A Bilateral Investment Treaty (BIT) is an international concept and a legally binding agreement between two sovereign countries that establishes the terms and conditions for private investment by nationals and companies of one state in the territory of the other state. This type of investment is categorized as Foreign Direct Investment (FDI). The first BIT was signed on November 25, 1959, between Pakistan and Germany, and these treaties came into prominence after the World Wars as developed countries sought to guard their investments in developing countries against expropriation. The core problem BITs solved was creating a stable and predictable legal environment to encourage cross-border investment.
A BIT works by setting forth actionable standards of conduct for the host government's treatment of foreign investors. Key provisions typically include National Treatment (treating foreign investors no less favorably than domestic investors), protection from expropriation without prompt, adequate, and effective compensation, and the right to the free transfer of funds. The distinctive mechanism is the Investor-State Dispute Settlement (ISDS), which allows an investor to bypass the host state's domestic courts and take the host state directly to international arbitration, often under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).
India signed its first BIT with the UK in 1994 and had signed 83 BITs based on the 2003 Model BIT by 2015. Following a surge in ISDS claims against the government, India replaced its previous model with the stricter 2016 Model BIT. This new model significantly changed the landscape by removing the Most-Favoured Nation (MFN) clause and the broad Fair and Equitable Treatment (FET) standard. It also introduced a requirement for investors to exhaust all domestic judicial and administrative remedies for a period of up to five years before initiating international arbitration, a period that has since been reduced to a two-year local remedies requirement in the proposed new model. India subsequently sent termination notices to 68 countries in 2017, seeking to renegotiate its older treaties under the new framework.