REFORMING INVESTOR-STATE ARBITRATION: INDIA INVESTMENT TREATY PRACTICE AND THE GLOBAL MOVE TOWARDS SOVEREIGNTY

Abstract

The Investor-State Dispute Settlement (ISDS) has been a key pillar of international investment law, fundamentally designed to guard foreign investors against arbitrary or discriminatory state action. This legitimacy has declined over the years, largely due to arbitral decisions becoming inconsistent, treaty standards being interpreted in an overly liberal manner, lack of transparency, and restraint of domestic regulatory autonomy. Developing states are particularly acutely aware of these problems, as they are normally exposed to tremendous financial risks and policy ambiguity upon becoming respondents in investment arbitration proceedings.

The Indian experience in the area of investment arbitration has been instructive in influencing the present practice of treaties. Following a series of negative experiences in the course of bilateral investment treaties with loosely defined terms and conditions, India conducted a thorough review of its investment law system. The result of that review was a revised Model Bilateral Investment Treaty and a clear move towards treaty design based on sovereignty. Policy changes in 2024-2025 indicated that India was more prudent in its investment protection approach with the inclusion of tighter substantive commitments, greater emphasis on the right to regulate, and an increased resort to domestic legal redress before using international arbitration.

This paper critically analyzes the changing treaty practice of India in the broader framework of global ISDS reform. The Indian strategy represents a recalibration rather than withdrawal from international investment law. This paper assesses the balance between investor confidence and regulation in the public interest by examining the current trends of the treaties, policy explanations, and systemic implications of investing in India. The emerging treaty practice in India plays a significant role in modern discussions about the future of international investment governance, highlighting the growing importance of legitimacy, accountability, and regulatory autonomy in determining investment law regimes.

Introduction

International investment law has been a subject of critical examination during the last decade, especially in relation to the Investor-State Dispute Settlement (ISDS) tool that is integrated into Bilateral Investment Treaties (BITs). Although ISDS was initially intended to guard against arbitrary state conduct by protecting foreign investors, it has come under increasing criticism for limiting regulatory freedom and putting investor concerns above the interests of the public.[1] Developing states such as India have become increasingly outspoken critics of the traditional ISDS model, citing unfavorable arbitral awards and perceived loss of sovereignty.[2]

The story of investment arbitration in India is particularly instructive. As a respondent state in ISDS proceedings during the early 2010s, India faced significant financial risk and policy unpredictability.[3] Such experiences necessitated a comprehensive review of its treaty and dispute-settlement procedures. Consequently, India has adopted a more reserved and sovereignty-oriented approach to international investment agreements.[4]

This paper focuses on the changing practice of treaties in India against the backdrop of global reforms in investor-state arbitration. India’s recent practice is part of a wider global trend of rebalancing investment protection criteria, where domestic regulatory space is important while still maintaining its reputation as a destination for foreign investment.

Background

Bilateral Investment Treaties are international instruments that seek to facilitate and secure cross-border investments by providing substantive rights to investors such as fair and equitable treatment, protection against expropriation, and access to international arbitration.[5] The ISDS mechanism is at the centre of these treaties, giving investors the opportunity to bypass domestic courts and directly arbitrate against host states.[6]

Traditionally, ISDS was supported by the notion that host countries have inefficient or discriminatory legal systems.[7] Nevertheless, over time, ISDS tribunals have been criticized for their broad interpretations of treaty terms, inconsistency, and inadequate accountability. States are growing concerned that this form of arbitration may create a regulatory chill on public policy, particularly in areas such as health, environment, and economic regulation.[8]

In the 1990s and early 2000s, India signed numerous BITs, many of which had broad investor protections. These treaties subjected India to an avalanche of arbitration cases that caused legal and financial problems.[9] In response, India proceeded to conduct a systematic review of its treaty commitments, leading to the adoption of a revised Model BIT in 2016, marking a clear break with its previous approach to investment treaties.[10]

Developments

The post-2016 treaty practice of India represents a departure from the traditional framework of ISDS, reflecting an evolving policy position that has continued through 2024-2025. The Model BIT underwent significant structural modifications, including the narrowing of the definition of investment, the explicit acknowledgment of the state’s right to regulate, and the requirement that investors must first exhaust all domestic remedies before commencing international arbitration.[11] These provisions were crucial in redefining the balance between investor protection and state sovereignty.[12]

India has approached new investment agreements cautiously in recent years, and instead of renewing old agreements with broad, investor-friendly terms, has renegotiated them. The treaty negotiations between 2024 and 2025 were characterized by greater emphasis on integrating investment protection into broader economic or trade treaties rather than standalone BITs.[13] This approach enables the contextualization of investment commitments alongside trade, development, and regulatory cooperation goals.[14]

Additionally, India has maintained a presence in multilateral forums that address structural issues in ISDS. India has indicated its desire to influence, rather than simply withdraw from, the evolving investment law regime by participating in international deliberations on arbitration reform.[15] This represents a strategic initiative to align domestic policy priorities with emerging international standards while remaining open to foreign investment.

Analysis

India’s new approach to treaties is a component of a global reconsideration of the legitimacy and sustainability of the traditional investor-state arbitration model. For many years, the prevailing view was that strong, broadly based guarantees to investors would reduce political risk and attract foreign capital. However, more recent evidence and state practice challenge that notion, particularly as arbitration awards impose enormous financial burdens and constrain legitimate public policy.[16] The shift toward sovereignty in India’s case represents not a sudden reversal but rather a gradual recalibration of values.

One key element of India’s approach is the requirement that investors exhaust local remedies before pursuing international arbitration. This arrangement reinforces the principle that domestic courts have primacy and that arbitration is an option of last resort. This aligns with the principle of subsidiarity in international law and demonstrates respect for national courts. While critics argue that this may make investors apprehensive, it also encourages accountability and reduces the likelihood of parallel proceedings that could fragment the dispute resolution process.[17]

India is also narrowing the scope of core protections, thereby reducing the discretion that arbitral tribunals have in interpretation. Terms such as fair and equitable treatment have traditionally allowed tribunals to review state action through a broad and occasionally inconsistent lens. India is now adopting more definitive language and carving out exceptions based on public interest considerations, which should lead to more predictable outcomes and reduce the risk of excessive liability.[18] This represents a recalibration of treaty language to favor democratic accountability.

Simultaneously, there are concerns that these reforms could make the Indian investment climate less attractive in the long term. The reduced availability of arbitration could be perceived as a new risk by investors, particularly in capital-intensive industries.[19] The success of this strategy fundamentally depends on the efficiency, independence, and credibility of Indian courts. The legal safeguards that the reforms are intended to establish may be undermined by slow processes or questions about institutional capacity unless stronger institutions are developed.

From a broader perspective, India’s actions contribute to an increasing diversity of approaches in international investment law. The field is moving away from the one-size-fits-all arbitration model toward frameworks that can accommodate each country’s priorities and development requirements. This suggests that investment regulations are dynamic and that their recalibration is not only legally sound but also politically justified in a shifting global economy.

Implications

The impact of India’s treaty reforms extends beyond its own investment policy and signals a global shift in how investment law is perceived. The emphasis on regulatory freedom and the recalibration of protections indicates that India is challenging the traditional belief that broad arbitration rights are essential to attracting capital. Instead, it is emphasizing stability, clarity, and the capacity of local courts to provide effective remedies.[20]

For investors outside India, this means that dispute resolution options exist but are increasingly linked to engagement with local institutions and clearly defined treaty provisions. This may compel investors to conduct more thorough legal due diligence and to incorporate domestic courts more substantially into their risk assessment.[21]

In the broader picture, India’s position is fueling debate on reform-oriented governance, particularly in developing countries that must balance economic growth with democratic accountability. If this approach proves effective, it may guide future treaty negotiations and contribute to the development of a more balanced and legitimate global investment system.[22]

Conclusion

India’s emerging treaty approach represents a definitive realignment of the balance between investor rights and national sovereignty in international investment law. Rather than closing itself to foreign investment or retreating into international isolation, India is proactively attempting to rectify historic imbalances that have skewed the playing field in favor of investors at the expense of domestic policy space. By redefining core protections, restricting access to arbitration, and reasserting the role of national courts, India is seeking to reclaim its policy autonomy without abandoning its commitment to international legal frameworks.

This shift should be viewed in the context of the worldwide ISDS reform movement. Many states are reevaluating the legitimacy, consistency, and accountability of arbitral tribunals, particularly when their determinations conflict with public interests. India’s policy responds to these concerns and contributes to the ongoing reinvention of investment governance.

However, the ultimate test will be how well this translates into practice. The credibility of domestic courts, clarity in treaty language, and transparency of dispute resolution are all critical factors in maintaining investor confidence. If local remedies appear too cumbersome or unreliable, they may deter rather than attract investors. Treaty reform must therefore be accompanied by institutional strengthening and more efficient judicial processes.

Looking ahead, India’s example may provide valuable guidance to other developing countries seeking to balance development objectives with international commitments. A well-calibrated framework—one that honors sovereignty while providing adequate investor protection—can help construct a more equitable international investment regime. India’s experience demonstrates how international investment law is evolving, with legitimacy increasingly tied to balance, accountability, and the practical demands of public policy.[23]

References

[1] UNCTAD, World Investment Report 2024 (United Nations 2024). 
[2] M Sornarajah, ‘The Legitimacy Crisis of Investor-State Arbitration’ (2015) 36 University of Pennsylvania Journal of International Law 1. 
[3] UNCTAD, World Investment Report 2023 (United Nations 2023). 
[4] Government of India, Model Text for the Indian Bilateral Investment Treaty (2016). 
[5] UNCTAD, Investment Policy Framework for Sustainable Development (United Nations 2015). 
[6] UNCITRAL, Investor-State Dispute Settlement: A Guide (United Nations 2014). 
[7] R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn, OUP 2012). 
[8] G Van Harten, Investment Treaty Arbitration and Public Law (2007). 
[9] UNCTAD, ‘India: International Investment Agreements’ <https://investmentpolicy.unctad.org> accessed 12 January 2026. 
[10] Government of India, Model Text for the Indian Bilateral Investment Treaty (2016). 
[11] ibid art 15. 
[12] Government of India, Model Text for the Indian Bilateral Investment Treaty (2016). 
[13] UNCTAD, ‘Termination of Bilateral Investment Treaties by India’ <https://unctad.org> accessed 12 January 2026. 
[14] Ministry of Commerce and Industry, Government of India, Press Release (2024). 
[15] UNCITRAL, Report of Working Group III (ISDS Reform) UN Doc A/CN.9/WG.III/WP.216 (2023). 
[16] UNCTAD, Reforming Investor-State Dispute Settlement (United Nations 2022). 
[17] J Crawford, Brownlie’s Principles of Public International Law (9th edn, OUP 2019). 
[18] S Schill, Fair and Equitable Treatment under Investment Treaties (2011). 
[19] OECD, Investor Confidence and Investment Treaties (OECD 2021). 
[20] J Pauwelyn, ‘The Rule of Law without the Rule of Lawyers?’ (2015). 
[21] UNCTAD, World Investment Report 2024 (United Nations 2024). 
[22] K Tienhaara, ‘Regulatory Chill and the Threat of Arbitration’ (2018). 
[23] L Johnson and L Sachs, Investment Treaties and Public Interest (2015).