CRITICAL ANALYSIS OF THE REVISED INDIAN FDI POLICY
The Author of this blog is Ms. Shruti Chaudhary, a student of 4th year, BA LLB(Hons.) at Dr. Ram Manohar Lohiya National Law University, Lucknow
Sudden emergence of the global
pandemic and nationwide-lockdown caused by the Novel Coronavirus
(COVID-19) has endangered individuals and economy as a whole. To minimize
the impact on the general public, business establishments, and manage current
situations, the Government of India is diligently tracking all possible routes
through which the situation can be controlled, among others, by issuing
amendments, advisories, and various announcements.
Department for Promotion of Industry
and Internal Trade (DPIIT) through its Press note 3 (2020), dated April 17, 2020 (“Press
Note”) has revised the existing regulatory framework on foreign
investments in India.
The Press Note highlights the concerns
surrounding the likely uncredited hostile takeovers resulting from global
economic turbulence. Therefore, in order to curb the opportunistic
takeovers/acquisitions of Indian firms and companies, the new FDI Policy now
demands 'prior government approval' (Approval Route) for all foreign
investments in the event that the root of these foreign investments comes from
countries that 'share land borders' with India.
Countries sharing land borders with
India include China, Bangladesh, Nepal, Pakistan, Bhutan, Myanmar and
Afghanistan. Now, foreign investment by any entity located in the
above-mentioned countries or if the beneficial owner of the investment is an
entity or a citizen of the above-mentioned countries, then prior government
approval will be required (according to
the Press Note). It is important to note here that a transfer of current or
potential FDI in an Indian company (directly / indirectly) resulting in a
change of beneficial ownership would also require prior approval by the
Changes effected by the press note
Earlier FDI policy:
As per paragraph 3.1.1, a
non-resident entity may invest in India, except in those sectors / activities
which are prohibited, subject to the FDI Policy.
Bangladesh's citizens/entities can
only invest under the Government Route. Also, Pakistan's citizens/entities can
invest in sectors other than defence, space, atomic energy and sectors
prohibited for foreign investment only under the Government Route.
New Modified FDI
Pursuant to paragraph 3.1.1(a), a
non-resident entity can invest in India, subject to the FDI Policy, except in
those sectors / activities prohibited.
1. An entity of a country sharing a
land border with India or where the beneficial owner of an investment in India
is located in or is a citizen of any such country can invest only under the Government
2. In addition, a Pakistani citizen or
an entity incorporated in Pakistan may invest in sectors / activities other
than defence, space, atomic energy, and sectors / activities prohibited for
foreign investment only under the government route.
Pursuant to paragraph 3.1.1(b): In the
event of a transfer of ownership of any existing or future FDI in an entity in
India, directly or indirectly, resulting in the beneficial ownership falling
within the restriction / purview of paragraph 3.1.1(a), such subsequent change
in beneficial ownership will also require Government approval.
Accordingly, the amended and newly
inserted lines of the Press Note clarify that the Government's intention is to
regulate and bring foreign investment under the Government / Approval route to
curb potential opportunistic takeovers of Indian companies due to the current
In relation to Companies
Any new (proposed) company whose
investors/beneficial owners are from countries sharing land borders with
India would require Government Approval. Currently, name approval process
would not require any prior government approval except CRC/MCA requirements.
Clarity is still to be given by the
Government in case of Companies, which are already under the process of
Incorporation or Incorporation certificates are yet to be issued, on whether
prior government approval will be required in case of those companies which involves
foreign investors who are situated in Countries sharing land borders with India.
It is not clear how widely the
terms 'indirectly' and 'beneficial control' would be viewed while the revised
scheme is being introduced. In addition, whether Government approval will also
apply for subsequent investments by firms from such bordering countries.
relation to International Law
The purpose of the analysis
appears to be to ensure that international firms with access to funds will not
take advantage of the economic harm caused by the shutdown pertaining to COVID-19.
reform, however, is mainly intended to control Chinese FDI. Recently, the
People's Bank of China raised its stake in India's largest non-bank mortgage
provider, HDFC, from 0.8% to 1%, even as HDFC lost about a third of its share
price due to economic uncertainty caused by the coronavirus outbreak.
response to India 's move, Chinese Embassy spokesman Ji Rong said that the
"Indian side's barriers to investors from different countries violate the
WTO's principle of non-discrimination, and run counter to the general trend of
liberalization and trade and investment facilitation.”She
stated that India's developments were not in line with the consensus of G20
leaders and trade ministers to create an open, equitable, non-discriminatory,
transparent, predictable and stable climate for trade and investment.”
opposition poses a significant question: is India's revision of its FDI policy
valid under international investment law?
it's important to note that the World Trade Organization (WTO) does not govern
the entry or regulation of FDI into a country. Multilateral WTO agreements
primarily control disciplines relating to trade in goods and services, as well
as IP. In fact, in a 1980s dispute between the United States and Canada, the
settlement Panel set up under the General Agreement on Tariffs and Trade (GATT)
— the predecessor to the WTO — explicitly stated that mandate of the
organization was only to ascertain the GATT consistency of specific
trade-related measures taken by a state, and not its right to regulate foreign
investment per se.
Secondly, there are exceptions to international agreements, including
WTO agreements, for extraordinary measures taken in emergencies. Consequently,
any measures that a country considers necessary to protect its essential
security interests, taken in time of war or other emergencies, are not
considered to contravene its international obligations. Certainly, a State's
contribution to trade and investment liberalization does not require a loss of
its core security interests.
The WHO has classified the COVID-19 crisis as a “public health emergency
of international concern.”India's
revised FDI strategy, which specifically aims to safeguard an important security
interest, cannot therefore be regarded as incompatible with the applicable WTO
agreements. In any case, as was decided by the WTO Panel in the Russia—Measures
Concerning Traffic in Transit case,
it is up to the country concerned to determine what it regards as an essential
security interest and what constitutes a necessary measure to protect those
Thirdly, bilateral disputes over FDI policy will usually be considered
under a bilateral investment treaty's (BIT) dispute resolution mechanisms.
However, there are currently no bilateral treaties on investment between India
and China. Therefore, under a BIT arbitration process China also lacks the
right to contest India's amendment to its FDI rules. But even if such a BIT
existed it would have explicitly provided exceptions for security and/or force
majeure clauses.Such clauses justify certain State actions that would otherwise
be banned. For example, India's BIT model contains security exception clauses
which have an overriding effect on the remainder of the BIT commitments.
India’s amendment of its FDI policy follows the footsteps of many other
countries trying to prevent China’s predatory purchasing of low valuation
assets during the COVID-19 crisis.
The guidelines of the European Commission,
for example, note that "the potential consequences of the current economic
shock include an increased potential risk to strategic industries, in
particular but not limited to health-related industries in any way." The
guidelines further note that "in the sense of the emergency COVID-19,
there could be an increased risk of attempts to acquire healthcare capacities
(e.g. for surgical or protective equipment manufacturing) or associated
industries such as scientific establishments (e.g. developing vaccines) by
foreign direct investment." The FDI's taking over of weakened strategic
assets is a widespread fear.
Though the policy does have some critical areas of question however, in
conclusion, it is doubtful that India will be bullied as its FDI actions are on
extremely strong legal bases. But tackling the larger picture is important.
Even if one sets aside the alleged role of China’s wet markets in
the COVID-19 outbreak, and ignores the continued suppression of virus-related
facts and information by its leaders, the financial and strategic exploitation
of a pandemic-induced economic slowdown is reprehensible and undoubtedly
requires state regulation. Bearing in mind the injury to China's status as a
responsible stakeholder, Beijing would be wise to avoid actions which risk
reaffirming its bad faith. Especially at a time when manufacturing firms are
leaving their shores and Chinese capital is becoming increasingly unwelcome,
Beijing needs to pursue a more conciliatory approach—one that addresses other
states' grievances and concerns in a substantive way. Otherwise it can threaten
to become a pariah in international society.
Govt restricts FDI
from Countries with which India share Land Border, Tax Guru (Apr. 17, 2020), https://taxguru.in/rbi/govt-restricts-fdi-countries-india-share-land-border.html.
 Companies Act(2013).
Rahul Srivastava, Alarmed
by Chinese Bank raising stake in HDFC, Centre revises FDI Policy, India
Today (Apr. 18, 2020 17:54 IST), https://www.indiatoday.in/business/story/alarmed-by-chinese-bank-raising-stake-in-hdfc-centre-revises-fdi-policy-1668407-2020-04-18.
Elizabeth Roche, Beijing
calls New Delhi’s move to amend FDI norms Discriminatory, Live mint (Apr. 21, 2020, 01:03 AM IST), https://www.livemint.com/news/india/china-objects-to-india-tweaking-fdi-rules-says-move-violates-wto-norms-11587368297241.html.
Agreement on Trade
Related Investment Measures,
World Trade Organization, https://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm.
Rolling Updates on
World Health Organization, https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen.
Russia – Measures
Concerning Traffic in Transit, World Trade Organization, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds512_e.htm.
Model Text for the
Indian Bilateral Investment Treaty, Bilateral Investment Treaty, https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf.
Capriati, Is Italy’s Economic Crisis an Opportunity for China?, The
Diplomat (Apr. 18, 2020), https://thediplomat.com/2020/04/is-italys-economic-crisis-an-opportunity-for-china/.
Guidance to the
Foreign States concerning Foreign Direct Investment, European Commission, https://ec.europa.eu/transparency/regdoc/rep/3/2020/EN/C-2020-1981-F1-EN-MAIN-PART-1.PDF.
Dina Fine Maron, ‘Wet
Markets’ likely launched the Coronavirus, National Geographic (Apr. 15,