In the context of COVID-19, India amended its FDI policy to allow screening of FDI from certain countries. Though the intent of the policy is well justified, how the new policy is framed raises questions on its compliance with India’s commitments in the World Trade Organization (WTO). This policy was made in the context of Chinese entities engaging in the opportunistic acquisition of shares in enterprises of strategic importance to India.
The People’s Bank of China (PBC), which is the central bank of China, had increased its stake in HDFC, India’s biggest housing mortgage lender, from 0.8% to 1.01% by acquiring shares in April 2020. Increasing the stake by PBC is special on two accounts. One, it is exceptional that the central bank of country acquires shares in banks of foreign countries. Two, PBC’s acquisition of additional shares to raise its stake took place when the stock value of HDFC had declined about 30% due to the COVID-19 pandemic situation. Many in India had raised alarm on PBC raising it’s stake in HDFC when the market conditions were vulnerable.
On 17 April 2020, the Department for Promotion of Industry and Internal Trade (DPIIT), the nodal agency dealing with 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 new circular stated that entities from countries which share land border with India or where the ultimate beneficial owner of the investment in India is situated or is a citizen of such 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 due to COVID- 19 pandemic. This circular applies to all 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 very insignificant. Therefore, one could argue that in effect the circular was meant for China.
China alleges that the new policy violates the WTO principle of non-discrimination. Now the questions 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 in 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 of India 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) which 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 time of war or other emergencies in international relations. And the Press Note has clearly stated that the amendment is for curbing opportunistic takeovers during the COVID-19, which has been officially declared as a pandemic.
But a limitation of this defence is that it is not a permanent solution. Once the COVID-19 pandemic is brought under control, the protection provided by the article XIV bis will cease to exist. Without the back up of this clause, the new policy of India 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 of the Members of WTO.
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 in this regard. It is an interagency committee mandated to review certain FDI transactions on the grounds of national security. The United States is effectively checking FDI from China using this mechanism.
There are other countries, like India, which 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).
(Another version of this post is published by Policy Circle on 19 June 2020).