India mulls limited MFN clause in bilateral investment treaties

India's approach to bilateral investment treaties may be undergoing a significant revision as policymakers examine the selective use of Most-Favoured-Nation (MFN) clauses, a mechanism that extends the most generous treatment granted to one country to all treaty partners. The consideration comes eight years after India removed the provision entirely from its Model Bilateral Investment Treaty, a decision prompted by concerns raised during a high-profile investment dispute.

The 2016 exclusion of the MFN clause was driven by apprehensions about its sweeping application in treaty disputes. Investment arbitration cases had demonstrated how broad MFN language could be interpreted to circumvent procedural protections and expand investor rights beyond the original agreement's intent. By removing the clause, India sought to maintain tighter control over its treaty obligations and limit potential exposure to costly disputes.

The reported reconsideration of MFN provisions now involves designing a narrower framework that would provide measured benefits to foreign investors without exposing India to excessive legal and financial risks. A calibrated MFN clause could allow India to offer competitive treaty terms while maintaining protective guardrails against aggressive legal interpretations. This approach would require careful drafting to specify which substantive rights qualify for most-favoured treatment and which do not.

The shift reflects India's evolving strategy in international investment diplomacy. As India competes for foreign capital and seeks to enhance its investment climate credentials, incorporating limited MFN protections could improve the appeal of its bilateral treaties to prospective investors. Simultaneously, stricter limitations would address the concerns that prompted the original withdrawal of the clause.