On 17 April, the Indian government amended its Foreign Direct Investment (FDI) policy in order to deter predatory foreign investments exploiting the financial distress of Indian companies hit by COVID-19.
According to a notification by the Department for Promotion of Industry and Internal Trade (DPIIT), the amendment makes it mandatory for any investment by an entity of “a country sharing a land border with India”, or if the potential investor is situated in or is a citizen of any such country, to seek approval from the government.
As a result, companies based out of Pakistan, Afghanistan, Bhutan, Nepal, Myanmar and China will now have to go through the government before putting money into Indian ventures.
However, out of these countries, the FDI restrictions were already applicable to Pakistan and Bangladesh, and investments by all the other are anyway negligible – all except China.
So it is clear that the key objective of the amendment was to protect India from predatory investments by Chinese companies. This move came after the People’s Bank of China (PBC), which is the central bank of the People’s Republic of China, raised its stake in Housing Development Finance Corp. Ltd (HDFC) from 0.8 per cent to 1.01 per cent in the March quarter.
The DPIIT has notified that this amendment will be interpreted broadly and will also apply to Hong Kong, even though its governance and economic systems are separate from mainland China. However, no change has been brought in the rules pertaining to Foreign Portfolio Investment (FPI) and the Foreign Institutional Investor (FII).
In a separate decision, which succeeded PBC’s decision to buy more stakes in HDFC, by the Securities and Exchange Board of India (SEBI), custodians have been asked to disclose, at extremely short notice, all investments coming in to India from or via China.
Why does India want to regulate investments from China?
FDI is when a company takes controlling ownership in a business entity in another country. In India, at least 18 of the top 30 unicorns have a component of Chinese investments. Nearly 1,000 Chinese companies have a presence in India, in some way or the other.
Besides, there are hundreds of small and big Indian companies that have either received Chinese investments or expect to do so in the coming years. Indian start-ups, including Paytm, Snapdeal, Ola, Swiggy, Zomato, and Big Basket, are backed by leading Chinese investors, such as Alibaba, Tencent, and Ant Financial.
There is no doubt that with the Indian economy shackled by the COVID-19, the amendment will indeed protect Indian companies from China’s predatory purchasing of low valuation assets.
India has been in lockdown since 24 March, with almost all the businesses being inactive. During such uncertain and tough times, the takeover of weakened strategic assets through FDI is a legitimate concern. Thus, state regulation was necessary to shield Indian ventures from predatory Chinese investors and their “opportunistic takeovers”.
Not only India, many other countries across the world have tweaked their FDI rules amidst the COVID-19 crisis.
The Australian Government announced that the dollar threshold for FDI screening will be zero (A$0) from the night of 29 March. It has also increased the timeline for processing FDI proposals to six months.
The United States has intervened in or blocked proposed foreign direct investment (FDI) transactions to address national security concerns, with a particular focus on China.
The Spanish government enacted a Royal decree amending a 2003 law, which makes it mandatory to obtain prior government authorisation on any FDI proposal. Any investments without such permission will have no legal effect.
China’s ‘unofficial’ response
China did not directly respond to the change, as the issue was not raised by its foreign ministry during its regular briefing, perhaps to avoid internationalising its objection.
However, the spokesperson of Chinese embassy in New Delhi, Ji Rong, said that the “barriers set by the Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.”
She claimed that India’s moves did not conform “to the consensus of G-20 leaders and trade ministers to realise a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment.”
Yet, the embassy avoided any vehement or harsh criticism of the new FDI rules, evidently to avoid quashing all future prospects of Chinese investments in India.
India’s move valid under international law
India’s amendment to its FDI rules is valid under international investment law. To understand how, one has to look into specific provisions within various international arrangements.
World Trade Organisation (WTO)
The rules and regulations of FDI in a country are not governed by the WTO. After World War II, trade and investment issues were decoupled through the General Agreement on Tariffs and Trade (GATT), which did not deal with foreign investment.
This was clearly stated by the settlement panel set up under GATT in a 1983 dispute between the United States and Canada. The panel said that “mandate of the organisation was only to ascertain the GATT consistency of specific trade-related measures taken by a state, and not it’s right to regulate foreign investment per se.”
The WTO agreements cover goods, services and intellectual property, but not investment per se. Therefore, New Delhi’s amendment to its FDI rules does not violate the rules of WTO.
Bilateral Investment Treaty (BIT)
BIT is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state, or in other words, FDI.
In 1959, the first BIT was signed between Pakistan and Germany. Any bilateral disputes over FDI regulations would be solved by the dispute resolution mechanisms stipulated by the BIT, which generally is arbitration.
However, India has not entered into any BIT with China yet. Therefore, China lacks the ability and power to challenge India’s amendment to its FDI rules under a BIT dispute resolution mechanism clause.
Moreover, even if such a BIT did exist, it would have explicitly provided for security exceptions and/or force majeure clauses. Such clauses justify certain actions taken by the state that would otherwise be prohibited.
There are some standard clauses in all agreements, which are known as ‘boilerplate clauses’. Such provisions in international agreements or treaties usually have exceptions related to the security of the state. In fact, India’s BIT model contains certain clauses that have an overriding effect on the rest of the commitments in the BIT.
Hence, even with a BIT, India could have legally amended its FDI norms.
Essential security interests
Article XXI of GATT provides for the essential security exemption from WTO rules. In the interest of the country’s security interests, a country can violate WTO rules.
Economic security is a part of this security. In any case, the WTO Panel in the case of Russia — Measures Concerning Traffic in Transit – decided that it is best left to the concerned country to determine what it considers to be an essential security interest, and what constitutes a necessary measure to protect such interests.
The WHO has declared the COVID-19 crisis a pandemic and classified it as a “public health emergency of international concern.” Hence India’s amendment to the FDI rules, in order to protect its economic security, is exempted under Article XXI and cannot be considered inconsistent with the relevant WTO Agreements.
State intervention necessary
That amendment, which stands the legal test, will certainly ensure that vulnerable Indian companies are not exploited at the hands of China. The claims made by China’s embassy spokesperson have no ground.
Even if one sets aside the alleged role of China in the COVID-19 outbreak and its responsibility for the same under international law, the financial and strategic exploitation of a pandemic-induced economic slowdown is possible and predictable. Without any doubt, it warrants state intervention.
India’s decision to tweak its FDI rules, thus, is a move in the right direction.
Views expressed are the author’s own.
Chaaru Gupta is a student of law at the National Law University, Jodhpur.
Featured image from Pixabay.
