the New India-UAE BIT’s Local Remedies Requirement is subject to the reaching of a resolution that is ‘satisfactory to the disputing investor’ within the stipulated period. Unlike the Indian Model BIT, which requires an aggrieved investor to ‘exhaust’ all judicial and administrative remedies for at least a period of five years from the Knowledge Date, the New India-UAE BIT, instead, requires an aggrieved investor to ‘pursue’ such remedies and clarifies that a disputing investor will have the absolute right to transmit a notice of dispute at the lapse of the stipulated three-year period irrespective of pending appeals or ongoing proceedings. Moreover, similar to the Indian Model BIT, the Local Remedies Requirement under the New India-UAE BIT will not be applicable if the disputing investor can demonstrate that there are no available domestic legal remedies capable of reasonably providing any relief against the measure in respect of which it claims a breach of treaty obligations.

No third-party funding of claims

Another significant feature of the New India-UAE BIT is Article 16, which expressly prohibits third-party funding for investors in ISDS proceedings. This prohibition appears to be inconsistent with the Indian Model BIT, as well as with India’s recent BITs with Belarus, Brazil and Kyrgyzstan, none of which regulates or proscribes third-party funding. The blanket prohibition in the New India-UAE BIT is particularly important, given that Indian law does not prohibit or regulate third-party funding in litigation or arbitration, and judicial guidance on this issue remains scant.

In the broader context of new-generation trade and investment agreements, States have increasingly chosen to address third-party funding explicitly, either by prohibiting or regulating it within their BITs and FTAs. For example, the 2018 Argentina-UAE BIT prohibits third-party funding (Article 24), while the 2017 EU-Canada Comprehensive Economic and Trade Agreement (Article 8.26), the 2019 EU-Viet Nam Investment Protection Agreement (Article 3.37), the 2019 Indonesia-Australia Comprehensive Economic Partnership Agreement (Article 14.32) and the 2018 EU-Singapore FTA (Article 3.8) introduce disclosure requirements for third-party funding to address concerns related to potential conflicts of interest. In fact, the EU-Viet Nam Investment Protection Agreement (Article 3.37(3)) also requires ISDS tribunals to take into account the fact of third-party funding while awarding security for costs and account for such disclosure while deciding on the cost of proceedings. Notably, the Indian Model BIT does not follow either of these approaches, suggesting that the blanket prohibition on third-party funding in the New India-UAE BIT may be influenced by the UAE’s approach in its 2018 BIT with Argentina.

From an investor’s perspective, the prohibition of third-party funding raises broader concerns related to access to justice. By prohibiting third-party funding, States seek to minimize the financial and administrative burden associated with defending multiple or less meritorious disputes, ensuring that only investors with sufficient resources pursue legitimate claims. As such, third-party funding is likely to remain a bone of contention in current and future treaty negotiations. If India continues to retain this position in future BIT negotiations, it leaves unprotected its own businesses with investments in other countries.

Conclusion

The New India-UAE BIT reflects India’s ongoing efforts to adapt its investment treaty framework and FDI strategy. It signals India’s willingness to deviate from the Indian Model BIT and negotiate agreements with different countries on varying terms. The inclusion of portfolio investments under treaty protection and the reduction of the period for exhausting local remedies to three years (from five) are positive signals including for the purpose of attracting foreign capital and increasing FDI flows. On the other hand, the prohibition of third-party funding for investors in ISDS proceedings may hamper India’s negotiations elsewhere and produce serious repercussions, especially for Indian investors who lack the wherewithal to pursue international arbitral claims against host States.

This insight has been authored by Niti Dixit, Dr. Deborshi Barat, Zahra Aziz and Gladwin Issac from S&R Associates. They can be reached at [email protected], [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.