The Aakhya Weekly #84 | Investment Frontiers: India and UAE Forge a New Path with Bilateral Treaty
The Aakhya Weekly #84 | Investment Frontiers: India and UAE Forge a New Path with Bilateral Treaty
In Focus: India inks new BIT with the UAE
By Sujaya Sanjay
PM Modi embarked on a two-day visit to the United Arab Emirates this week, which was marked by a great many milestones, including the signing of a new bilateral investment treaty (BIT) for reciprocal promotion of foreign investments in both countries. The new treaty is in addition to the existing Comprehensive Economic Partnership Agreement (CEPA) signed by both countries in February 2022.
The aim of the BIT is to promote investor confidence and increased opportunities for foreign direct investment (FDI), particularly in sectors like renewable energy, semiconductors, healthcare, and asset monetisation. In addition, the BIT is expected to promote job creation, export promotion and reducing import dependence.
India’s BIT programme, which began post the 1991 economic liberalisation, was quickly abandoned once investors started invoking arbitration under the BITs claiming huge sums in compensation for expropriation resulting from government policies and measures (read more about this here). India terminated most of its earlier treaties and published a model BIT in 2016, which could only be described as a knee-jerk reaction to the unforeseen consequences of BITs and the unidirectional arbitration mechanism. The model BIT, which represents India’s negotiating position, retains access to arbitration for investors (albeit with several procedural obstacles) but is otherwise drafted such as to disproportionately dilute (or even eliminate) investor protections while using broader language in preserving the State’s right to regulate.
The new BIT replaces the previous treaty that was concluded between both States in 2013—as envisaged in Chapter 12 of the CEPA. While the text of the treaty has not yet been made public, it is anticipated that the BIT, keeping with the trend of the times, will endeavour to strike a balance between protecting foreign investment and preserving the State’s right to regulate.Below are some of the expectations and key contention points from the BIT:
Inward and outward investment: a shift in perspectives
This BIT is highly important for both countries, which have seen deepening of diplomatic and economic ties in recent years. The UAE today is India’s third largest trading partner and is looking to ramp up investments into India. To provide a snapshot: the Abu Dhabi Investment Authority, UAE’s largest sovereign wealth fund, is planning to invest $4-5 billion through the tax-neutral Gujarat International Finance Tec-City (GIFT City). Reciprocally, the UAE is also seeing an increased inflow of capital from India. For instance, Indian investment was one of the leading contributors to Dubai’s growth. FDI by Indian investors into Dubai surged to a record $335 million in the first half of 2023 alone, and Indian capital funds the most number of real estate projects (123 investments), outpacing investments from countries like Canada and Latvia. India was one of the top 5 sources for FDI projects and FDI capital in Dubai in 2022.
Although in absolute numbers India remains a net importer of capital, Indian investments abroad are also on the rise, particularly in tax-friendly jurisdictions like the UAE.
This shift in perspective, away from the traditional understanding of India as a recipient of foreign investment, is an essential factor for India’s negotiators in this BIT. India therefore should like to seek a balance between preserving the Government of India’s regulatory space at home, while also ensuring that Indian investors and their investments abroad also have access to reasonable treaty protections.
Asset vs enterprise: defining investment
The UAEis an important hub for investing into India due to territorial proximity, strong diplomatic ties between countries, and the tax-friendly policies in emirates like Dubai. With BIT protections in place, the UAE will soon replace other investor-friendly jurisdictions like Mauritius and the Netherlands as the hub for investing into India. Investors looking to invest in India are therefore likely to route their investments through special purpose vehicles (SPVs) incorporated in Dubai.
The coverage of protected investments under the BIT, therefore, will be an interesting one.India has sought to limit BIT protections only to investors who have incorporated businesses in its territory. The model BIT took a definitive turn away from the traditional broadly worded asset-based definition to a narrower enterprise-based definition, requiring investors to incorporate an enterprise in the host State’s territory to qualify as an investment. Article 1.4 of the model BIT excludes certain classes of investments, such as portfolio investments, actionable claims from judgments or arbitral awards, government-issued debt securities, and so on. Such a narrow definition is unlikely to be acceptable to the UAE, while India is unlikely to revert to the old asset-based definition of investments in a bid to narrow the scope of protections.
FDI opportunities in renewables, AI, semiconductors
Globally, investments into renewable energy are on the rise. According to the World Bank, foreign investments drove over 40 percent of all renewable energy power generation projects in 2019. Even during and after the pandemic, renewable energy continues to be a crucial sector in international project financing. For India and the UAE in particular, investors in both countries are investing heavily into renewable energy projects in the other’s territories. For example, Indian companies are bidding for EPC contracts to build solar photovoltaic plants in Mohammed bin Rashid Al Maktoum Solar Park, which has already seen a massive influx of Indian capital and expertise. Both India and the UAE are also seeking big investments in offshore wind—India for the Gulf of Mannar Wind Farm, and the UAE for the Al Dhafra Wind Farm.
Both countries have recently signed multiple MoUs—one in October 2023 and another last week—reaffirming their commitment to deeper collaboration in clean energy technology, with a focus on green hydrogen and energy storage.
Another crucial segment is AI and semiconductors. The UAE is looking to expand its presence as a pioneer inemerging techand AI, by mass-purchasing AI chips, setting up an AI ministry,andinvesting in AI start-ups through sovereign wealth funds. India is likewise looking to build a semiconductor ecosystem in India by providing design-linked and production-linked incentives for global semiconductor companies. India’s engineering talent also has a huge demand in the UAE, thereby creating fertile ground for economic cooperation and cross-border investments. BIT protections would be beneficial in a capital-intensive and new sector like semiconductors as they would provide the right kind of assurances to first-time investors in India, thereby promoting foreign investment in the sector.
Exhaustion of local remedies
It isreasonable to assume that the India-UAE BIT could include a similar provision mandating exhaustion of local remedies. Recently, the Government of India has indicated the possibility of tweaking the model BIT for some trading partners, but has also indicated that investors would have to exhaust local remedies before invoking the arbitration option—a “non-negotiable position”, as reportedly said by one official. The model BIT provides for a five-year period for investors to seek relief before India’s courts.The Government of India has alsorecently set up specialised tribunals to resolve disputes in key sectors like renewables—a key indicator of its intention to ensure that investors afford the Government of India a proper opportunity to resolve any disputes locally, before proceeding to arbitration.
Top Stories for the Week
Uttar Pradesh's IT & Semiconductors Plans Gain Momentum
Uttar Pradesh’s IT and semiconductor ecosystems are undergoing significant development, bolstered by recent policy initiatives and groundbreaking projects. In line with this, Prime Minister Narendra Modi is set to inaugurate 60 IT and IT-enabled service projects worth Rs. 91,457 crores on February 19, signaling a major boost to the state's economy and its technological landscape. These projects are expected to create job opportunities for over 80,000 individuals, further enhancing Uttar Pradesh's position as a prime investment destination.
Uttar Pradesh is one among many Indian states that are in a race to create the country’s leading semiconductor hubs. To achieve this, it is doubling down on its efforts to create a robust ecosystem, as evidenced by the recent announcements about its semiconductor policy. Industrial groups investing in semiconductor manufacturing units are likely to receive substantial financial support, which includes access to Centre-State allocated funds of Rs. 80,000 crores, of which the state government is contributing 75% of the amount.
In addition to this, incentives such as a 75% subsidy on land of up to 200 acres, could further incentivise industry participation. Thirteen companies have already expressed their intent to establish manufacturing units in the state, indicating a promising start for Uttar Pradesh's semiconductor industry.
UPI, Rupay launched in Sri Lanka & Mauritius
Following the launch of UPI in France, the mobile payment system has now been introduced in Sri Lanka and Mauritius. The introduction of UPI will allow Indians visiting Sri Lanka and Mauritius to utilize UPI for transactions, while Mauritians traveling to India will also enjoy the same benefit. In addition to this, RuPay card services have been launched in Mauritius, enabling Mauritian banks to issue cards based on the RuPay mechanism, and facilitating transactions both in India and Mauritius.
The latest rollout is in line with India’s efforts in enhancing bilateral relations and economic ties with Sri Lanka and Mauritius. This initiative represents a notable, forward-looking step in reinforcing digital connectivity and financial cooperation between these countries. Furthermore, the Ministry of External Affairs (MEA) highlighted India's leadership in Fintech innovation and Digital Public Infrastructure, with the Prime Minister prioritizing the exchange of developmental experiences and innovation with partner countries.
During the G20 summit, India showcased its achievements in Digital Public Infrastructure, earning widespread acclaim from the Global South for its secure and seamless transaction capabilities. The government's focus extends beyond domestic borders, as it aims for the benefits of UPI to extend internationally, facilitating hassle-free, easy transactions in other countries. UPI has already been introduced in Bhutan, Oman, UAE, and Nepal, and discussions are underway with several African countries, including Namibia, Mozambique, and Kenya, for further expansion.
A Few Good Reads
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To catch up on Pakistan’s "election imbroglio," check out this piece published by ORF.
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