Earlier this month, Economic Affairs Secretary in the finance ministry Anuradha Thakur said the long awaited review of India’s model Bilateral Investment Treaty (BIT) was nearing completion and it may be sent for Cabinet approval soon.
Her comments came 18 months after Finance Minister Nirmala Sitharaman announced in the February 2025 Budget that the “current model BIT will be revamped and made more investor-friendly” to encourage sustained foreign investment.
The BIT with the UAE, which came into force in August 2024, and the India-Israel agreement, effective July 4 this year, show that India has already begun relaxing some of the most restrictive features of its existing model. Both reduce the period investors must pursue remedies in domestic courts before seeking international arbitration from five years to three, known as investor-state dispute settlement mechanism (ISDS). Both also cover a wider range of financial investments, including portfolio investments such as shares and bonds.
The Israel agreement reveals another tweak: It covers immovable property as an investment, but specifically excludes rights over land and real estate from the treaty’s so called national treatment obligation – the principle that foreign investors should receive treatment no less favourable than domestic investors. In other words, an Israeli investor can get treaty protection for an investment in property, but cannot invoke the treaty to argue that India must give it the same rights to own or use land as it gives an Indian investor.
The emerging approach, therefore, is not a return to India’s older, highly investor-friendly treaties. It is a more selective opening: broader protection and faster access to arbitration in some areas, while retaining explicit safeguards for government regulation in sensitive areas.
How did India’s restrictive BIT model emerge?
A BIT is essentially an agreement under which two countries promise certain protections to investors from the other country. In some circumstances, it allows an investor to take a dispute with the host government to an international arbitration tribunal.
India’s older BITs gave foreign investors broad protections, including a provision known as Fair and Equitable Treatment (FET). In simple terms, FET can protect investors against arbitrary, unfair, or inconsistent government treatment which is often open to varied interpretation. Foreign investors also had broader and more direct access to international arbitration for resolving disputes.
When India lost the arbitration case with Australian mining company White Industries in 2011, the first such defeat, it prompted a reassessment of its approach towards investment treaties, then known as Bilateral Investment Promotion Agreements (BIPAs). The Vodafone and Cairn disputes further strengthened the government’s concern that broad investment protections could expose domestic policy decisions to international arbitration.
India subsequently approved a model Bilateral Investment Treaty (BIT) document in December 2015 and unilaterally terminated BIPAs with 77 countries, asking them, including the European Union, to renegotiate based on the model BIT.
The new model narrowed the definition of investment, excluded portfolio investment, removed the Most Favoured Nation (MFN) clause, which requires a country to treat investors from one treaty partner no less favourably than investors from another, replaced the broad FET standard with a much narrower list of protections and introduced the five-year domestic-remedies requirement.
The five year clause under the ISDS mechanism, however, became a key issue of contention.
The model BIT also failed to gain much traction with major investment partners. Since its adoption, India has concluded new investment agreements under that framework, with only a handful of countries, including Belarus, Kyrgyzstan, Brazil, Taiwan, and Uzbekistan, signing investment treaties with India under the strict conditions.
Why do the UAE and Israel treaties matter?
The treaties with UAE and Israel signal a change of heart and approach.
Prabhash Ranjan, professor at the Jindal Global Law School, sees the two treaties as evidence of a partial but real shift. “They show two things: first, a bit of flexibility on matters like ISDS. India has moved away from the position in the Model BIT that foreign investors should pursue local remedies for 5 years to 3 years; second, consistency on other core issues like non-inclusion of MFN, exclusion of taxation matters,” he said.
Atul Pandey, partner at Khaitan & Co, frames the shift in similar terms, though he cautions against reading it as a wholesale reversal. “The UAE and Israel agreements suggest that India is moving towards a more pragmatic and investor-friendly position, although not abandoning the core safeguards of the 2016 Model BIT,” he said.
Pandey said the UAE treaty also adopts a broader approach to protected investments, including portfolio investments, while the Israel agreement expressly provides full protection and security for investors and investments. “At the same time, India continues to preserve substantial regulatory space, excludes a broad, open-ended fair and equitable treatment standard and retains significant carve-outs. The direction is therefore one of calibrated liberalisation rather than a complete reversal of policy,” he points out.
Did India’s BIT retreat affect FDI?
There is also some empirical evidence that the wider retreat from BITs had an investment cost. A study by Sarah Hartmann and Rok Spruk found that India’s termination of BITs was followed by a decline of more than 30 per cent in FDI from affected countries relative to countries whose treaty arrangements remained unchanged. The study also found evidence of investment being rerouted through jurisdictions where treaty protection remained available.
That does not establish that the termination of BITs caused India’s entire FDI slowdown. But it does suggest that investment treaties can influence where multinational companies choose to route capital.
Why outward FDI has changed India’s calculation
There is another reason India’s position has changed since 2015: Indian companies have become increasingly important investors abroad.
Net FDI flows have fallen sharply from a peak of $44 billion in FY21 to $7.65 billion in FY26, according to the latest Reserve Bank of India data, while net outward FDI by Indian companies has grown threefold from $11 billion to $33.29 billion over the same period.
That means a BIT is no longer simply a tool for attracting foreign companies into India. It can also protect an Indian company investing in another country. Thakur signalled as much holding that the ongoing review is also likely to aim at protecting Indian firms that have emerged as major overseas investors. That has changed the calculation behind the Model BIT.
Ranjan argues this reversal in India’s capital position makes an inward-looking treaty model actively counterproductive. “It is very important,” he said of the need for a liberal BIT model now that Indian firms are major outward investors. “If we have an inward-looking protectionist BIT, it would be a handicap for Indian investors if they get into regulatory trouble outside India.”
Pandey frames it as a structural change in what a BIT is for. “A more balanced BIT framework is no longer only about attracting foreign capital into India. Indian businesses are increasingly investing abroad in manufacturing, energy, infrastructure, technology and natural resources, often in jurisdictions where political and regulatory risks can be significant. Effective investment treaties give those companies an independent remedy where their assets are expropriated, subjected to discriminatory treatment or affected by arbitrary state action. India must therefore view BITs from both sides of the capital flow.”
What should the new Model BIT contain?
Both Ranjan and Pandey, though, converged on a similar list of what the Cabinet-bound BIT model revision should contain: a shorter, clearly capped local-remedies period; a workable MFN provision instead of a blanket exclusion; some room for taxation disputes rather than a total carve-out; and a more functional ISDS mechanism overall.
“The improvements that I would like to see are the local remedies rule should be brought down to two years; the BIT should provide for a balanced MFN provision; taxation matters should not be altogether removed from the ambit of the BIT; the ISDS mechanism should be made workable,” Ranjan said.
Pandey said the revised Model BIT should turn the flexibility seen in recent agreements into a clear and commercially workable baseline. “The new text may also provide clearer protection against arbitrary and discriminatory state action, cover recent forms of investment, and ensure straightforward enforcement of awards. These protections can be drafted with precise thresholds and public-policy exceptions so that India retains its right to regulate without making treaty protection illusory.”
“And most importantly, there should be wider consultation with people outside the government, including civil society, academia, etc,” Ranjan concluded.
