Is India’s Latest FDI Regulation in Violation of WTO Law?

[Ashi Mehta and Parv Kaushik are IV year B.A L.L.B (Hons.) students at the National Law School of India University, Bengaluru]

On 17 April 2020, the Indian Ministry of Commerce & Industry issued a press note, which makes foreign direct investment (FDI) from an entity located in a land-bordering country subject to prior government approval. The stated aim of this amendment is to curb “opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic”. Considering India already requires prior government approval for FDI from Pakistan and Bangladesh, the move is said to target Chinese investors. In light of the Chinese spokesperson’s statement calling the move violative of the World Trade Organisation (WTO) non-discrimination principles, this post seeks to inspect if such a claim would be tenable before the Dispute Settlement Body (DSB).

FDI-Related Provisions under GATS

Foreign investment is not often seen through the prism of the multilateral trading rules. It could be argued that the issue in question is more suited to be brought before an investment arbitration tribunal, considering bilateral investment treaties (BITs) are the most popular method of settling such investment-related disputes. However, the WTO DSB is potentially available to China to raise such a claim.

The integration of cross-border trade and investment in the WTO is evident in the General Agreement on Trade in Services (GATS). Article I:2 of the GATS mentions ‘trade in services’ with four modes of supply. ‘Mode 3’ is supply “by a service supplier of one member, through commercial presence in the territory of any other member (emphasis supplied)”. Article XXVIII(d) provides a definition of the term ‘commercial presence’. Consequently, these are often cited as the measures which correspond to a notion of FDI in WTO law. All WTO members with specific commitments have to ensure certain principles are adhered to.  In the instant case, the most-favoured-nation (MFN) principle is the applicable non-discriminatory principle. To briefly summarise this principle, under WTO law, countries cannot discriminate between their trading partners. Under the GATS, if a country permits foreign competition in a sector, equal opportunities must be given in the same sector to other WTO members as well.

In EC – Bananas III, the Appellate Body (AB) held that GATS Article II:1 is applicable to de facto discrimination (where a policy is seemingly neutral on its face but affects a certain set of parties more than the others)and rejected the argument that the measure in question “pursued entirely legitimate objectives”. Further, the AB stated that “aims or effects” of the stated activity are not relevant in determining if the activity in question gives less favourable conditions of competition to services or service suppliers of foreign origin. In a more recent case, Argentina – Financial Services, the AB has reiterated its position that any measure which is inconsistent with Article II:1 cannot be looked at from the prism of ‘regulatory purpose’.

At this stage, it is important to provide a caveat. The success of such a potential litigation by China before the WTO DSB is dependent on the FDI sector because MFN obligations are dependent on sectoral commitments set by a member. The theoretical argument here discounts such a situation. Instead, it is argued that even if India claims that its measure has intended or actual legitimate effects, WTO jurisprudence rejects this if the primary effect is that of providing less competitive conditions for such countries which have specified commitments, notwithstanding any other effects. Hence, there is a clearly discriminatory standard applied on FDI coming from countries that share a land border with India. 

Application of Exceptions under GATS

Having established that the measure in question violates the MFN provision of the GATS, it must be seen whether it can be justified by claiming the exceptions provided in either Article XIV or XIV bis of the GATS. Articles XIV of the GATS mentions General Exceptions, which allow a member to introduce measures that are necessary for the protection of public moral/public order, health, or to secure the compliance of any law or regulations. Further, measures inconsistent with national treatment and MFN principles are permitted, provided they pertain to situations mentioned within the Article. It is prima facie evident that the measure in question does not fall under these exceptions and cannot be argued as a defence.

Some commentators have stated ‘essential security interest’ as a potentially applicable exception mentioned under Article XIV bis. The WTO recently, for the first time, interpreted the security exceptions in the context of the GATT in Russia – Traffic in Transit. Since all agreements within the WTO framework adopt similar language with respect to the security exceptions clauses, this ruling is persuasive in the context of GATS.

It has often been argued, as it was in this case, that measures brought under the security exceptions are self-judging in nature and cannot be reviewed by a WTO tribunal. This argument was categorically rejected by the Panel in this decision. The Panel, in light of the drafting history of the GATT, concluded that while a member has leeway to determine what it considers as an essential security interest and the measure needed to protect it, the WTO will have to objectively evaluate whether the measures are in accordance with the enumerated requirements. To argue that such measures are beyond the scrutiny of the WTO would undermine the fundamental tenets of this institution, which aims at securing stability and predictability in trade amongst nations. If such an interpretation is supported, any member can pass measures inconsistent with the GATS and circumvent its framework under the garb of securing essential security interests and not be scrutinised for such actions.

The enumerated circumstances under Article XIV bis relate to measures on supply of services pertaining to provisioning of military establishments;relating to fissionable and fusionable material; and taken during wartime or other emergencies in international relations. The DSB has to test whether the measure objectively pertains to any of these three situations. Evidently, the measure in question does not pertain to the first two circumstances, and has not been taken during wartime. Hence, the question that requires attention is whether the phrase “other emergencies in international relations” can be used to justify India’s step.

The Panel addressed the scope of this phrase as well in the decision in Russia – Traffic in Transit. It noted that, as per the sentence, and in the context of the provision itself, political or economic differences between members were not sufficient to classify it as an emergency in international relations. Such a conflict, while serious in a political sense, does not fall under the ambit of this phrase. The Panel held that the phrase appears to refer to a situation of armed conflict,latent armed conflict, heightened tension, general instability engulfing or surrounding a state. Therefore, the measure in question, seeking to curb opportunistic FDI, would not fall under the exceptions carved in the GATS.

Conclusion 

Therefore, having stated the caveat that China’s success in such a litigation is entirely dependent on India’s sectoral commitment and not FDI broadly as a concept, India on a prima facie basis has adopted a discriminatory measure under the GATS, the relevant agreement to challenge such a measure. Further, its efficacy is also questionable when one considers the fact that Chinese investors often also invest from offshore companies based in Mauritius or Singapore – India’s biggest sources of FDI. It remains to be seen if the measure causes more harm than gain.

– Ashi Mehta & Parv Kaushik