In April 2020, the Government of India notified a change in their FDI policy mandating the requirement of government approval for all foreign direct investments from countries with which India has a land border and all investments made in India whose beneficial owner resides in such border country. This policy covers Pakistan, Bangladesh, China, Nepal, Myanmar, Bhutan and Afghanistan out of which the position for Pakistan and Bangladesh remains the same. Thus FDI and beneficial ownership with respect to investors of China, Nepal, Myanmar and Bhutan have been brought under the purview of FDI subject to government approval which is a deviation from the earlier position of automatic permission granted to FDI in most sectors. Given the economic pursuits and might of the above-mentioned four countries, it can easily be surmised that the policy seeks to target Chinese FDI specifically.
What does opportunistic takeover mean in this context?
According to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI Takeover Code”), acquisition refers to the act of direct or indirect acquisition of share, voting rights or control in a target company.
The policy of the Government of India, as publicised, has been brought in to combat “opportunistic takeovers” of Indian companies which are facing weakened economic conditions due to the coronavirus crisis. However, this concept of opportunistic take-over does not have a statutory or academic definition. Thus it is important to analyse this concept in light of the present situation so as to discern the disguised motive behind this policy.
The policy came in response to People’s Bank of China’s decision to increase its stake in HDFC Bank from 0.8% to 1.01%. China, by the end of 2019, had a disproportionate investment in India’s tech market through TikTok, Xiaomi and Huawei to name a few along with stakes in PayTM, Oyo, Ola etc. As per 2019, 18 out of 30 Indian startups were funded by Chinese investors and companies and China’s cumulative investment in India exceeded $8 billion.
Given the economic slump that the Indian, as well as the world economy, was already facing coupled with the long durations of no economic activity due to the lockdown, it is no new knowledge that many Indian companies will emerge from the crisis at the brink of bankruptcy or by being substantially devalued. India has an increasing liberal FDI policy with new additions to the list made by the Finance Minister. This makes India an investment haven especially for countries like China known to have predatory trade practices and a tendency to weaponise trade.
Thus the Indian government’s fear is not entirely unfounded and the policy comes in force to help the government screen the foreign investments in the country which have the capacity to exercise substantial control over the Indian economy, thereby exercising its discretion in allowing the same. The jurisdiction based approach of the policy seemingly tries to target China among other neighbouring countries without compelling the government to clamp its FDI policy for all countries.
However, through the lens of free trade institutions like the WTO of which both China and India are members, a dispute regarding such a policy is likely to witness multifarious arguments and contentions of the violation of the international covenants and bilateral agreements.
Through the lens of International Trade Law
This measure can attract violations of the WTO Agreements on several counts in terms of discrimination between a certain class of foreign investors and Indian investors and discrimination between the aforementioned class of investors and investors from other foreign jurisdictions.
With respect to discrimination between foreign investors and domestic investors, in terms of FDI in goods, Article II of the Agreement on Trade-Related Investment Measures (“TRIMS”) prohibits violation of national treatment obligations undertaken by a State. Therefore, discrimination of FDI between a class of countries and Indian investors falls foul to this obligation undertaken by India.
In terms of FDI in the service sector, Article XVI(f) of the General Agreement on Trade in Services (“GATS”) prohibits measures which seek to limit the participation of foreign capital in terms of limit on the percentage of foreign shareholding or the total value of individual or aggregate foreign investment. The Indian Government’s policy to subject all such aforementioned classes of FDI to government approval and subsequent discretion restricts market access of such foreign investor to the services market of India. Even though it is not a complete ban, the operative element of the policy lies in the discrimination of direct investors from these, with respect to all goods and services sectors, as compared to domestic investors and investors of other countries. Additionally, this policy cannot be construed to fall under the general exceptions of TRIMS or GATS as the measure paves way for the Indian government to arbitrarily prevent the passage of such FDI in India and allegedly a disguised restriction to afford protection to the domestic industry so as to recover from the brunt of COVID crisis. Thus, in an argument based on national treatment violation, China is likely to emerge victorious.
With respect to discrimination between foreign investors of different jurisdictions, namely neighbouring countries and the rest of the world, no argument can be advanced. Under the WTO law, discrimination between different foreign trading entities by the domestic governments is protected by the Most Favoured Nation (“MFN”) clause. Neither the GATT, GATS or TRIMS has such MFN clause for among different countries with respect to investment measures. Thus, it may not be possible to bring a claim based on the MFN clause under these umbrella Agreements.
The MFN claim can, however, be brought under a bilateral investment treaty between India and China which was signed in 2006. Article 4 of the India-China BIT prohibits discrimination of Chinese investors from other foreign investors unless as prescribed by the treaty itself. One defence available to India would be under the exception of “essential security interests” as provided for in Article 14 of the BIT. However, this defence may not survive as subjugating FDI from only neighbouring countries across all sectors is unlikely to be accepted as falling under the purview of essential security interests. Additionally, a flip side to this is that the term of the BIT extends from 2007 to 2018. This subsequently extinguishes the claim of non- discrimination for investments made for investments post-2018.
Another argument that may be used in the dispute relates to the Canada – Administration of the Foreign Investment Review Act (“FIRA Dispute”). In this case, the United States called into question the practice under the Foreign Investment Review Act of the Canadian government “to enter into agreements with foreign investors according to which these are to give preference to the purchase of Canadian goods over imported goods and to meet certain export performance requirements”. The Panel ruled against Canada and found the measures under the FIRA to be inconsistent with the country’s GATT obligation. Having said that, the Panel is famously known to have noted that the General Agreement was not to prevent Canada from exercising its sovereign right to regulate foreign direct investments and that it was not the intention of the Panel to interfere with the regulation of such investment per se.
However, it needs to be kept in mind that both the parties to the dispute had specifically agreed on excluding Canada’s right to regulate the entry and expansion of foreign direct investments, out of the dispute. Additionally, the Panel’s reports of WTO disputes have only persuasive value in subsequent disputes unlike the Agreements and bilateral treaties which have a binding effect on the decision of future Panels.
Therefore, the Panel, in the given dispute between India and China, may either accept the sovereign right of India to regulate its investments or direct it to do away with discriminatory trade practices in this context, both of which will be valid rulings under the WTO laws and procedure.
China has reacted to the new FDI policy noting the discriminatory element of the same and calling India out on its commitment to free trade which it displayed in the 2019 G20 and on the basis of the free trade principles enshrined in the WTO laws. However, whether it will invoke the WTO’s jurisdiction cannot be predicted. If invoked, the arguments listed above are likely to be the main arguments which will play out in detail.
Given the tumultuous phase within which the Indian, as well as the world economies, are going through, the WTO can be expected to be lenient in giving its opinion, especially since the countries involved differ vastly in terms of economic might. India’s apparent fear of Chinese business houses taking over devalued Indian companies cannot be entirely dismissed and may even gain some amount of recognition in the international fora considering many countries in the world are likely to face a similar threat from other economically developed countries.
Conclusively, whether China decides to remedy the situation by undertaking diplomatic measures or whether it decides to take the dispute to the WTO is yet to be seen.
ABOUT THE AUTHOR
Subhalaxmi Hota is a third-year student at West Bengal National University of Juridical Sciences. She represented her university in the 12th GNLU International Moot Court Competition and is interested in the different aspects of WTO Law.