- 15-Oct-2025
- public international law
believe that their rights under the treaty have been violated. While ISDS is intended to provide protections to foreign investors, India perceives several risks and challenges associated with it. These concerns primarily revolve around the erosion of state sovereignty, policy flexibility, and the potential for abuse by foreign investors.
One of India’s primary concerns with ISDS is the erosion of state sovereignty. ISDS mechanisms allow foreign investors to challenge domestic regulations and laws, including those related to public health, environmental protection, taxation, and labor laws. India has raised concerns that this undermines its ability to make public policy decisions in the interest of its citizens, without the fear of being sued by foreign investors.
For example, if India enacts a law regulating pollution or pharmaceutical pricing, foreign investors might claim that such regulations harm their investment, potentially resulting in costly arbitration cases. These concerns are particularly significant in a country like India, where public interest and public policy often require evolving legal frameworks.
India fears that ISDS provisions could lead to a chilling effect on its ability to adopt and enforce necessary regulatory reforms. The fear is that foreign investors may use ISDS as a tool to intimidate or deter the Indian government from implementing laws or regulations that could negatively affect their business interests.
For instance, a foreign tobacco company might sue the Indian government over a public health regulation banning tobacco advertising or restricting sales, arguing that the regulation affects their business. Such cases can create a fear of legal consequences and discourage the government from passing policies that prioritize public welfare.
India has expressed concern over the inconsistency and lack of predictability in ISDS outcomes. Different arbitral tribunals might interpret the same provisions in BITs differently, leading to unpredictable results. This lack of consistency creates uncertainty for both states and investors, making it difficult to gauge the actual risks and benefits of entering into BITs with ISDS provisions.
For instance, India was involved in a case with White Industries (Australia), where an arbitral tribunal ruled in favor of the Australian company for the non-enforcement of an arbitral award, despite the Indian government’s arguments based on public policy concerns. The decision raised questions about the fairness and transparency of the ISDS system.
India is concerned that ISDS provisions may open the door to frivolous or opportunistic claims by foreign investors seeking to bypass domestic legal systems. There is a risk that companies might exploit ISDS mechanisms to challenge policies that they find inconvenient or detrimental to their business interests, even when those policies are legitimate and necessary for public welfare.
For example, a foreign investor might challenge a government policy that seeks to increase environmental standards, arguing that such a policy would reduce their profit margins. The threat of an expensive arbitration may influence the government’s decision-making process, leading to over-cautiousness or policy paralysis.
ISDS arbitration can be expensive and time-consuming for governments, particularly for a developing country like India. The cost of defending against arbitration claims, along with potential compensation or penalties, can place a significant financial burden on the state.
For example, in the White Industries case, India was ordered to compensate the foreign investor for not enforcing an arbitral award. This case highlighted the financial risks involved in ISDS disputes and the unpredictability of the process.
To address these concerns, India developed its own Model BIT in 2016, which introduced several reforms aimed at balancing investor protection with sovereign rights. The Model BIT includes provisions such as:
India’s aim with these provisions is to create a more balanced framework that ensures the protection of investors without undermining the government’s sovereign right to regulate in the public interest.
India has renegotiated several of its existing BITs to bring them in line with its Model BIT (2016). This includes terminating treaties that were seen as too favorable to foreign investors and renegotiating those that did not reflect India’s evolving policy on foreign investment.
For instance, India terminated its BIT with the Netherlands and Belgium-Luxembourg after concerns that these treaties did not adequately protect India’s sovereignty. By reworking these treaties, India aims to limit the scope of ISDS claims and ensure that foreign investments do not undermine India’s domestic regulations.
An Australian company operating in India files an ISDS claim under the Australia-India BIT. The company argues that India’s new environmental laws, which impose stricter emissions standards, are an act of expropriation because they require the company to invest heavily in new technology to comply.
India’s concern is that such claims could restrict its ability to make essential environmental policies, which are in the public interest but might affect business profits. Under the ISDS system, the arbitration panel could rule in favor of the foreign investor, forcing India to pay compensation.
As a result, India’s response would likely be to limit such claims through Model BIT provisions that prioritize state sovereignty and allow for the exhaustion of local remedies before arbitration can proceed.
India’s concerns with ISDS reflect its balancing act between attracting foreign investment and safeguarding its sovereign rights to regulate in the public interest. While India recognizes the importance of protecting investors, its growing focus on policy space, sovereignty, and avoiding excessive financial liabilities has led to significant changes in its approach to BITs and international arbitration. These changes include reworking BITs, introducing exhaustion of local remedies provisions, and focusing on transparent and accountable dispute resolution mechanisms.
Answer By Law4u Team
Discover clear and detailed answers to common questions about public international law. Learn about procedures and more in straightforward language.
