One of the items at the top of President Obama’s agenda in India this week is the long-delayed U.S.-India bilateral investment treaty (BIT).  Such a treaty was proposed by the President during his 2010 visit to India, but the proposal got little traction with the prior government.  It is likely to do better with the current Indian administration: progress on a treaty would add momentum to Prime Minister Modi’s campaign for long-term investment in Indian manufacturing and infrastructure and it would complement attempts by his government to roll back tax and other policies that have deterred investment in the recent past.

While the negotiations will likely take many months or years to bear fruit, an important signal of the Indian government’s intentions will come within the next few weeks.  With at least six investment treaty arbitrations pending against India, an office within India’s Ministry of Finance has reportedly proposed a new “model” for India’s BITs to the cabinet for its approval.  The text of the proposed model BIT has not been released publicly, but reports suggest that it reflects a substantial weakening of protections precisely in the areas of greatest concern to foreign investors.  In particular, the proposal is said to:   

• Exclude taxation measures from challenge before arbitral tribunals.  (India’s unpredictable enforcement of anti-avoidance and transfer pricing provisions in its tax code has been a frequent point of grievance and is the basis of an ongoing arbitration brought by Vodafone, as well as a second threatened action by Nokia.)

• Disclaim liability for treaty violations where the judiciary or local governments are at fault.  (This change would take direct aim at a recent arbitral decision, White Industries v. Union of India, where an investor was awarded damages as a result of the Indian courts’ decade-long delay in enforcement of a commercial arbitration award against a state-owned company.  Under well-established principles of international law, a state is internationally responsible for the actions of all of its branches, organs and subdivisions.)

• Impose further restrictions on the ability to bring claims for the taking of intellectual property.  (More specifically, the proposed model BIT may entirely exclude compulsory licensing from challenge, a change that would be particularly concerning for innovative pharmaceutical firms that have faced a long history of hostility in India.  While many BITs permit compulsory licensing of intellectual property, they frequently permit such licenses to be challenged by intellectual property owners as inconsistent with the conditions placed on compulsory licensing in the WTO’s TRIPS agreement.)

Each of these proposed changes would substantially increase the challenges involved in negotiating a text acceptable to both the U.S. and Indian governments, not least because they would conflict directly with provisions in the U.S.’s own recently revised model BIT.  The cabinet’s willingness to moderate or reject such proposals would go a long way toward demonstrating its commitment to concluding a treaty with the U.S.