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  • Mugdha Mohapatra

Changes in Foreign Direct Investment Rules, 2020: Is India violating WTO Rules?

This article has been authored by Mugdha Mohapatra, a fourth-year student at National Law School of India University, Bengaluru, pursuing B.A.LL.B (Hons.) course.

In April the Ministry of Commerce and Industry released Press Note 3 to amend the FDI policy in order to “curb opportunistic takeovers of companies”. The measures [1] are: i) all investments from countries sharing a land border with India are now required to go through the government approval route irrespective of the sector and ii) any transfer of ownership of FDI in Indian entities that would result in beneficial ownership for an entity that falls within the aforementioned restriction also requires government approval. Such screening requirements already existed for investments from Pakistan and Bangladesh. These measures can be best characterized as “screening requirements” to allow foreign investment in India. If such a measure is to be challenged under international law by China, it would have to resort to the dispute settlement mechanism under WTO rules. This is because India has terminated [2] the Bilateral Investment Treaties with China which allows disputes arising from such treaties to be resolved through arbitration. Dispute settlement by WTO panels focus upon textualist legal interpretations of multilateral trade agreements and by design exclude any other considerations. Furthermore, even though reports by WTO panels and appellate bodies are not treated as precedents, these decisions lay down accepted tests and principles of interpretations for WTO legal texts. In this article, the impugned measures have been analysed in light of relevant WTO disciplines having a bearing upon investment. I have argued that the measures introduced do not constitute a violation of India’s commitments under the General Agreement on Tariffs and Trade (hereinafter GATT), Trade-Related Investment Measures (hereinafter TRIMs), and General Agreement on Trade in Services (hereinafter GATS). The General Agreement on Tariffs and Trade challenge GATT is one of the multilateral trading agreements that governs members of the WTO. This agreement governs the elimination of tariff barriers that govern the free trade and movement of goods based on the principles of ‘most favoured nation’ (hereinafter “MFN”) and ‘national treatment’ (hereinafter “NT”). These are the principles of non-discrimination that member states are expected to comply with. The GATT however does not attempt to regulate foreign investment. The only investment related issue adjudicated upon under GATT is the case of Canada-FIRA. [3] In this case, the Canadian government introduced measures to screen investments in Canadian corporations. The panel report in this case identified that the GATT agreement does not have the power to regulate investments and only focused upon the export and local content requirements which impacted goods. The panel conceded that it was the sovereign right of a nation to regulate investments. The measure introduced through Press Note 3 is a screening requirement and does not affect the supply of goods per se, thus a challenge under the GATT protocol will not be successful. A Panel may take into account the fact that the measure at issue disproportionately affects only those nations sharing a land border with India unlike the FIRA which applied to all foreign entities seeking to invest. However, such an analysis is not a ‘test’ required by the text of the GATT to be ‘fulfilled’ and will not affect the outcome. The Trade-Related Investment Measures challenge The TRIMs agreement [4] is a limited multilateral instrument that restates and clarifies the scope of the applicability of the GATT to investment regulations related to goods (Art.1). This prohibits member states from derogating from their NT obligations and imposing quantitative restrictions (Art.2). An illustrative list of such violative measures refer to quantitative restrictions, export related requirements, performance requirements etc. Although the illustrative list is not exhaustive, previous panels, such as the one in the case of India-Autos, [5] have always focused upon direct negative impacts upon trade in goods as opposed to measures that merely have an impact upon trade while analysing TRIMs. Measures such as screening foreign investment are routinely utilised as ‘welfare enhancing measures’. These may be categorised as wasteful and as imposing ‘frictional costs’ upon foreign investors, but the TRIMs agreement simply does not apply to such measures. The General Agreement on Trade in Services challenge Of all the relevant WTO rules, the GATS [6] provides the most targeted reference to foreign direct investment. The GATS governs Mode 3 of supply of services, i.e. ‘through commercial presence’. A common way in which commercial presence is established is by FDI in entities supplying services in the member states.​ Under the GATS framework, member countries are required to specify their NT obligations to liberalise specified sectors in a schedule of commitments. However, countries are required to apply the principle of MFN in all sectors. This means that there is an obligation to accord ‘no less favourable treatment’ to every member state as per Article 2 of the GATS. Less favourable treatment, as held in the panel report of US–Section 337 of the Tariff Act of 1930, does not mean identical treatment must be ensured. This requirement is only fulfilled when conditions of competition [7] are modified due to the impugned measure. The current FDI policy does not prohibit foreign investments from the affected countries or impose additional costs upon such investments, and the ‘fundamental thrust’ [8] of the policy is not to disadvantage foreign investments but only to screen such investments. Therefore, it is unlikely that this policy would be treated as a violation of India’s MFN or NT obligations. If the impugned measure is challenged it would be under the market access commitments undertaken under Article XVI (2)(f) of the GATS which prevents members from adopting ‘limitations on the participation of foreign capital in terms of maximum percentage limit on foreign share-holding or the total value of individual or aggregate foreign investment’. A screening requirement does not constitute a violation under this definition. The panel in China-Publication and Audio Visual Products [9] found that in order to constitute a violation under Article XVI 2(f) the measure must either specify a maximum percentage of capital that can be held by foreign investors; or stipulate a total permissible value of foreign investment, either by an individual investor or foreign investors as a whole. Even though India’s new FDI policy makes the process of investing in India more cumbersome, it in no way place a ceiling on the maximum percentage of holdings or specify a total value of investments in any way. Therefore, a challenge to the impugned measures is not sustainable under the GATS framework. It should also be noted that the manner in which a dispute is referred to WTO dispute settlement is not divorced from the political context within which it operates. UNCTAD reported [10] that FDI screening norms now exist in over 28 jurisdictions including the European Union, China, Russia, USA and UK. Such regulations are predominantly justified on the basis of national interest and national security concerns. Furthermore, due to the COVID-19 situation, in line with United States CFIUS regime, Australia, Germany, Spain, and Italy have regulated investments from China through similar measures. [11] In this specific political context, a challenge to such measures may not even be introduced by China. Conclusion The notification suffers from several defects that should be remedied. [12] India’s legislative change is extensive as it applies to all sectors and not just those considered “sensitive” sectors. There is no distinction between majority or control investments and minority or passive investments from China. The term ‘beneficial ownership’ is also not defined in Indian law. It would also help the Indian government’s position to clarify whether this is a temporary or a permanent change in policy to ensure predictability for investors. However, if the measure of imposing a screening requirement is challenged before the WTO, it is unlikely that such a challenge would survive. This is so, especially in light of the COVID crisis and the imposition of such requirements all over the world. However, there is a need to bring clarity on the applicability of the notification to preserve a sense of certainty for global investments. ​Endnotes: [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12]

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