India’s Department for Promotion of Industry and Internal Trade has revised its Foreign Direct Investment (FDI) policy in order to curb the possibility of predatory foreign investment exploiting the financial distress of COVID-19-hit Indian companies. The amendment to India’s FDI policy now requires any investment from a country that shares a border with India to proceed through the government. Even transferring ownership of any existing or future FDI to such an entity would require government approval.
Since FDI from Bangladesh and Pakistan was already subject to government approval, the revision is mainly intended to regulate Chinese FDI. The People’s Bank of China recently increased its stake in India’s largest non-banking mortgage provider, HDFC, from 0.8 percent to 1 percent just as HDFC lost about a third of its share price due to economic disruption caused by the coronavirus pandemic.
In response to India’s move, Chinese embassy spokesperson 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 liberalization 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 realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment.”
China’s objection raises an important question: is India’s revision of its FDI policy valid under international investment law?
First, it is important to note that the entry or regulation of FDI into a country is not governed by the World Trade Organization (WTO). The multilateral WTO Agreements mainly regulate disciplines on trade in goods and services, and intellectual property. In fact, in a 1980s dispute between the United States and Canada, the settlement Panel set up under the General Agreement on Tariffs and Trade (GATT) — the predecessor to the WTO — explicitly stated that mandate of the organization was only to ascertain the GATT consistency of specific trade-related measures taken by a state, and not its right to regulate foreign investment per se.
Second, international agreements, including WTO Agreements, provide exceptions for extraordinary measures taken in times of emergencies. Therefore, any measures that a country considers necessary for the protection of its essential security interests, which are taken in time of war or other emergencies, are not considered to be in contravention of its international commitments. A state’s commitment to trade and investment liberalization certainly does not include a forfeiture of its essential security interests.
The WHO has classified the COVID-19 crisis as a “public health emergency of international concern.” Hence India’s revised FDI policy, which clearly intends to protect an essential security interest, cannot be considered inconsistent with the relevant WTO Agreements. In any case, as was decided by the WTO Panel in the Russia—Measures Concerning Traffic in Transit case, it is 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.
Third, bilateral disputes over the regulation of FDI would normally be considered under the dispute settlement mechanisms of a bilateral investment treaty (BIT). However, currently there are no bilateral investment treaties between India and China. Therefore, China lacks the ability to challenge India’s amendment to its FDI policy under a BIT arbitration mechanism as well. But 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. India’s BIT model, for instance, contains security exceptions clauses, which have an over-riding effect on the rest of the commitments in the BIT.
India’s amendment of its FDI policy follows the footsteps of many other countries trying to prevent China’s predatory purchasing of low valuation assets during the COVID-19 crisis. The guidelines of the European Commission, for example, mention that “among the possible consequences of the current economic shock is an increased potential risk to strategic industries, in particular but by no means limited to healthcare-related industries.” The guidelines further state that “in the context of the COVID-19 emergency, there could be an increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines) via foreign direct investment.” The takeover of weakened strategic assets through FDI is a widespread fear.
In conclusion, India is unlikely to be bullied as its FDI moves are on extremely strong legal footing. But it is important to address the larger picture. Even if one sets aside the alleged role of China’s wet markets in the COVID-19 outbreak and ignores its leaders’ continuing suppression of facts and information related to the virus, the financial and strategic exploitation of a pandemic-induced economic slowdown is reprehensible, and unquestionably needs state regulation. Considering the injury caused to China’s status as a responsible stakeholder, Beijing would be wise to eschew actions that risk a reaffirmation of its bad faith. Particularly at a time when manufacturing companies are exiting its shores and Chinese capital is increasingly becoming unwelcome, Beijing needs to adopt a more conciliatory approach — one which meaningfully addresses the grievances and fears of other states. Otherwise, it may risk becoming a pariah in international society.
Ameya Pratap Singh is a DPhil candidate in Area Studies (South Asia) at the University of Oxford.
Urvi Tembey is an international trade lawyer.