China Slams India's Amended FDI Rules for protection of its Domestic Companies by calling it "Discriminatory"

Recently, the Chinese Embassy in India has issued a statement that: -

“On April 18, India’s Department for Promotion of Industry and Internal Trade (DPIIT) revised its foreign investment policy, making it much difficult for companies from countries sharing land border with India, including China, to invest in the country. 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.

Where companies choose to invest and operate depends on the country’s economic fundamentals and business environment. Facing the economic downturn caused by COVID-19, countries should work together to create a favorable investment environment to speed up the resumption of companies’ production and operation. 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 liberalization and facilitation of trade and investment. More importantly, they do not conform 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. Companies make choices based on market principles. We hope India would revise relevant discriminatory practices, treat investments from different countries equally, and foster an open, fair and equitable business environment.”

I think this statement seems to be misleading and is presenting a one-sided picture of the situation. If we peruse the Press Note No. 3 (2020 Series) issued by the Department for Promotion of Industry and Internal Trade, we will see that it starts with the following: -

“The Government of India has reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017 as under:...”

A bare perusal of the above would suggest that the purpose of promulgating such a notification is to curb opportunistic takeover/acquisitions of Indian companies due to the Covid-19 pandemic. Thus, a situation of emergency (Covid-19) which is not just in terms of health but also has socio-economic aspects attached to it, has been cited that has constrained the government of India to amend its FDI Policy.

Let us now come to the amendment. The relevant parts of Para 3.1.1 state that: -

“....... A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.”

It is further stated that: -

“In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.”

Here, it is important to note that the term “land border with India” has been used. Any country that has land border with India would be affected by this notification. It is quite just to ask why the classification of countries having “land border with India” has been used in this case. We know that Covid-19 is an infectious disease and has shown extremely high propensity towards human to human transmission. Thus, it was important to seal the land borders of India to minimize human contact. And not just land borders but also the aerial and the nautical borders have been sealed. However, the said notification is concerned only with the land borders.

According to China, these barriers set up for specific countries are in violation of the WTO’s principle of non-discrimination. These principles of non-discrimination can be traced to GATT 1947 as well as various other WTO Agreements.

Let us now come to Article XX of the GATT 1947 which provides general exceptions to the principles of non-discrimination. The relevant excerpt is reproduced hereinbelow: -

“Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

....

(b) necessary to protect human, animal or plant life or health;

(j) essential to the acquisition or distribution of products in general or local short supply;

Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist.”

The jurisprudence relating to Article XX is already quite exhaustive and needless to say that Article XX provides an exception to the contracting parties in relation to principles of non-discrimination inter alia where it is necessary to protect human health or such restrictions are essential to acquisition or distribution of products in general or local short supply.

In the present situation as well, India simply seeks to protect its industries and companies from hostile takeovers or acquisitions in this time of pandemic. It is common knowledge that Covid-19 Pandemic has not just health related implications but also has caused deep rooted socio-economic implications and disparities within countries. The entire country of India is under a lockdown. Only essential supplies are being maintained and the government is making all efforts to open the lockdown in a phased manner. In such a situation, thinking of protecting the domestic industries does not seem like a bad idea and such measure does seem to find shelter in Article XX. 

Further, Covid-19 Pandemic will take a long time to go and there is also a possibility that we will have to learn to live with it. As and when, such a crisis withers away, the abovementioned restrictions may be eased or lifted. Till then, in light of Covid-19 Pandemic, my view is that as of now, the China has an extremely weak case if it decides to challenge this action of government of India.