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Impact of New FDI Norms on Chinese Investments in India

The Department for Promotion of Industry and Trade (DIPP), on 17 April 2020, issued Press Note No. 3 of 2020 (“Press Note”)in order to bring about a crucial change to the extant Foreign Direct Investment (“FDI”) Policy to “curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.” The Press Note mandates the prior approval of the government for any FDI by an entity (including citizens) based in any nation sharing a land border with India, or if the beneficial ownership in the investing entity lies with such an entity based in the nation sharing land border with India. While prior to the Press Note, entities based out of Bangladesh and Pakistan were subject to government approval, this change brings within the ambit of government approval also entities based in China, Afghanistan, Bhutan, Myanmar and Nepal, being the other land border sharing nations, and all entities whose beneficial ownership lies with an entity based out of these countries. The Press Note has been followed by an appropriate amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 on 22 April 2020.



The Press Note, which comes immediately following China’s central bank, the People’s Bank of China raising its stake in the Indian housing finance powerhouse, Housing Development Finance Corporation Limited (HDFC) from 0.8% to 1.01%, has sparked furor from across the great wall of China. While the Press Note has left certain aspects unaddressed, this write-up focuses on whether the same is discriminatory and foul of WTO trade-law principles.


After the announcement of the Press Note, the Chinese government alleged that the additional barriers set by the Press Note were violative of the World Trade Organisation’s (“WTO”) principle of non-discrimination. In response to this, an Indian government official had anonymously told the press that the move was not aimed at barring funds from across the border, but instead merely put forth a condition that any investment from across the border will have to undergo government scrutiny. It was further iterated in the official’s statement that the change in norms would apply even to  investments made in India while the  Indo-China Bilateral Investment Treaties subsisted.


Let us now proceed to examine the relevant WTO trade-law principles and whether the Press Note is violative of the same.


What are the cornerstone principles of non-discrimination?

The WTO’s multilateral trading system functions on the cornerstone principle of non-discrimination, i.e., the requirement that member countries do not treat any two like products in a preferential manner, irrespective of their origin and irrespective of whether such like product is imported or domestic. This principle of non-discrimination is dual faceted as under the WTO laws: (i) Most Favoured Nation (“MFN”) treatment obligation; and (ii) the national treatment obligation.[3] The MFN treatment obligation requires that a member of the WTO which grants certain favourable treatment to any country to grant the same treatment to all other WTO members. The national treatment obligation requires that a WTO member treat products, services, and service suppliers of other WTO members no less favourably than it would treat its own ‘like’ products, services, and service suppliers. For the purpose of this article, we are not concerned with national treatment obligation, as it is the MFN treatment obligation that is being alleged by China to be violated by India in introducing changes to the FDI Policy. It is important to keep in mind that while the MFN treatment obligation is not ipso facto applicable to foreign investments, the same is usually adopted by the BITs entered into by any two nations or group of nations.


MFN Treatment Obligation in the India-China BIT

India and China entered into a bilateral investment treaty (“IC BIT”) on 21 November 2006 which came into force on 01 August 2007 and was terminated on 03 October 2018. This would mean that no investment made or to be made after 03 October 2018 would enjoy the privileges under the IC BIT including the MNF treatment obligation contained in Article 4(1) of the IC BIT. However, it needs to be noted that the IC BIT continues to be effective for a period of 15 years from the date of termination in respect of investments made prior to its termination.


Accordingly, the MFN treatment obligation and the national treatment obligation covered under the IC BIT would continue to apply for Chinese investments made before 03 October 2018. This would essentially mean that any rights acquired through these investments would qualify for MFN treatment and national treatment obligation. But, will this mean Chinese investors have the right to automatically make further investments in their portfolio/investee companies?    


To asses this we need to briefly understand pre-entry or post-entry model followed under BITs. A pre-entry model is one where MFN treatment obligations when included in a BIT are to be extended to even pre-investment processes and activities, like for instance any screening/scrutiny process. A post-entry model on the other hand only extends the MFN treatment obligations to investments once the investment comes into existence. Till the time an investment comes into existence, the investee state is free to impose different pre-investment processes and standards for different nations under a post-entry model. The IC BIT neither explicitly provides for inclusion of pre-investment processes and measures within its ambit, nor explicitly excludes the same from within its ambit. In the absence of any interpretative notes (usually provided by both countries to a BIT to help interpret the BIT provisions) to the IC BIT, guidance for the purpose of determining the model adopted by the IC BIT can be taken from the Model BIT published by the Department of Economic Affairs of India under which pre-investment activities are specifically excluded from the scope of BITs, thus indicating that India usually follows the post-entry model. Basis the foregoing, it can be argued that the IC BIT also follows a post-entry model. 


Therefore, while in the ordinary course any further investments may be subject to scrutiny as that will be a pre-entry event, it may be open for China to question the applicability of scrutiny being foul of MFN treatment obligations in cases where such further investments are as a result of any pre-existing investment rights inter-alia in the nature of participation in further issuances, additional funding rights, call option right etc. under the concerned investment agreement that was executed prior to termination of the IC BIT.

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