State's Right to Regulate

The state's right to regulate is its sovereign authority to make and enforce laws within its territory, including laws affecting foreign investments. Under international investment law, this authority coexists with obligations accepted through bilateral investment treaties, investment chapters and customary international law. It preserves regulatory policy space, but does not give the state blanket immunity from liability.

Scope of the right

A state may adopt bona fide measures for objectives such as public health, environmental protection, public order, labour welfare and financial stability. Foreign investors do not possess a general right to an unchanged regulatory framework merely because a new law reduces profitability.

• Regulation must remain consistent with applicable treaty standards, including non-discrimination, protection against unlawful expropriation and any promised standard of treatment.
• The exact regulatory freedom depends primarily on the wording, exceptions and reservations of the applicable investment treaty.

Regulation and investor protection

A regulatory measure may amount to indirect expropriation if it substantially deprives an investor of the use, control or economic value of an investment without formally transferring ownership. However, economic loss alone does not automatically establish expropriation.

• Under the police powers doctrine, bona fide and non-discriminatory public welfare regulation is generally treated as a legitimate exercise of state authority rather than compensable expropriation.
• An investment tribunal examines the measure's purpose, effects, discriminatory or arbitrary character and the terms of the applicable treaty.
• Direct seizure or treaty-inconsistent conduct cannot be justified merely by describing it as regulation.

Approach in India's Model BIT

India's Model BIT reaffirms the state's regulatory authority and provides policy space through treaty exceptions. Its expropriation framework generally protects non-discriminatory measures designed and applied to achieve legitimate public interest or public purpose objectives, while retaining safeguards against abusive state action.