A Bilateral Investment Treaty (BIT) is an international agreement between two sovereign states that establishes the terms and conditions for private investment by nationals and companies of one state in the territory of the other, a type of Foreign Direct Investment (FDI). The first modern BIT was signed on November 25, 1959, between Pakistan and Germany. BITs gained prominence as capital-exporting countries sought to protect their investments in developing nations against risks like expropriation and nationalization, a problem previously addressed inadequately by diplomatic protection.
A BIT works by guaranteeing a core set of substantive protections for foreign investors. Key provisions include Fair and Equitable Treatment (FET), Full Protection and Security, and the better of National Treatment (equal to domestic investors) or Most-Favoured-Nation (MFN) Treatment (equal to any other foreign investor). Crucially, BITs protect against expropriation without prompt, adequate, and effective compensation. The mechanism is connected to the Investor-State Dispute Settlement (ISDS) system, which allows an investor to bypass local courts and take the host state directly to international arbitration, often under the rules of the International Centre for Settlement of Investment Disputes (ICSID).
India's approach to BITs has changed significantly. Following adverse arbitral awards, India adopted a new, more restrictive Model BIT in 2016. This new model led India to terminate around 75 older BITs in 2016 and 2017. A major change in the 2016 Model BIT is the requirement for mandatory exhaustion of local remedies for a period of five years before an investor can resort to the ISDS mechanism. This shift aims to balance investment protection with the host state's right to regulate.