Why India may revive ‘Most-Favoured-Nation’ rule in bilateral treaties

UPSC Syllabus: Gs Paper 2-International relations

Introduction

India is reconsidering its Bilateral Investment Treaty (BIT) framework after finding that its restrictive approach has made some treaty negotiations difficult. It may introduce a Qualified Most-Favoured-Nation (MFN) provision to address investor concerns and improve investment certainty, especially with major partners such as the European Union (EU), without restoring the broad MFN rule that had raised concerns for India.

Understanding MFN in Investment Treaties

1. Bilateral Investment Treaties (BITs): BITs are agreements between two countries that establish rules for protecting investments and cover issues such as non-discrimination, expropriation, Fair and Equitable Treatment (FET), fund transfers and Investor-State Dispute Settlement (ISDS).
2. MFN as a Non-Discrimination Rule: MFN generally requires investors from one treaty partner to receive treatment no less favourable than that given to investors from another treaty partner.
3. Treaty-Based Scope of MFN: An MFN clause may allow investors to claim protections available under another treaty, but its effect depends on the specific wording and scope of the provision.
4. Difference from WTO MFN: Investment-treaty MFN concerns foreign investor treatment, while the World Trade Organization (WTO) MFN principle applies to trade relations between member countries.
5. Qualified MFN: Qualified MFN provision keeps the principle of non-discrimination but places clear limits on its use. It can specify which treaty provisions can be claimed, whether claims can apply retrospectively, and whether settled disputes can be reopened.

Why Did India Remove the MFN Provision?

1. White Industries Dispute: In 2011, the White Industries v. India, an Australian investor used MFN in the India-Australia BIT to rely on the “effective means” standard available under India’s BIT with Kuwait.
2. Adverse Award against India: The investment arbitration tribunal allowed White Industries to rely on the Kuwait treaty protection, and India was ordered to pay about US$4.08 million, plus interest and costs.
3. Risk of Borrowing Treaty Protections: The dispute raised concerns that investors could use MFN to borrow substantive and procedural protections from India’s other BITs that were not negotiated in their own treaties.
4. Law Commission’s Concern: The Law Commission of India had identified the risk that investors could use MFN provisions to obtain wider protections from other Indian BITs.
5. Cautious 2016 Model BIT: India adopted a more cautious 2016 Model BIT after the White Industries dispute, excluding open-ended MFN and full Fair and Equitable Treatment (FET) while narrowing the definition of investment.
6. Five-Year Domestic Remedy Requirement: The model required investors to pursue domestic remedies for five years before accessing international arbitration, giving greater importance to domestic dispute resolution.

What Happened After the 2016 Model BIT?

1. Termination of Older Treaties: India terminated or sought to renegotiate several older investment treaties and moved towards the stricter approach of the Model BIT.
2. Narrower Investor Protection: The new approach removed MFN, narrowed the investment definition and replaced broad Fair and Equitable Treatment (FET) protection with more limited safeguards.
3. Limited Acceptance by Investment Partners: Only a handful of countries, including Belarus, Kyrgyzstan, Brazil, Taiwan and Uzbekistan, signed investment treaties with India under the stricter framework.
4. India-UAE Treaty: The India-UAE investment treaty, effective from August 2024, reduced the domestic-remedies period from five to three years and widened investment coverage.
5. India-Israel Agreement: The India-Israel investment agreement, effective from July 4, 2026, also reduced the domestic-remedies period to three years and included wider financial investments.
6. MFN Still Excluded: Despite these changes, the India-UAE and India-Israel agreements retain the exclusion of MFN, showing that India remains cautious about unrestricted MFN.

Why Is India Reconsidering MFN?

1. Difficult Treaty Negotiations: Restrictions under the existing framework have made negotiations with some major investment partners more difficult, creating pressure for a more flexible model.
2. Need to Attract Foreign Investment: Declining net FDI has increased the need for a more predictable and competitive investment regime that can provide greater certainty to foreign investors.
3. Declining Net FDI: Average annual net FDI fell from nearly US$40 billion in FY20-FY22 to around US$7.65 billion in FY26, based on preliminary data.
4. Changing Investment Approach: Recent treaties with the UAE and Israel show that India has already relaxed some earlier restrictions, while continuing to exclude MFN.
5. EU’s Evolving Model: The European Union (EU) has moved towards an Investment Court System while retaining non-discrimination protections.
6. Reciprocal Treatment: Qualified MFN could help India seek similar treatment for Indian companies operating in major economies such as the US and EU.

Proposed Reforms to India’s BIT Framework

1. Qualified MFN with Specific Limits: India may allow MFN only for clearly specified treaty provisions, preventing investors from automatically importing favourable protections from unrelated third-country treaties.
2. Safeguards against Wider Claims: The provision could clarify retrospective application, reopening of settled disputes and covered categories of treatment to prevent broad MFN claims.
3. One-Year ISDS Window: The domestic-remedies period under Investor-State Dispute Settlement (ISDS) could be reduced from five years to one year, allowing unresolved disputes to move towards international arbitration sooner.
4. Stronger Domestic Dispute Resolution: The shorter ISDS period would place greater responsibility on domestic dispute-resolution institutions, as weak institutions could allow investors to reach international arbitration sooner.
5. Ten-Year Post-Treaty Protection: The proposed framework would extend post-treaty protection for investors from five years to 10 years after the BIT expires.
6. Wider Investment Definition: Treaty protection could cover portfolio investments and other financial assets, including certain shares and minority holdings depending on the final wording.
7. Ban on Third-Party Funding: The proposed framework could prohibit third-party funding of investment disputes, adding another safeguard to the dispute-resolution process.
8. Retention of Key Safeguards: India would retain the exclusion of open-ended MFN and full Fair and Equitable Treatment (FET) protection, so the proposed changes would not restore the earlier broad treaty approach.

Conclusion

India’s proposed BIT reforms seek a middle path between unrestricted MFN protection and the restrictive approach adopted after the White Industries dispute. A carefully limited MFN clause, faster dispute resolution and wider investment coverage can improve investor certainty and competitiveness. At the same time, safeguards can protect India’s regulatory autonomy and strengthen its position in bilateral investment negotiations.

Question for practice:

Discuss why India may revive a qualified Most-Favoured-Nation (MFN) provision in its Bilateral Investment Treaties (BITs) and the key reforms proposed in its investment treaty framework.

Source: Business Standard