Rework India’s investment treaty framework to attract FDI flows

Since its adoption in 2015, India has signed agreements with only five countries—Belarus (2018), Kyrgyzstan (2019), Brazil (2020), the UAE (2024) and Uzbekistan (2024), highlighting challenges in securing BITs with key trade partners and attracting foreign direct investment (FDI) flows.

Annual FDI inflows have only marginally increased from $60.2 billion in 2016-17 to $70.9 billion in 2023-24, reflecting global economic uncertainties and India’s restrictive investment treaty framework. Investors often cite legal unpredictability and cumbersome dispute settlement provisions as deterrents. 

The revamp presents an opportunity not just to tweak the treaty’s text, but to re-conceptualize India’s engagement with global investors to restore their confidence and enhance inflows.

Also Read: BITs shouldn’t bite: Time to rework India’s approach to bilateral investment treaties

Attracting foreign investment in an era of geopolitical fragmentation and restructured global supply chains requires a fine balance between investment protection and regulatory autonomy. 

India’s model BIT, drafted in reaction to a spate of adverse international arbitration rulings (Cairn Energy, Vodafone, etc) is excessively cautious. Its mandatory five-year exhaustion of local remedies before international arbitration, restrictive definition of investment and omission of the Most Favoured Nation (MFN) clause had made it unpalatable to foreign investors.

The revised BIT framework must correct these shortcomings without overly diluting India’s regulatory autonomy.

First, the clause on five-year local remedies must be streamlined. While domestic dispute resolution is essential, a protracted wait exacerbates investor uncertainty when a judicial backlog is a major concern. A fork-in-the-road (FITR) clause, which ensures investors make a definitive choice between domestic courts and arbitration, or a shorter exhaustion period could lift investor confidence without domestic legal institutions being undermined.

Second, the definition of ‘investment’ should align with global best practices, shifting from a rigid enterprise-based approach to a broader asset-based one that recognizes intangible assets, portfolio investments and digital transactions. India’s exclusion of such assets in its model BIT limits its ability to attract investments in technology and services, where capital mobility is high.

Also Read: India can get foreign investment without dispute-settlement treaty giveaways

Third, the exclusion of MFN provisions should be re-assessed. While India rightly seeks to prevent investors from cherry-picking favourable terms from other treaties (or ‘treaty shopping’), a well-defined MFN clause—allowing investors equal substantive protections but not procedural benefits—could boost investor confidence without exposing India to unintended legal risks. India’s global competitors, such as Vietnam and Indonesia, provide MFN treatment, which is non-discriminatory and thus serves to enhance their investment attractiveness.

Fourth, the Investment-State Dispute Settlement (ISDS) mechanism should be recalibrated. The BIT’s restrictions on tribunal jurisdiction, particularly its avoidance of the ‘Fair and Equitable Treatment’ (FET) standard, have been a sticking point in negotiations. While broad and vague FET provisions expose states to excessive litigation, a well-defined FET clause—mirroring those in European Union BITs—can provide a balanced mechanism to protect investors against arbitrary state action without cramping India’s regulatory space.

Fifth, to align foreign investments with India’s sustainable development goals, BITs should incorporate Environmental, Social and Governance (ESG) obligations. The EU-Canada treaty and Morocco-Nigeria BIT show how investor commitments to environmental protection, labour rights and corporate responsibility can be embedded. 

However, overly stringent ESG provisions can deter investors, particularly in emerging markets, by raising compliance costs and regulatory burdens. A calibrated approach that aligns with global standards while retaining flexibility for local economic contexts is thus needed.

Also Read: Critics of ESG investing should take a closer look at the concept

Lastly, institutional stability is key. India’s abrupt termination of 77 BITs in 2016 created policy uncertainty. While recalibration is necessary, policy consistency is equally important. Any new BIT framework must not only be investment-friendly, but also signal India’s stable and predictable approach to international economic engagement. The proposed revamp should go by transparent stakeholder consultations.

India’s evolving investment treaty framework needs to embody both economic pragmatism and sovereign resilience. But we mustn’t go back to the pre-2016 status. We need a forward-looking strategy that attracts investors while preserving India’s regulatory autonomy. If executed well, this reform could raise India’s credibility, deepen its integration with global value chains and fast-track the economy’s rise. India has an opportunity to adopt a BIT framework that aligns with international best practices in the interest of sustained FDI inflows and GDP growth.

These are the authors’ personal views.

The authors are, respectively, a Supreme Court lawyer specializing in international dispute resolution and partner at Seven Seas Partners; and an assistant professor of economics at IIM Ranchi.