BIT sweeter? India weighs easing treaty rules with safeguards to attract foreign capital

The government is examining whether to relax the five-year timeline for foreign investors, required under the usual treaty template, to first exhaust Indian legal remedies before pursuing global arbitration for dispute settlement, they said. Under its 2024 investment pact with the UAE, India shortened this requirement to three years, signalling a special bilateral relationship.

The government is also weighing the pros and cons of granting the so-called most-favoured nation (MFN)-forward benefit, which means any concession offered by India to an investment partner under a bilateral treaty will automatically be extended to an existing partner, the officials said.However, safeguards will be built into any of these concessions to prevent potential abuse of treaty terms, they said.

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Two important principles

Foreign investors have long demanded relaxed terms under the Investor–State Dispute Settlement (ISDS) mechanism and MFN-forward concessions under investment treaties.

But any concession under BITs, according to the officials, will be guided by two principles: India won’t cede its future sovereign policy-making space, and it won’t allow the so-called “treaty-shopping” — essentially a strategy to dodge taxes.

A decision on these issues will be made after broader consultations, the officials said.

While the template will serve as a basis for negotiations, there will be no one-size-fits-all framework, and the final BITs will vary across countries depending on strategic, economic and other considerations, the officials stressed.

“The government is well aware of the sensitivities around such provisions. That’s why safeguards have to be built into any such relaxations, if they are finally approved,” said one of the officials. “But this is also the time to take the bull by the horns, because we need sustained foreign investments—a whole lot of them. The finance ministry is working on such issues.”

India is already planning to scrap the capital gains tax on investments in government securities by foreign portfolio investors.

It is pursuing BITs with over two dozen nations and blocs, including the EU, Russia, Saudi Arabia, the US, Qatar and Oman.

From caution to cautious optimism

The government has been cautious in forging investment treaties with other countries after an old treaty template–which formed the basis of dozens of such agreements with various countries between 1996 and 2016–led to litigation in several cases.

This prompted the government to draw up a new model in 2016. But the view now is that the 2016 template needs to be revised, ET has learnt.

The setbacks in arbitration rulings against the government, especially in the Vodafone tax case, further stoked caution.

However, deepening fears of capital outflows, especially after the West Asia war, and growing risk of capital reallocation driven by the global surge in artificial intelligence and other strategic technology investments, have warranted a fresh review of certain key issues around the basic negotiating terms of such treaties.

From $85 billion in FY22, total foreign direct investment (FDI) fell over two years before rising again to top $80 billion in FY25. Gross FDI inflows touched a peak of $94.5 billion in FY26. Net inflows, however, have remained subdued in recent years.