India and Israel Sign New Bilateral Investment Treaty

India and Israel have recently signed a Bilateral Investment Treaty (BIT), marking a significant development in their bilateral relationship. This agreement, which replaces the older BIT signed in 1996 and terminated in 2017, aims to bolster economic ties, with Israel becoming the first OECD country to adopt India’s new investment treaty model.

What is a Bilateral Investment Agreement (BIA)?

A Bilateral Investment Agreement (BIA) is a legal framework between two countries that protects and promotes investments made by investors from one country in the other country’s territory.

• Investor Protection: Provides legal protections to investors, ensuring that investments are not expropriated by the host government without compensation.

• Dispute Resolution: Allows investors to seek remedies through mechanisms like Investor-State Dispute Settlement (ISDS) or state-to-state disputes.

• International Recognition: Recognized under Article 38(1)(a) of the International Court of Justice Statute as a primary source of international obligations.

India’s BIT framework has evolved over time, transitioning from the Old Model BIT (1993) to the New Model BIT (2015), with new agreements signed with countries such as Uzbekistan (2024), UAE (2024), and Kyrgyzstan (2025).

Key Features of the India-Israel BIT

1. Investment Boost:

   • The BIT aims to increase bilateral investments between India and Israel, which currently stand at around USD 800 million.

2. Balanced Investor Protection:

   • The agreement ensures protection against expropriation or nationalization, requiring the host country to offer fair and prompt compensation in case of such actions.

3. Dispute Resolution:

   • The arbitration-based mechanism for dispute resolution aims to foster a stable investment environment, offering a transparent and predictable system for addressing disputes.

4. Transparency and Predictability:

   • The BIT requires both countries to maintain clear and predictable investment policies and regulations, thereby reducing uncertainty and strengthening investor confidence.

The Model BIT of 2015

India’s New Model BIT (2015) introduces several key reforms to enhance investment protection while ensuring the host country retains the right to regulate. Some of the important features include:

• Definition & Protection: An investment is defined as an enterprise that is constituted and operated in good faith by an investor under the laws of the host country.

• Full Protection and Security: Both parties are mandated to provide full protection and security to investments and investors.

• National Treatment: Foreign investors must be treated on par with domestic investors.

• Exclusions Clause: Certain sectors like government procurement, taxation, and national security are excluded from BIT obligations.

• ISDS Mechanism: Investors must first exhaust local remedies for 5 years before resorting to Investor-State Dispute Settlement (ISDS).

Evolution of India-Israel Relations

The bilateral relationship between India and Israel has grown significantly since the two countries established full diplomatic ties in 1992. Some key milestones in the relationship include:

• Economic Ties: Bilateral trade reached USD 6.53 billion (excluding defense) in FY 2023-24, with India enjoying a trade surplus.

• Innovation & Technology: Initiatives like the India-Israel Industrial R&D and Innovation Fund (I4F) (2023-2027) are aimed at fostering joint research and technological advancements.

• Defense Cooperation: India is one of Israel’s largest defense customers, importing around 40% of its annual arms exports. Jointly developed projects include the Barak-8 missile system.

• Regional Cooperation: The I2U2 Partnership, comprising India, Israel, the UAE, and the US, was launched to strengthen regional collaboration.

• Cultural Exchange: Both countries have also worked on cultural exchanges and collaborated on sectors like health, agriculture, and water resource management.

Challenges in India’s BIT Framework and Suggested Measures

Despite the positive strides in the BIT framework, India faces several challenges that could affect its attractiveness as an investment destination. Here are some of the key challenges and potential solutions:

1. Lack of Clarity in Legal Terms:

• Challenge: Ambiguities in terms like "investment" and customary international law (CIL) can lead to legal disputes.

• Solution: India can work towards defining these terms precisely to reduce legal uncertainties.

2. Delays in Dispute Resolution:

• Challenge: The requirement to exhaust local remedies before seeking international arbitration can cause delays.

• Solution: Allow investors to choose between local courts or international arbitration at the outset of a dispute, ensuring faster resolution.

3. Exclusion of MFN and FET:

• Challenge: Excluding Most-Favored-Nation (MFN) and Fair and Equitable Treatment (FET) provisions reduces investor confidence, as they may feel they are not receiving treatment equal to that of investors from other countries.

• Solution: India should consider incorporating MFN and FET provisions into BITs with safeguards to avoid treaty shopping and ensure non-discrimination.

4. Exclusion from ICSID Convention:

• Challenge: Not being a signatory to the International Centre for Settlement of Investment Disputes (ICSID) Convention limits enforcement options for investors seeking redress.

• Solution: India could become a signatory to the ICSID Convention, enhancing the credibility of its dispute resolution process and bolstering investor confidence.

Conclusion

The new Bilateral Investment Treaty with Israel represents a significant step in India’s evolving foreign investment strategy. The treaty is designed to boost trade and investment while ensuring that India retains the right to regulate sensitive sectors. By striking a balance between investor protection and sovereignty, this agreement lays a foundation for continued collaboration between India and Israel, fostering growth in key sectors like technology, defense, and innovation.