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.

Introduction

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.[1]

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 Government.[2]

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.

Exceptions:

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 policy:

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.

Exceptions:

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 route.

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 COVID-19 pandemic.

Grey areas

In relation to Companies Act, 2013[3]

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.

In 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.

The 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.[4]

In 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.”[5]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.”

China's opposition poses a significant question: is India's revision of its FDI policy valid under international investment law?

Firstly, 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.[6]

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.”[7]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[8], 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 interests.

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.[9]

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.[10] The guidelines of the European Commission[11], 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.

Conclusion

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[12] 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.

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[1]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.

[2]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.

[3] Companies Act(2013).

[4]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.

[5]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.

[6]Agreement on Trade Related Investment Measures, World Trade Organization, https://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm.

[7]Rolling Updates on Coronavirus Disease, World Health Organization, https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen.

[8]Russia – Measures Concerning Traffic in Transit, World Trade Organization, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds512_e.htm.

[9]Model Text for the Indian Bilateral Investment Treaty, Bilateral Investment Treaty, https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf.

[10]ValbonaZeneli, Michele 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/.

[11]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.

[12]Dina Fine Maron, ‘Wet Markets’ likely launched the Coronavirus, National Geographic (Apr. 15, 2020), https://www.nationalgeographic.com/animals/2020/04/coronavirus-linked-to-chinese-wet-markets/.