Assessing the WTO Consistency of India’s Recent FDI Policy Reform for Preventing Acquisition of Distressed Assets During a Pandemic – Part I

Abhishek Rana and Rishabha Meena

Introduction

While the COVID-19 (also referred to as ‘coronavirus’) pandemic has been declared as a public health emergency of international concern by the WHO -with the health sector of many economies in crisis, this virus has had an equally significant impact on the global economy too. To deal with issues surrounding the outbreak of this pandemic, numerous countries have taken multiple economic measures like the imposition of restrictions on exports of specific goods and services, the shutdown of factories and industries, changes in investment policies, et cetera. UNCTAD through its Investment Policy Monitor’s special issue, published on May 4, 2020, highlighted the responses of various countries to this ongoing crisis by analysing the investment policy measures undertaken for the facilitation of investment, support for small and medium-sized enterprises (SMEs), foreign investment screenings, and other incentives to the domestic industries. The pandemic has affected the foreign direct investment (“FDI”) flows as well, where the recent report from the UNCTAD’s Global Investment Trade Investment Monitor noted that there is a 40% expected decline in such global FDI flows during the 2020-21 period. Numerous countries, mostly being developed economies, like Italy, Germany, Australia, France, and Spain have interestingly already amended their domestic legislation(s) concerning FDI. For instance, Australia amended its FDI policy requiring approval from the Foreign Investment Review Board (FIRB) in all types of foreign investment irrespective of its value; whilst Italy amended its Golden Power law empowering the government to regulate and screen investments in new sectors too with such amendment being enforced until December 31, 2020.

Correspondingly, India also amended its FDI policy on April 17, 2020, through a notification published by the Department for Promotion of Industry and Internal Trade (branch of the Indian Ministry of Commerce and Industry), wherein as per this new amendment, any entity or beneficial owner of an investment into India if situated in or is a citizen of any such country that shares its land border with India (Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal, and Pakistan), can only invest under the government route, i.e. upon seeking prior approval and authorization from the government(hereinafter referred to as an ‘Amendment’). Before the Amendment, only investors from Bangladesh and Pakistan were required to invest through the government route, with certain exceptions of sectors where Pakistani entities were prohibited from investment. The current Amendment also dealt with the issue of the transfer of ownership of an existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership of any entity in the neighbouring countries as such changes will also now require government approval.The rationale behind this Amendment was to protect the domestic industry from opportunistic investment(s) from the neighbouring countries taking advantage of the distressed assets, while also preventing hostile takeovers of small and medium enterprises which might be in vulnerable conditions. China is the first country to have openly criticized this Amendment in the FDI policy on the ground that it violates India’s commitments at the WTO. China also contended that this amendment goes against the G-20 consensus of the parties which ensures that "free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment".

Foreign investments are generally governed by international investment law as well as by WTO legal texts. The authors, however, have restricted the scope of their assessment only to international trade law, and are not dealing with possible claims that can be brought under the now terminated India-China BIT. Thus, the first part of the blog focuses on whether the concerned Amendment can itself be challenged under the General Agreement on Tariffs and Trade (GATT) or under the Agreement on Trade-Related Investment Measures (TRIMS). Meanwhile, the second part of this blog series analyses the possible claims that China can bring against India at the WTO under the General Agreement on Trade in Services (GATS), especially with a fascinating possibility of seeing a rare Article VI GATS violation. The blog series is concluded by checking whether India can essentially rely on the exceptions under these Agreements or are there any other origin neutral ways that shall be followed instead of relying on this policy-change.

Foreign Investment at the WTO

It was in the Canada — Administration of the Foreign Investment Review Act dispute that the GATT, 1947 dispute settlement Panel decided that the GATT does not prevent Canada from exercising its sovereign right to regulate FDI, but instead checks the trade-related measures undertaken by the contracting party in light of their obligations under the GATT, 1947. The authors also endorse this view as the investment is a sovereign activity and its governance by a multilateral organisation such as WTO will be a threat to its national sovereignty. Thus, in the absence of opposing jurisprudence on this topic and absence of any difference between GATT, 1947 under GATT, 1994 on the topic of investment, this dispute remains significant in clarifying the GATT’s scope with respect to an FDI policy change, viz. only limited to examining the validity of the trade-related measures taken by the WTO Members, instead of being able to regulate the FDI in itself.

The subject of trade-related investment measures was later introduced again during the Uruguay Round negotiations, which was a highly debated topic between developed and developing countries. However, a consensus was reached for the inclusion of national treatment provision for the imported goods and provision for quantitative restrictions on imports and exports under the Trade-Related Investment Measures Agreement (“TRIMS”), similar to Articles III and XI GATT, respectively. Thus, it can be said that TRIMS is not competent to address all the investment-related issues at the WTO; instead, it only clarifies a few existing legally binding principles of the GATT, with the scope of TRIMS being limited to either allowing or restricting the import or export of goods through investments, and not investments per se.

Implications under GATT & TRIMS

In the current situation, TRIMS lacks a legal framework to deal with the screening and transfer of ownership issues pertaining to an investment, which the Amendment is concerned with. Consequently, since there is no provision for Most Favoured Nation (MFN) treatment under TRIMS, as has been provided under Article I of GATT, it is not possible for a country to bring a claim under this Agreement for differential treatment between two Members.  Also, China cannot bring a non-violation complaint under the GATT as one of the essential requirements for it is to show nullification or impairment of a benefit “directly or indirectly under the relevant covered agreement”. As already explained above, the Amendment does not fall within the ambit of either GATT, 1994 or TRIMS, and hence a non-violation complaint cannot be brought. This policy change cannot be challenged under the GATT as the concerned Amendment asking for a governmental approval is a procedural requirement, which does not fall under the ambit of trade in goods. Nevertheless, it does not restrict China from bringing a dispute at the WTO under Article 4 of the Dispute Settlement Understanding (DSU), with a possible violation of obligations under the General Agreement on Trade in Services (GATS), brazenly also referred as the real investment agreement of the Uruguay Round.

Abhishek Rana is an International Trade Attorney and a Senior Research Fellow at the Forum for Trade Remedies. He is also a Visiting Lecturer in international trade law at the Indian Society of International Law. He completed his LL.M. from the Queen Mary University of London as an International Economic Law Scholar. He tweets @AbhishekRana

Rishabha Meena is a final semester B.A., LL.B. (Hons.) student at the National Law University, Jodhpur specializing in international trade and investment law. He has done various moot court competitions, internships, publications, etc in the field of international trade law.

All views expressed here are in the strict personal capacity of the authors, and do not reflect those of the organisations to which they are affiliated with.