Introduction:

A Foreign Direct Investment (FDI) is an investment in by foreign investors in the foreign based company. In a decision fraught with geopolitical and economic ramifications, the Indian government amended its foreign direct investment (FDI) policy to put a blanket ban on investments through the automatic route by entities from countries that share a border with India.

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The move is seen as an attempt to ward off the threat of “opportunistic” Chinese takeover of Indian companies, whose valuations have been badly hit by the coronavirus pandemic. The curbs, which were already in force for investments from Pakistan and Bangladesh, will extend to entities where Chinese citizens have “beneficial ownership” to ensure that the restrictions are not circumvented by routing investments via Hong Kong, Singapore or other countries.

FDI restrictions and WTO norms:

• 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.
• 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 audio-visual, 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.
• 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.

Concerns raised against the move:

• China has objected to these changes, arguing that it violates the WTO principle of non-discrimination.
• The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.
• The Chinese embassy not only cited its investments but also the “donations” made by Chinese companies to help fight the Covid-19 pandemic.
• As of December 2019, China’s cumulative investment in India has exceeded 8 billion US dollars, far more than the total investments of India’s other border-sharing countries. The impact of the policy on Chinese investors is clear.
• Chinese investment has driven the development of India’s industries, such as mobile phone, household electrical appliances, infrastructure and automobile, creating a large number of jobs in India, and promoting mutual beneficial and win-win cooperation.
• Chinese enterprises actively made donations to help India fight COVID-19 epidemic.
• China also accused India of not conforming “to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.”
• Therefore, Without the appropriate legal and regulatory sanction, India might experience reciprocal measures.
• In order to protect India’s unicorn, there is need to devise a scheme of preferential or special shares which a unicorn can issue to foreign investor.
• These shares will preserve the decision making by Indian innovators, while also providing them access to foreign capital.

Way forward:

• There is a need for India to develop new legal and institutional tools. As the ones employed by US and EU member states such as data protection laws or revised mergers and acquisitions rules, and institutional bodies.
• The Chinese have already restarted manufacturing when the rest of the world still grappling with coronavirus.
• China has several months’ advantage over all other major economies and can therefore secure significant benefits.
• After each crisis in recent years, China has consolidated itself. Indian government is trying to pre-empt acquisitions.
• Countries need to strengthen their domestic capabilities to meet the Chinese challenge.
• 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