Why India may revive Most Favoured Nation rule in bilateral treaties | Economy & Policy News

India is reportedly considering a limited form of the Most-Favoured Nation (MFN) provision as part of the proposed overhaul of its bilateral investment treaty (BIT) framework. However, the move would not restore the broad MFN clause that was removed from India’s model BIT nearly a decade ago.

According to a report in The Financial Express, the proposed framework could allow a qualified MFN provision in investment treaties with large economies, including major trading partners such as the European Union (EU).

The provision would be designed to give investors greater certainty without allowing them to rely on provisions from unrelated third-country treaties to make wider claims.

What is MFN in an investment treaty?

MFN is a non-discrimination provision. In an investment treaty, it generally requires a country to provide investors from one treaty partner treatment no less favourable than that available to investors from another treaty partner.

For example, if India gives investors from one country a particular protection under a later treaty, an MFN clause can, depending on its wording, allow investors from another treaty partner to seek the same treatment.

The scope of an MFN clause depends on the language of the treaty. A broadly worded provision can therefore have wider consequences than a clause that specifies exactly which protections can be claimed.

Why did India remove MFN?

India’s decision to exclude MFN from its current model BIT followed the country’s experience with investment arbitration.

One key case was White Industries v India, which resulted in an adverse arbitration award against India in 2011. White Industries, an Australian company, invoked the MFN provision in the India-Australia BIT to rely on a protection contained in India’s BIT with Kuwait.

The protection, known as the “effective means” standard, was not contained in the India-Australia treaty. The tribunal allowed White Industries to rely on the provision from the India-Kuwait treaty. India was subsequently ordered to pay about $4.08 million, along with interest and costs.

The case became an important part of India’s review of its investment treaty policy. In 2016, the Model BIT did not include an MFN provision. It also adopted a narrower definition of investment and introduced a five-year requirement for investors to pursue domestic remedies before initiating international arbitration.

The absence of MFN was intended to prevent investors from using India’s other treaties to obtain protections that were not negotiated in the treaty under which they had brought a claim. A report by the Law Commission of India had identified the concern that investors could use MFN provisions to borrow substantive and procedural protections from India’s other BITs.

What happened after the 2016 Model BIT?

India’s approach became more restrictive after the White Industries case. The government terminated or sought to renegotiate several older investment treaties and moved towards the 2016 Model BIT.

The model removed MFN, narrowed the definition of investment, replaced the broad fair and equitable treatment standard with more limited protections and required investors to pursue domestic remedies for five years before accessing international arbitration.

The model also struggled to gain wider acceptance among India’s major investment partners. According to the Business Standard report, only a handful of countries, including Belarus, Kyrgyzstan, Brazil, Taiwan and Uzbekistan, have signed investment treaties with India under the stricter framework.

Why is India looking at MFN again?

India is now reviewing the model BIT after finding that some of its restrictions have made treaty negotiations difficult.

The India-UAE investment treaty, which came into force in August 2024, and the India-Israel investment agreement, effective from July 4, 2026, have already moved away from some elements of the older model. Both reduce the period for pursuing domestic remedies from five years to three years and cover a wider range of financial investments, including portfolio investments.

MFN, however, remains excluded from both agreements.

The proposed qualified MFN approach would therefore be different from restoring an unrestricted provision. According to The Financial Express report, the provision could be carefully limited so that investors receive greater policy certainty without being able to base broader claims on protections contained in treaties with third countries.

How would qualified MFN work?

A qualified MFN clause would place specific limits on what an investor could claim through the MFN provision.

Instead of allowing an investor to automatically import any more favourable protection from another treaty, the treaty could specify the provisions to which MFN applies and those that remain outside its scope.

This distinction is important because the White Industries dispute involved an investor using MFN to rely on a protection contained in another Indian treaty. The proposed approach seeks to avoid a repeat of that broad use while retaining some form of MFN protection.

What else is proposed?

The MFN proposal forms part of a wider overhaul of India’s BIT framework.

The draft Cabinet note, cited by The Financial Express in its report, proposes reducing the domestic-remedies period under ISDS to as little as one year. It also proposes extending post-treaty protection for investors to 10 years, from five years. The definition of investment could be widened to include portfolio investments and other financial assets. Third-party funding of investment disputes could also be prohibited.

The 2016 model’s exclusion of MFN and its narrower fair and equitable treatment standard are proposed to be retained, according to the report.

The proposed changes would therefore not amount to a return to India’s earlier, broader investment treaties. The MFN provision under consideration would be limited in scope, while other safeguards introduced after the White Industries case would remain part of the framework.