India reduces local remedies exhaustion period to 3 yrs for UAE investors

India has cut down by two years the local remedies exhaustion period for UAE investors from five years under the Bilateral Investment Treaty (BIT), which came into effect between the two countries in August.

The treaty, which is aimed at providing comfort to investors of both countries, also includes portfolio investments in a deviation from such treaties in the past.

Local remedies exhaustion means that investors must first try to resolve their disputes using the legal system of the host country before they can take the matter to international arbitration.

The treaty signed between India and the UAE in February has been enforced from August 31 this year, a finance ministry statement said.

"Investor-State Dispute Settlement (ISDS) through arbitration with mandatory exhaustion of local remedies for three years," the finance ministry said in a statement.

The Model BIT requires investors to attempt resolving disputes through India's legal system for at least five years before seeking international arbitration

Unlike India's Model BIT, which excludes portfolio investments such as stocks and bonds, the India-UAE BIT has included them as protected investments.

This broadens the scope of the treaty, allowing investors with passive financial holdings to use the ISDS mechanism.

"Some of the key features of the India-UAE BIT 2024 are closed asset-based definition of investment with coverage of portfolio investment," it said.

According to think tank Global Trade Research Initiative (GTRI), this shift increases India's exposure to disputes over financial instruments, even those that don't contribute significantly to economic development, moving away from the Model BIT's focus on long-term investments.

The country's Model BIT excludes portfolio investments, focusing only on direct investments.

The ministry said enforcement of this pact with the UAE gives continuity of investment protection to investors of both countries, as the earlier Bilateral Investment Promotion and Protection Agreement (BIPPA) between India and the UAE signed in December 2013 expired on September 12 this year.

The other key features of the pact included provisions such as treatment of investment with obligation for no denial of justice, no fundamental breach of due process, no targeted discrimination and no manifestly abusive or arbitrary treatment.

It also includes the scope carved out for measures such as those related to taxation, local government, government procurement, subsidies or grants and compulsory licence; and no investor claim in case investments are involved with corruption, fraud, round tripping.

However, while providing investor and investment protection, balance has been maintained with regard to the state's right to regulate and, thereby providing adequate policy space.

The treaty provides for protection to investments from expropriation, transparency, transfers, and compensation for losses.

With a share of 3 per cent, the UAE is the seventh largest in total foreign direct investment (FDI) received in India, with cumulative investment of about USD 19 billion from April 2000-June 2024.

India also made 5 per cent of its total overseas direct investments in the UAE to the tune of USD 15.26 billion from April 2000-August 2024.

India-UAE BIT is expected to increase the comfort level and boost the confidence of investors by assuring minimum standard of treatment and non-discrimination while providing for an independent forum for dispute settlement by arbitration.

"The treaty is expected to pave the way for increased bilateral investments, benefiting businesses and economies in both countries," the statement said.

Both countries have also implemented a free trade agreement, which came into force on May 1, 2021.

Last month, India and Uzbekistan signed the BIT aimed at boosting the investors' confidence of both countries.

Such pacts are important as India earlier lost two international arbitration cases against British telecom giant Vodafone and Cairn Energy plc of the UK over the retrospective levy of taxes.