New bilateral investment model: 2-year local remedy window, no most favoured nation clause

India has finalised a revised Model Bilateral Investment Treaty (BIT), announced in the Union Budget 2025-26, incorporating three major structural changes ai...

What Happened

India has finalised a revised Model Bilateral Investment Treaty (BIT), announced in the Union Budget 2025-26, incorporating three major structural changes aimed at balancing investor protections with the state's right to regulate in the public interest.
The most significant change is reducing the mandatory local remedies exhaustion period from five years (as stipulated in the 2016 Model BIT) to two years before an investor may escalate a dispute to international arbitration.
The revised model eliminates the Most Favoured Nation (MFN) clause, which had allowed foreign investors to import more favourable protections from India's other treaties — a feature that had been exploited for "treaty shopping" and created unpredictable legal exposure for the government.
Tax-related disputes are explicitly excluded from the scope of investment treaty protection, a safeguard introduced in direct response to high-profile international arbitration losses involving large tax demands on foreign investors.
The revision is positioned as making India's investment treaty framework more investor-friendly and internationally competitive, while preserving domestic policy space on issues of national security, public health, and environment.

Static Topic Bridges

Bilateral Investment Treaties (BITs) and Investor-State Dispute Settlement (ISDS)

A Bilateral Investment Treaty (BIT) is an agreement between two countries that establishes the terms and conditions for private investment by nationals and companies of each state in the other state. BITs typically confer rights on foreign investors — fair and equitable treatment, protection against expropriation, and access to international arbitration — that domestic investors do not possess. The Investor-State Dispute Settlement (ISDS) mechanism within BITs allows foreign investors to directly sue sovereign governments before international arbitration tribunals, bypassing domestic courts.

India signed over 80 BITs between 1994 and 2015, most based on an older "model" that gave investors broad protections without strong carve-outs for public policy.
Following a series of adverse international arbitration awards — including the White Industries case (2011), Cairn Energy case ($1.2 billion award), and Vodafone tax arbitration — India terminated approximately 68 BITs between 2016 and 2017.
The 2016 Model BIT replaced the older framework with a more defensive posture, requiring investors to exhaust local remedies for five years before proceeding to arbitration.

Connection to this news: The 2026 revised Model BIT retains the sovereignty-protective architecture of 2016 but reduces friction for genuine investors by shortening the local remedy window from five years to two years.

Most Favoured Nation (MFN) Clause in Investment Treaties

The MFN clause in investment treaties requires a host state to treat investors from one signatory country no less favourably than investors from any third country. While MFN is a cornerstone principle of international trade law under the WTO, its application in BITs has proven controversial because it allows investors to "import" more favourable protections from other treaties India has signed — effectively treating the entire BIT network as a composite of the most investor-favourable provisions.

Treaty shopping using MFN clauses was a significant concern following the Maffezini v. Spain arbitration (2000), which established that MFN clauses could import dispute settlement procedures from third-party treaties.
The 2016 India Model BIT already restricted MFN to "treatment" in limited contexts, but the revised 2026 model eliminates the clause entirely.
Removal of MFN is consistent with emerging treaty practice in several countries including Brazil, South Africa, and the EU's approach in its modern investment chapters.

Connection to this news: Eliminating the MFN clause gives India greater certainty about its treaty obligations and prevents investors from cherry-picking protections from India's most favourable bilateral treaties.

Exhaustion of Local Remedies Doctrine

The exhaustion of local remedies doctrine is a principle of international law requiring that an individual or company must first seek redress through the domestic legal system of a host state before bringing a claim to an international forum. In the investment treaty context, it serves as a gating mechanism that forces disputes through national courts before international arbitration is permitted, preserving domestic judicial sovereignty and filtering out frivolous claims.

The 2016 India Model BIT required a five-year exhaustion of local remedies — one of the longest such requirements globally, compared to the OECD standard of no mandatory exhaustion and many other Asian models of 18 months to three years.
The "futility exception" allows investors to bypass local remedies if they can demonstrate that no effective domestic remedy exists.
The revised two-year window aligns more closely with international market practice and addresses investor concerns that five years constituted an unreasonable delay for access to justice.

Connection to this news: The two-year local remedy window is the headline reform — it directly addresses investor criticism that the 2016 Model BIT's five-year requirement was prohibitively long and deterred investment flows.

India's FDI Policy and Investment Climate

Foreign Direct Investment (FDI) into India is regulated under the FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT) and the FEMA (Foreign Exchange Management Act, 1999) framework. India received $70.9 billion in FDI inflows in FY2023-24, making it one of the world's top FDI destinations. BITs complement the FDI policy framework by providing legal certainty and treaty-level protections to foreign investors beyond what domestic law offers.

India operates an "automatic route" (no prior government approval required) for FDI in most sectors, with a "government route" for sensitive sectors such as defence, media, and telecom.
FEMA, 1999 replaced FERA (Foreign Exchange Regulation Act, 1973) and liberalised India's foreign exchange management regime.
The Bilateral Investment Treaty framework operates independently of, but complementarily to, the FDI Policy.

Connection to this news: The revised BIT model strengthens India's investment treaty infrastructure at a time when the country is negotiating multiple new agreements (including with the EU, UK, and US) and needs a balanced template that can attract FDI without creating excessive legal exposure for the state.

Key Facts & Data

Revised Model BIT announced: Union Budget 2025-26 (February 2026).
Key change 1: Local remedy window reduced from five years (2016 model) to two years.
Key change 2: MFN (Most Favoured Nation) clause eliminated entirely.
Key change 3: Tax disputes explicitly excluded from treaty scope.
India terminated approximately 68 BITs between 2016 and 2017 following adverse arbitration awards.
High-profile losses that shaped the revision: Cairn Energy ($1.2 billion), White Industries (2011), Vodafone tax arbitration.
India's FDI inflows in FY2023-24: $70.9 billion.
FEMA, 1999 is the governing statute for India's foreign exchange and investment regulatory framework.
DPIIT administers India's FDI Policy under the aegis of the Ministry of Commerce and Industry.