India is signing bilateral investment treaties again. What changed after the 2016 reset?

Indian Economy & International Relations · 9 October 2026 · Based on Indian Express (original report)

Must read — 2 past UPSC questions on this theme (Prelims GS-1 2020, Prelims GS-1 2020); also both a Prelims fact and a Mains debate.

2-minute summary

India is undergoing a major overhaul of its Bilateral Investment Treaty (BIT) framework, moving away from the highly defensive posture adopted during the 2016 policy reset. Following the Union Budget 2025-26 announcement to review the 2016 Model BIT, the government is introducing greater flexibility to attract foreign direct investment (FDI). The core of the debate lies in the 'Exhaustion of Local Remedies' (ELR) clause, which requires foreign investors to seek redress in domestic courts before approaching international arbitration. While the restrictive 2016 Model mandated a strict five-year ELR, India's new treaties show a pragmatic compromise: the 2024 India-UAE BIT reduced this period to three years, and the October 2026 India-Saudi Arabia BIT further lowered it to two years. This shift balances the protection of state regulatory sovereignty with the legal certainty demanded by global investors, especially in high-value sectors like oil refineries.

Why it's in the news

Following the Union Budget 2025-26 mandate to review the 2016 Model BIT, the Finance Minister announced that a revised, investor-friendly BIT template will soon receive Cabinet approval, highlighted by the finalization of a new BIT with Saudi Arabia in October 2026 featuring a relaxed two-year local remedies clause.

Facts to remember

  • India terminated 68 out of 74 ratified bilateral investment treaties (BITs) following the adoption of the 2016 Model BIT.
  • Under the 2016 Model BIT, foreign investors were required to pursue domestic remedies (ELR) for a minimum of five years before initiating international arbitration.
  • In the 2024 India-UAE Bilateral Investment Treaty, India agreed to a reduced Exhaustion of Local Remedies (ELR) period of three years.
  • In the India-Saudi Arabia Bilateral Investment Treaty finalized in October 2026, the Exhaustion of Local Remedies (ELR) period was further reduced to two years.
  • The Investor-State Dispute Settlement (ISDS) is a treaty-based mechanism that allows foreign investors to bring claims directly against host states for alleged treaty violations.

Background and context

India signed its first BIT in 1994 with the United Kingdom, based on the liberal 1993 Model BIT. By 2015, India had signed 83 BITs. However, a series of adverse international arbitration awards (such as the White Industries case) where tribunals penalized India for regulatory and tax decisions led to a major policy rethink. To protect its sovereign policy space, India released a highly protective Model BIT in 2015-16 and subsequently issued termination notices to 68 treaty partners. This 2016 Model required a mandatory five-year Exhaustion of Local Remedies (ELR) before invoking the Investor-State Dispute Settlement (ISDS) mechanism. This defensive posture led to a significant slowdown in new BIT signings and raised concerns among foreign investors about legal predictability. By 2024-2026, facing a slowdown in net FDI inflows, India began adopting a more flexible approach, negotiating shorter ELR periods (3 years with UAE, 2 years with Saudi Arabia) to restore investor confidence while maintaining basic regulatory safeguards.

Constitutional provisions

  • Article 253 — Empowers Parliament to make laws for implementing international treaties and agreements, which governs how BIT provisions are integrated into domestic law.
  • Article 73 — Defines the executive power of the Union, which extends to the negotiation, signing, and ratification of international treaties like BITs.

Committees and reports

  • Parliamentary Standing Committee on External Affairs Report on India's BITs — Recommended a review of the 2016 Model BIT, noting that the mass termination of treaties and the stringent 5-year ELR clause had negatively impacted foreign investment inflows into India.

International organisations

  • International Centre for Settlement of Investment Disputes (ICSID) — A World Bank Group institution for international investment dispute resolution. India is notably not a member of ICSID, preferring ad-hoc arbitrations under UNCITRAL rules.

Previous UPSC questions on this theme

  • Prelims GS-1 2020 — With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic ? (a) It is the investment through capital instruments essentially in a listed company. (b) It is a largely non-debt creating capital flow. (c) It is the investment which involves debt-servicing. (d) It is the investment made by foreign institutional investors in the Government securities.
  • Prelims GS-1 2020 — With reference to Trade-Related Investment Measures (TRIMS), which of the following statements is/are correct ? 1. Quantitative restrictions on imports by foreign investors are prohibited. 2. They apply to investment measures related to trade in both goods and services. 3. They are not concerned with the regulation of foreign investment. Select the correct answer using the code given below : (a) 1 and 2 only (b) 2 only (c) 1 and 3 only (d) 1, 2 and 3

Mains practice: The 2016 Model Bilateral Investment Treaty (BIT) of India was a swing from over-liberalization to over-protectionism. In light of recent treaty renegotiations, analyze how India can strike a balance between safeguarding sovereign regulatory space and attracting foreign capital.

India’s bilateral investment treaty framework has undergone a dramatic evolution, moving from the highly liberal 1993 Model to the defensive 2016 Model BIT, which led to the termination of 68 treaties. Recently, in response to declining net Foreign Direct Investment (FDI) and the Union Budget 2025-26 mandate to review the framework, India has adopted a pragmatic, flexible approach.

• **The Sovereign vs. Investor Dilemma**: The 1993 Model exposed India to severe Investor-State Dispute Settlement (ISDS) claims (e.g., the *White Industries* case). Consequently, the 2016 Model introduced a strict 5-year Exhaustion of Local Remedies (ELR) clause. While this protected India's regulatory space, it created a 'regulatory chill' in reverse, deterring foreign capital due to prolonged litigation timelines in Indian courts.

• **Calibrated Flexibility**: To restore investor confidence, India is negotiating shorter ELR periods. The 2024 India-UAE BIT reduced the ELR to three years, and the October 2026 India-Saudi Arabia BIT further lowered it to two years. This provides foreign sovereign wealth funds with faster access to international arbitration while preserving a window for domestic resolution.

• **Global Alignment**: Globally, nations are recalibrating investment protection. The European Union withdrew from the Energy Charter Treaty, and the US-Canada-Mexico Agreement (USMCA) removed ISDS clauses to protect environmental and public health regulations. India's shift aligns with this global trend of balanced, country-specific negotiations rather than a rigid, one-size-fits-all model.

• **Domestic Judicial Reforms**: As legal experts note, a foreign investor cannot constitutionally claim preferential treatment over domestic litigants in Indian courts. Therefore, any reduction in ELR timelines must be accompanied by domestic judicial fast-tracking.

**Way Forward**:

• **Statutory Fast-Tracking**: Establish specialized commercial divisions within High Courts with a statutory mandate to resolve treaty-based investor disputes within 18 to 24 months.

• **Pre-Arbitration Mediation**: Create an institutionalized dispute prevention cell within the Ministry of Finance to settle grievances before they escalate to formal ISDS.

• **Targeted Treaties**: Adopt a hybrid model that maintains strict ELR for highly sensitive sectors (like taxation and public health) while offering relaxed timelines for capital-intensive infrastructure sectors.

By balancing regulatory autonomy under Article 73 with robust legal predictability, India can secure the long-term foreign capital needed to achieve its sustainable development goals.

Prelims practice questions

Q1. Consider the following statements regarding Bilateral Investment Treaties (BITs) and India's framework: 1. Under the 2016 Model BIT, foreign investors must exhaust domestic judicial and administrative remedies for at least five years before seeking international arbitration. 2. The Investor-State Dispute Settlement (ISDS) mechanism allows private foreign investors to bring claims directly against host states for treaty violations. 3. India is not a member of the International Centre for Settlement of Investment Disputes (ICSID). How many of the above statements are correct?

  1. Only one
  2. Only two
  3. All three
  4. None

Answer: C. Statement 1 is correct: The 2016 Model BIT introduced a strict 5-year Exhaustion of Local Remedies (ELR) clause. Statement 2 is correct: ISDS is a mechanism that allows foreign investors to bypass domestic courts and bring claims directly against host states before international tribunals. Statement 3 is correct: India is not a member of ICSID (an institution of the World Bank Group), as it maintains concerns over the treaty's perceived bias toward developed nations.

Q2. With reference to India's recent Bilateral Investment Treaties (BITs), consider the following statements: 1. In the 2024 India-UAE BIT, the Exhaustion of Local Remedies (ELR) period was set at three years. 2. In the 2026 India-Saudi Arabia BIT, the ELR period was reduced to two years to provide faster access to international arbitration. 3. The 2016 Model BIT completely abolished the Investor-State Dispute Settlement (ISDS) mechanism for all future treaties. Which of the statements given above is/are correct?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer: A. Statements 1 and 2 are correct: India has shown progressive flexibility by reducing the ELR period to 3 years with the UAE (2024) and 2 years with Saudi Arabia (2026). Statement 3 is incorrect: The 2016 Model BIT did not abolish ISDS; rather, it heavily restricted it by requiring a mandatory 5-year domestic litigation period (ELR) before an investor could initiate ISDS.

Q3. In the context of international investment law, which of the following best describes the concept of 'Exhaustion of Local Remedies' (ELR)?

  1. A mechanism where international tribunals must refer disputes back to local municipal bodies for final binding arbitration.
  2. A treaty clause that mandates foreign corporations to utilize local raw materials and labor before importing resources.
  3. A rule requiring foreign investors to seek redress in the host state's domestic courts before initiating international arbitration.
  4. A requirement that host states must exhaust all domestic legislative options before expropriating foreign assets.

Answer: C. The Exhaustion of Local Remedies (ELR) is a standard rule in international law and BITs requiring a foreign investor to first seek resolution for their grievances in the domestic courts or administrative bodies of the host country for a specified period before they are permitted to file an international claim under ISDS.

Revision flashcards

  • What is the 'Exhaustion of Local Remedies' (ELR) clause in Bilateral Investment Treaties (BITs)? A provision requiring foreign investors to resolve disputes in the host country's domestic courts or administrative bodies for a specified duration before approaching international arbitration tribunals.
  • Why is India not a member of the World Bank's International Centre for Settlement of Investment Disputes (ICSID)? India views ICSID's arbitration rules as systemicly biased in favor of developed-nation investors, lacking transparency, and infringing upon domestic judicial sovereignty.
  • What specific Exhaustion of Local Remedies (ELR) timeline did India agree to in its BIT with the UAE signed in 2024? A three-year ELR period, marking a significant reduction from the five-year requirement stipulated in India's 2016 Model BIT.
  • In the India-Saudi Arabia Bilateral Investment Treaty finalized in October 2026, what is the agreed-upon timeline for the exhaustion of local remedies? A two-year ELR period, reflecting India's growing flexibility to attract foreign capital and sovereign wealth investments.
  • Why did India unilaterally terminate 68 of its bilateral investment treaties (BITs) following the 2016 policy reset? To protect its sovereign policy space and prevent costly international arbitrations (ISDS) after receiving adverse awards in high-profile tax and regulatory disputes.

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