A proposed remodelling of India’s bilateral investment treaties (BITs) will not bring back the most favoured nation (MFN) rule rescinded a decade ago, but may still address investor concerns from large trading partners like the European Union with a flexible standard of Qualified MFN treatment, according to official sources. The carefully circumscribed provision could offer investors greater policy certainty, without opening the door to broader claims based on provisions in treaties signed with third countries, the sources added.
The move is seen as necessary not only to attract foreign investors, but also to enable Indian investors to get similar treatment in major economies like the US or EU on a quid pro quo basis. An open approach to granting qualified MFN status to foreign investors could also be a great leverage in bilateral negotiations.
Strategic Balance
In the draft Cabinet note on BIT revamp circulated for deliberations, the Finance Ministry has suggested reducing the domestic Investor-State Dispute Settlement (ISDS) window to just one year from the present five years and doubling investor protection after the BIT expires to 10 years.
It also proposes widening the definition of “investment” to include portfolio investments and other financial assets, and banning third-party funding of litigation, the sources said. The 2015 BIT rule of not granting open-ended MFN or full Fair and Equitable Treatment (FET) standard will be retained, reflecting concerns arising from the legacy of past disputes.
“India has to cautiously move beyond MFN. The judgment ought to be based on a quid-pro-quo treatment which India expects for homegrown MNCs working in the USA and EU. Imagine a Sun Pharma investment in the USA treated with sub-par standards below Nigeria, as the USA has a better treaty with Nigeria. MFN is a sword that cuts both ways,” said Amit Agarwal, Senior Partner, Nangia & Co LLP.
The European Union has moved away from open-ended MFN towards its Investment Court System model, while retaining non-discrimination protections. India can potentially offer enhanced investor protection in certain cases under a similar arrangement, even as it is wary of pure MFN that is fraught with risks, analysts feel.
Sudhir Kapadia, Senior Adviser at KPMG Assurance and Consulting Services, said a qualified MFN could address some concerns around an open-ended provision. “Rather than allowing investors to automatically claim the most favourable provision from any other (third-party) treaty, the MFN clause could be limited by specific safeguards,” Kapadia said. For example, the government could clarify that the provision would not operate retrospectively or reopen disputes that have already been settled or give national treatment to the investments, he said.
The proposed reduction in the domestic litigation period for dispute settlement could be equally significant. “A one-year period could be a good benchmark. If a dispute is not resolved within one year through the domestic legal process, the parties could move towards international arbitration. The objective would not necessarily be to replace the courts, but rather to expedite commercial dispute resolution and encourage the use of alternative mechanisms where appropriate,” Kapadia added.
Agarwal, however, cautioned that the shorter timeline would need to be backed by stronger domestic institutions. “Ultimately, the proposed change places greater responsibility on India’s domestic dispute-resolution framework. Without corresponding institutional reforms, shortening the period may simply enable investors to reach international arbitration sooner, rather than genuinely strengthening domestic remedies.”
Expanding Asset Scope
The broader overhaul also seeks to make India’s investment framework more familiar to international investors by potentially bringing portfolio investments and other financial interests under treaty protection. Agarwal said a broader asset-based definition could bring “shares and certain minority or portfolio holdings” within the potential scope of treaty protection, depending on the final wording.
The push to revisit the BIT framework comes against a backdrop of weakening net foreign direct investment (FDI) into India. Net FDI has fallen from close to $40 billion a year on average in FY20-FY22 to roughly $7.65 billion in FY26 on preliminary data, even as outbound investment by Indian firms has risen sharply. The decline in net FDI, alongside the growing overseas footprint of Indian companies, has added to the pressure to make India’s investment regime more competitive and predictable.
The overhaul goes beyond dispute resolution and revises several other provisions, drawing on lessons from recent agreements with the UAE and Israel, where the ISDS window is reduced to three years.
As India is negotiating a dozen BITs, the immediate challenge for policymakers is to make the framework sufficiently attractive to foreign investors without reopening the broad treaty protections that India moved away from in its 2015 model.