An analysis of the new FDI and investment protection measures rolled out by the Government to protect Indian financial and sovereign interests during the COVID-19 induced crisis
It's been more than three months since the foreign origin Coronavirus has engulfed the world and is now devastating human health and the economics of nations including that of India. Being truly an exceptional situation, the Government of India simply does not have any option but to address it with all possible means at its command. Indeed, New Delhi has done the right thing by initiating measures to safeguard the foreign direct investment (FDI) route to ensure avoidance of potential misuse of unscrupulous elements.
Thus, the FDI policy was amended on April 17, 2020, by stipulating that an entity of a country which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, such subsequent change in beneficial ownership will also require Government approval. This has been done to curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic. The amendment lays down a procedural change. But is it tantamount to violation of India's treaty obligations?
Protection to investors of FDI is primarily extended through 'Bilateral Investment Treaties' (BITs) or through investment chapters in trade agreements. Under certain agreements, like the one between governments of the South Asian Association for Regional Cooperation (SAARC), there are provisions of investment promotion but not protection, extended to investors from India's neighbouring countries, including those with which land borders are shared. Investment protection for new investments made by investors from countries which share land borders with India doesn't seem to be covered by any extant BIT or trade agreement.
In early 2010, the arbitrariness of some provisions of BITs had led to a growing number of international arbitration cases against the Government of India. Provisions, including 'Most Favoured Nation' (MFN) treatment and 'Fair and Equitable' treatment were subject to different interpretations by arbitration panels. To bring about uniformity and balance between investors' rights and Government interest, India chose to revamp the model BIT text in 2015 and took steps to terminate BITs with 50-odd countries and requested them to re-negotiate on the basis of a new BIT model. Brazil was one of the first few countries with which India signed BIT in January 2020 after the introduction of the new model.
In this context, was it risky to terminate BITs, especially since Make in India had barely launched a couple of years before the termination? The FDI inflow graph given alongside allays some of these apprehensions. Global FDI inflows into India during the three-year period of 2016-19 after the termination of BITs were to the tune of $1,31,508 million as compared to $95,231 million in the three-year period of 2013-16 prior to termination. More specifically, FDI inflows from the top 15 source countries during the 2013-16 and 2016-19 were $87,494 million and $1,22,875 million, respectively.
Investments from top 15 investing countries in the three-year period post-2016 were 40.4 per cent higher than in three-year before 2016. Further, investments from 10 out of 15 countries increased post-2016. The magnitude or proportion of the decline in investments from the other 5 countries is not much. It is interesting to note that all these 5 countries, viz., the UK, Germany, Cyprus, France and Spain, are/were members of the European Union (EU). It's also important to recall that India has been negotiating investment protection within the ambit of a trade agreement with the EU for the past 13 years. Also, 3 out of 10 countries from where FDI has increased from 2013-16 to 2016-19, viz., Japan, Singapore, South Korea, provide investment protection under an existing trade agreement.
Among neighbours sharing land borders, India received FDI from Afghanistan, Bangladesh, China, Myanmar and Nepal during the time period between April 2000 to December 2019. FDI inflows into India from China, Myanmar and Nepal reduced in the period 2016-19, as compared to 2013-16.
For the period April 2000 to December 2019, China was the 18th largest source of FDI, with $2,342 million having flown into India. This amount was 0.51 per cent of the total cumulative inflows. India's BIT with China was terminated in 2018. In the year preceding the termination, FDI inflows from China were US$ 350 million, and in the following year, the inflows were US$ 229 million. Thus, the FDI inflows from China have been reducing in the recent past, even in the pre-FDI policy amendment regime.
As it stands, no correlation is discernible between the existence of BITs or investment chapters of trade agreements and FDI inflows into India or in other parts of the world. The US, the largest recipient of global FDI doesn't have an investment agreement with the UK which is the highest source of FDI into the US.
To conclude, investment protection may neither be necessary nor sufficient for FDI flows. FDI flows are governed more by factors which ensure investment promotion and ease of doing business, as reflected in the Union Budget 2020-21.
The writer is a member of the Indian Economic Service. Views expressed are strictly personal