Why India Needs To Review Its Private Investment Law And Policy In The Time Of Coronavirus

The Government of India’s revised Foreign Direct Investment (FDI) policy with effect from 17 April 2020 may have irked China and Chinese investors, but in the midst of an unprecedented global health-cum-economic crisis that is being called and analysed as a black swan event, it served as a reminder of the fundamental customary law concept of state sovereignty.

In other words, every international organisation or multilateral institution including the United Nations recognises and accepts that every sovereign nation in this world has the right to determine and protect its own sovereign interests including its economic interests.

Even from an international relations perspective, sovereign nations are well within their rights to review and revise their foreign policy (of which FDI policy is a part) based on national interest and national security.

So, any argument that India’s revised investment policy or rule violates any international agreement, including under the World Trade Organisation (WTO), is neither valid nor tenable under international law or law of nations.

Now, in order to understand and form an opinion about FDI in the context of India, it is imperative to remember that FDI as a mode of investment started since the time a global policy of free trade and mobility of capital was adopted by a majority of sovereign nations in the 1990s, and because it appeared to be a more economically favourable alternative to debt finance or bank loans as a source of capital.

As a result, incentives and subsidies were offered, particularly to multinational corporations and international institutional investors that endorsed and promoted a country’s domestic economic model and industrial policies.

However, no law or statute in international investment law mandates or regulates such foreign investment or FDI, per se. In fact, from a solely legal perspective, the WTO Agreements provide for exceptions in times of emergencies.

Considering that the World Health Organisation (WHO) has classified the COVID-19 crisis as a “public health emergency of international concern”, hence, any policy measure that a country considers necessary for the protection of its national interest or national security, in the time of such an emergency, cannot be held to be inconsistent with or in contravention of its relevant international obligations.

At the same time, there is also an unprecedented opportunity for the Executive to review the national investment policy as a whole, and work together with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry and the Reserve Bank of India (RBI) to make necessary regulatory changes or amendments so as to create a balance between domestic private investment and foreign direct investment flows.

For instance, a recent report by the foreign policy think tank Gateway House has estimated that the total current or present value of investment by Chinese investors in 18 out of India’s top 30 technology startup companies amounts to about USD 4 billion and as of December 2019, China's total investment in India exceeded USD 8 billion.

Although it is not yet a sizeable share of the total FDI pie, it does present a timely chance for India to renegotiate and enter into a new Bilateral Investment Treaty (BIT) with China on the basis of its new Model BIT text (the last India-China BIT was terminated with effect from 3 October 2018).

Exceptions for national security and/or force majeure clauses can then be duly negotiated and provided for as part of the dispute settlement clause of the new BIT.

In fact, Article 33 read with Annex 1 of India’s Model BIT already contains the exception clauses which have an overriding effect on the rest of the clauses in the treaty.

It implies that even with the existence of a BIT with China, India would be justified in changing or amending the procedural requirements of its FDI policy.

As far as domestic private investment goes, a review of banking regulations, capital market regulations and corporate taxation laws along with incentives for physical and social infrastructure would go a long way in driving Indian investors to invest in India.

For the time being, the press notification issued on 17 April will have the force of law when necessary amendments are introduced to and notified under the Foreign Exchange Management Act (FEMA) 1999.

But given the fact that the cumulative average growth rate of FDI inflows has surpassed that of Forex inflows from net exports since 1992, it remains to be seen how the government’s overall long-term policy on foreign investment evolves over the coming months and years.