Riya Mathur, Durham University England

Sameera Naiyar, Jamia Millia Islamia University

Editor: Masoom Israney, Middlesex University Dubai


For years’ foreign investment has been an undisputed factor for promoting economic growth and facilitating development. It is often described as a catalyst for economic development and benefits both parties involved by increasing tax revenues and providing enormous opportunities for expansion. For over 40 years, bilateral investment treaties (BIT’s) have been used to protect international investment and ensure a more predictable and fair treatment of investors. BITs serve as a piece of essential machinery for facilitating growth, making countries more competitive internationally and boosting economies.

Foreign Investment

Foreign investment involves the transfer of tangible or intangible assets from one country to

another for their use in that country to generate wealth under the total or

partial control of the owner of the assets.[1] In simpler terms, foreign investment involves a flow of capital from one country to another, enabling the investors to have considerable ownership stakes in domestic companies. [2] Often, investors have a lot of managerial powers due to their investment and they can shape the entire business if a stake is large enough.


Foreign investment is typically divided into four categories: foreign direct investment (FDI), foreign indirect investment or foreign portfolio investment (FPI), commercial loans, and official flows.

The foreign direct investment provides investors with lasting interest and most commonly takes place in the form of buying buildings, machines, factories, and other equipment or by opening a plant. On the other hand, foreign portfolio investment involves investors owning securities and other financial assets. However, it is passive ownership and does not give them any direct managerial powers. Consequently, this type of investment is not typically favoured as it can easily be and is often quickly sold off by the domestic company. Commercial loans can be seen as an investment when a domestic bank gives out a bank loan for foreign businesses. Official flows refer to a term used for development assistance given to developing countries by the developed countries.


Foreign investment is governed by international investment law. Unlike the instruments of the World Trade Organisation (WTO), it is not a single treaty but is comprised of multiple bilateral trade agreements (BITs) and investment chapters in preferential trade agreements, collectively called investment treaties. Under their terms, investors are offered protection. For instance, the home state is under an obligation to prevent property expropriation and ensure that investors receive fair and just treatment.

In the case where the condition of a treaty has been breached, or a dispute arises, a system of Investor-State Dispute Settlement (ISDS) or Investment Court System (ICS) is used for arbitration, through which an investor can directly challenge a state. Interestingly, only foreign investors are allowed to sue under the investment treaties, as only the states are parties to the treaties, and only they can be asked to pay damages in case of a breach. Domestic states can rely on their individual domestic courts if they have to sue the investor. There is no requirement as such for investment tribunals to mirror prior decisions taken, but there is a trend of often relying on preceding decisions. [3]

India faced its first solid case related to this particular aspect when White Industries brought in a claim of a violation of a treaty against India in White Industries Ltd. v Republic of India.[4] White industries celebrated a win, and India had to pay roughly USD 4 Million in damages and legal costs.

Criticism of The ISDS

Over the years, ISDS has attracted criticism on many grounds. Firstly, it is often argued that it threatens democracy and Rule of Law[5] because it gives international arbitrators a right typically reserved for the domestic courts. The fact that damages are paid through taxes of the domestic state makes this system even more unfavourable as funds are often diverted from sources like the health budget.[6] Opponents also point out a lack of transparency in the proceedings and predict the detrimental effects of foreign investors escaping strict environmental regulations and labour standards that typically apply to domestic corporations.[7]

Looking at a more recent case, India revised its FDI policies for all border sharing nations to combat "opportunistic takeovers." This came right after China raised its stakes HDFC by over one percent. China claimed that such a move was in violation of WTO principles, whereas experts say that no breach took place, as, in the WTO, no direct agreement in relation to FDI exists.

What is a BIT?

A Bilateral Investment Treaty is an agreement between two states or countries whereby they promise mutual promotion and protection of investments by companies or individuals situated in either of the territories. These agreements establish all the terms and conditions under which investors from one country invest in others. They also establish their rights and protect them from exploitation.

The following are the essential clauses covered under BITs:

· Applicability

· Fair and Equitable Treatment and Full Protection & Security

· National treatment and Most-favoured-nation treatment,

· Expropriation,[8]

· Dispute settlement mechanisms, both between States/countries and between an investor and a State/country.

Treatment of investor and their investments under BITs

Foreign investors may face a few restrictions of a regulatory nature while trying to enter the market, even if they have previously invested or have already set up in the country. These restrictions may be applied all at once or in phases, however convenient.

· Investment protection

The important provisions that have been induced for the protection of investments are:

a) fair and equitable standard and full protection and security;

b) guarantees of investors’ property rights, for instance through compensation provisions that can be invoked if the host state expropriates an investment; and

c) an obligation to provide for the free transfer, conversion, and liquidation of any form of capital, proceeds, payments, profits and others without restraints.[9]

Dispute settlement

Usually, the treaty provides for two kinds of dispute settlement mechanisms. The first, between the concerning parties regarding the applicability and interpretation of BITs and the other between a host country and an injured foreign investor. The former has to be resolved using consultations or other forms of diplomatic channels, while the latter can be resolved by granting the injured foreign investor an autonomous right to action against the state. This mechanism gives practical significance to the treaty, thereby enabling them to guarantee an effective protection of investments.

Status in India

India initiated BITs in the mid-90s. The primary goal was to provide favourable conditions and ensure protection to foreign investors and their subsequent investments. However, the Government of India has the final call on what sectors are open to foreign investment. It also reserves the right to determine the terms and conditions under those investments are to be made. The first BIT signed by India was in 1994 with the United Kingdom. [10]Since then, the country has signed BITs with 75 nations in total. Out of the 75, 66 have already been put into force while the remaining 9 are yet to be implemented. Apart from that, the country is also currently negotiating with 25 other states. India has recently signed treaties with Japan and Brazil on 8th and 25th January 2020, respectively, but they have not been put into force yet. Almost all the Indian BITs contain the Fair and Equitable Treatment (FET), a principle firmly attached to the genesis of a BIT. The FET principle creates minimum standards of treatment, which have to be followed by the host state. Another principle is for the Full Protection and Security (FPS) of the investors and their infrastructure. The most important aspect to note is that the investments made in India must be in accordance with the country's national laws.


In conclusion, foreign investment is a strong driver of economic growth and development and directly contributes to increasing the country's foreign exchange reserves, thereby making the currency stronger. However, in recent years, the ISDS system has attracted a lot of controversy and criticism from both developed and developing countries.

It is estimated that there are currently more than 2,500 BITs active in the world. At present many significant amendments have been made to the BITs. The key investment protection provisions have been re-defined, with new languages added to the guide for application of the expropriation article, the introduction of more public interest safeguards, and transparency being given greater importance.

[1] Sornarajah M, “Introduction,” The International Law on Foreign Investment (3rd edn Cambridge University Press, 2010). [2] James Chen, “Foreign Investments”(Investopedia, 30 April 2020) <> [accessed 11 August 2020] [3] WHO FCTC Secretariat’s Knowledge Hub on legal challenges. 2020. Why Is International Investment Law Relevant To WHO FCTC Implementation? - WHO FCTC Secretariat’S Knowledge Hub On Legal Challenges. [online] Available at: <> [Accessed 11 August 2020]. [4] White Industries Australia Ltd v India (2011) IIC 529, (2011 30 November). [5] Kevin P. Gallacher and Elen Shrestha, 'Investment Treaty Arbitration And Developing Countries: A Re-Appraisal' [2011] The Journal of World Investment & Trade. [6] Claire Provost & Matt Kennard, ‘The Obscure Legal System That Lets Corporations Sue Countries’, The Guardian (10 June, 2015), [7] Elizabeth Warren, ‘The Trans-Pacific Partnership Clause Everyone Should Oppose,' The Washington Post (25 February, 2015), [8] Prateek Bagaria and Vyapak Desai “Bilateral investment treaties in India." [9] Mikimaca (Scribd 26 June 2011) <> accessed 10 August 2020 [10] Vajiram & Ravi, ‘Current Affairs Capsule’ [March 2017] 127.

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