How India plans to rebuild its new investment treaty network to attract investors

Why in the News

India has cut the wait before a foreign investor can go to international arbitration from five years to two years, in its new Bilateral Investment Treaty (BIT) with Saudi Arabia. The pact is part of an overhaul of the treaty network India dismantled a decade ago, with 4 to 5 agreements expected by year end and a new model template awaiting Union Cabinet approval.

What is a BIT, and why does the local remedies rule matter?

1. What it is: A BIT is an agreement between two countries setting rules for investment by companies of one in the other. Like a written guarantee of fair treatment, it promotes and protects foreign investment.
2. Investor State Dispute Settlement (ISDS): This treaty clause lets a foreign investor take the host state to international arbitration for an alleged treaty violation.
3. Exhaustion of local remedies (ELR): This rule makes the investor first seek redress in the host state’s domestic courts or administrative bodies before bringing an international claim.
4. What went wrong: After terminating multiple BITs in 2016-17, India insisted on a five year ELR, which foreign investors flagged as a major challenge.
5. The takeaway: The ELR period decides how quickly an investor reaches a neutral forum, so it is the clearest test of how investor friendly a treaty is.

What has changed in India’s treaty practice?

1. Budget review: The Union Budget 2025-26 announced a review of the model BIT to make it investor friendly. The Finance Minister says Cabinet approval of the new template is due “shortly”.
2. Pacts already signed: Agreements with Saudi Arabia, Israel and the United Arab Emirates (UAE) were signed keeping the new framework in mind.
3. Shorter waits: India accepted a three year ELR in its 2024 BIT with the UAE. The Saudi treaty, finalised last week, shortens the wait further.
4. Partners want less: Trade partners have sought a one year ELR, which India has not accepted so far.
5. Investment context: The new pacts come amid a sharp slowdown in net investment inflows, and Saudi investment in Indian refineries is expected.

How should India balance investor protection and policy space?

1. Stated rationale: A two year ELR gives investors enhanced access to ISDS. It also keeps the State’s right to regulate, its power to make public interest rules that affect investors.
2. Uniform practice: A legal expert at Jindal Global Law School argues for one treaty practice, with the model BIT allowing one to two years for local remedies and no more.
3. Workable time limit: The same expert holds that the limitation period, the deadline for filing an ISDS claim, should not be too strict for foreign investors.
4. Why States terminated: Adverse orders from international tribunals were seen as encroaching on domestic policy space. Eg. South Africa and Indonesia also terminated BITs.

Challenges

1. Uneven treaty terms: Different ELR periods across the UAE, Saudi and other pacts leave investors without one predictable standard.
2. Slow domestic courts: Any ELR binds investors to slow courts, and court delay produced India’s first adverse award. Eg. White Industries Australia v. India (2011).
3. Regulatory exposure: Wider ISDS access opens tax and regulatory measures to arbitral claims. Eg. Vodafone and Cairn Energy won awards against retrospective tax demands.

Way Forward

1. Approve the template: Clear the new model BIT so pending negotiations proceed from one agreed text.
2. Faster commercial justice: Strengthen commercial courts so a local remedies period ends in a decision, not delay.
3. Defined exceptions: Spell out public interest exceptions precisely, so the right to regulate survives shorter waits.

Conclusion

India’s treaty policy is moving from shielding the state from arbitration to offering investors a shorter, defined route to it. Whether the approved template fixes one uniform standard, and whether the agreements now under negotiation follow it, is what to watch.

Back2Basics: 2016 Model BIT

1. Negotiating template: The model is the standard text India negotiates from, like a standard contract form.
2. Narrow protections: It narrowed what counts as an investment and kept wide exceptions for regulatory action by the state.
3. Shrinking network: After the model tightened terms, BITs in force fell from 73 to just eight.
4. Earlier coverage: “We have a model investment treaty. And are losing billions because of it” (2 October 2026) examined its cost to India.

Matching Previous Year Question

“[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ? (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India ANSWER: (d)”