A less direct approach: Amended FDI regulation is problematic under the WTO law

April 29, 2020 3:01 AM

Amended FDI regulation is problematic under the WTO law. India should adopt a more facially neutral regulation

One of the modes through which trade in services takes place is ‘through a commercial presence’ of the service supplier in the territory of another member.One of the modes through which trade in services takes place is ‘through a commercial presence’ of the service supplier in the territory of another member.

By Prabhash Ranjan & Jay Manoj Sanklecha

India recently amended its FDI policy by subjecting investments from countries with which it shares a land border to screening under the approval route and making them ineligible under the automatic route. The policy doesn’t name China, but it is clear that this aims to prevent opportunistic Chinese investors from acquiring, on the cheap, Indian companies weakened by the Covid crisis.

However, China has objected to these changes, arguing that it violates the WTO principle of non-discrimination. While economists debate the economic merit of these changes, the crucial question, from a strictly legal perspective is whether China’s objections, which can be considered under both international trade and investment laws, hold any water.

Although none of the WTO agreements directly seek to regulate it, some contain provisions that may have implications for foreign investment. One such agreement is the General Agreement on Trade in Services (GATS). GATS allows trade in services based on a positive list approach, i.e., WTO members list the sectors in which they wish to make commitments for trade in services. One of the modes through which trade in services takes place is ‘through a commercial presence’ of the service supplier in the territory of another member.

Broadly, the disciplines under GATS can be classified into general and specific. While the former apply to all members and all service sectors, the latter apply only to sectors inscribed in members’ schedule of commitments. The scope of the specific disciplines varies widely, with each member depending on the extent and limitation of commitments made.

One of the general disciplines is the most favoured nation (MFN) treatment, which requires members to ensure all other members equality of opportunity to supply like services in sectors where foreign competition is allowed, i.e., a WTO member cannot adopt a regulation affecting trade in services in a manner that affords less favourable treatment to service suppliers of a particular member than that accorded to those of any other country in respect of similar services. However, it doesn’t require “identity of treatment” amongst different service suppliers. It only requires that the treatment provided by a country does not prejudicially alter the “conditions of competition” between different service suppliers.

Notably, in sectors like audiovisual, banking services, etc, the MFN obligation is subject to a number of exceptions specifically made by India in Annex II. Outside these sectors, China can arguably claim a violation of the MFN obligation, contending that subjecting service suppliers from some countries to a different procedure competitively disadvantages their service suppliers.

While India might seek to justify the regulation under the general exceptions or essential security interest provisions of GATS, it may be difficult to explain why the regulation has been applied for select countries, given that threat of acquisition of domestic industries is the same from all foreign countries.

Under international investment law, India and China signed a bilateral investment treaty in 2007; India terminated this in October 2018. The BIT has a sunset clause that extends the application to 15 years from the date of termination, but the treaty’s scope of application is confined to investments already “made and accepted as such” in accordance with applicable law. Thus, the amended regulation does not violate the rights of the existing Chinese investors in India. Moreover, most Indian BITs do not provide for pre-entry protection and thus do not restrict India’s sovereign right. However, the possibility of Chinese investors investing in India through other countries under a different ownership structure and seeking protection under other Indian BITs cannot be ruled out.

Unlike international practice, by selectively applying the regulation to certain countries and not to others, India makes itself vulnerable to Chinese claims in respect of certain service sectors under the GATS. In such a scenario it may be advisable for the Indian government to adopt a more facially neutral regulation that does not de jure discriminate on the basis of origin of the investment and applies equally to all countries.

Ranjan teaches law at South Asian University & Sanklecha is a lawyer with specialisation in international law. Views are personal

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