By Reji K. Joseph
India amended its FDI policy to allow screening of investment from certain countries in the context of Covid-19. Though the intent of the policy is justified, how the new policy is framed raises questions on its compliance with India’s commitments at the World Trade Organisation (WTO). This policy was made to stop Chinese entities from engaging in opportunistic acquisition of shares in enterprises of strategic importance to India.
The People’s Bank of China (PBC) had raised its stake in HDFC, India’s biggest housing mortgage lender, from 0.8% to 1.01% through a deal in April 2020. The move by the central bank of China is important on two accounts. One, it is rare for the central bank of a country to acquire shares in foreign banks. Two, PBC’s acquisition of additional shares to raise its stake took place when the stock value of HDFC was down 30% due to the Covid-19 crisis. The deal raised alarms in India because of its timing.
On 17 April 2020, the department for promotion of industry and internal trade (DPIIT), the nodal agency for FDI policy, issued a circular (Press Note 3 of 2020) effecting an amendment to para 3.1.1. of the Consolidated FDI Policy, 2017. The circular stated that entities from countries that share land border with India or where the ultimate beneficial owner of the investment in India is situated or is a citizen of such a country can invest in India only through government approval route. The objective of the policy was clearly stated as curbing opportunistic takeovers/acquisitions of Indian companies during the economic crisis induced by the Covid-19 pandemic. This circular applies to investment from seven countries – Pakistan, Afghanistan, Bangladesh, China, Nepal, Myanmar and Bhutan — with whom India shares land border. India had already restricted FDI from Pakistan and Bangladesh and investments from other countries except China are insignificant. Therefore, one could argue that the circular was meant for China.
China alleges that the new policy violates the WTO principle of non-discrimination. Now the question is whether India would be able to justify the amendment to its FDI policy given its commitments under WTO. There is indeed no agreement as such dealing with foreign investment at the WTO. The agreement on Trade-Related Investment Measures (TRIMS) only restricts the ability of members from attaching trade-related measures for the approval of foreign investment. Therefore, the amendment to the FDI policy will not come under the purview of the TRIMS agreement. The other agreement that covers some part of FDI is the GATS Agreement (Mode-3) that deals with commercial presence in foreign countries to provide services. China can challenge the policy under the GATS agreement.
India can defend its policy relying on the security exceptions under Article XIV bis of GATS. This clause clarifies that nothing in the agreement would prevent a member from adopting measures for the protection of essential security interests in times of war or other emergencies. And the Press Note has clearly stated that the amendment is for curbing opportunistic takeovers during the Covid-19, which has been officially declared a pandemic.
But this defence suffers from a limitation – the provision is not a permanent solution. Once the Covid-19 pandemic is brought under control, the protection provided by Article XIV bis will cease to exist. Without the back up of this clause, the new policy is likely to be treated as a violation of the principle of non-discrimination. India will have to justify the new policy that applies only to a few WTO members.
To address this issue, India needs to develop a proper system for the screening of FDI in general and not targeted at selected countries. As part of the screening process, investment from certain countries can be restricted on the grounds of national security considerations. The Committee on Foreign Investment in the United States (CFIUS) is a good example. It is an interagency committee mandated to review certain FDI transactions on the grounds of national security. The US is effectively checking FDI from China using this mechanism.
There are other countries, like India that have recently introduced measures for screening of FDI. However, their measures seem to comply with WTO norms. Australia’s FDI screening policy is tied to its Foreign Acquisitions and Take Over Act of 1975 (FATA). Any FDI that comes under the purview of FATA would be screened. This policy is explicitly not targeted at any member of WTO. Similarly, Spain amended its FDI policy as part of two Royal Decree Laws of March 2020 for addressing the economic and social impact of Covid-19. The amendments to the FDI regulations – Suspension of the regime of liberalisation of certain foreign direct investment in Spain, suspends liberalisation of FDI in sectors which affect public order, public health and public safety. Although the new policy is targeted at FDI from non-EU members, this measure will not be treated as discriminatory as the Parliament of European Union (EU) has already established a framework for the screening of FDI into EU by members of EU (EU Regulation 2019/452 – Establishing a Framework for the Screening of Foreign Direct Investment into the Union).
(Reji K. Joseph is an associate professor at Institute for Studies in Industrial Development, New Delhi. The views are personal.)
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