The Globalization of Investment Policies:
An important part of the framework of an investment policy is to provide for the ability of a company to invest in a foreign country such that all capital from the investment can then be transferred. Investment policies provide for the repatriation of capital earnings. Most countries create investment policies that place few restrictions of such transfers, only subject to laws of taxation so that the environment for international inflows is encouraged. Investment lawyers have an important job of reviewing and applying such policies in their respective financial markets towards specific client interests.
An example of this is where under the 1999 policy of India, FDI could be completely repatriated, including capital earned and dividend generated. However, the investments made in 22 specific industries listed in the policy were subject to conditions for balance of dividends where the foreign company must balance dividends with earnings generated from the export of goods produced by the investor in India over a period of 7 years[1]. The list of industries includes consumer driven sectors like entertainment, vehicles, footwear manufacturers, food and beverage industries, alcohol breweries and cigarette production[2].
By the policy of 2000, this condition of balancing dividends was no longer necessary and this meant that the approval of repatriated earnings was automatic with no conditions to be satisfied unless the particular industry provides for additional guidelines.
In most emerging economies, the government prepares investment policies that ensure maximum benefit to the infrastructural development of its various sectors, while also protecting the rights of foreign investors so as to create an encouraging environment. This includes the use of a clause within the policy that specifies the scope of applicability of its laws and regulations to an investment opportunity made before entry. Some countries have policies that extend the scope of applicability to all foreign investments, irrespective of the time of entry which means that the foreign company will have to adopt new measures to comply with the new regulations[3]. Others have clauses that do not apply such regulations to pre-existing investments[4]. Thus, an investment lawyer’s specific area of practice will determine the kind of work one has to do.
These clauses become important because when this scope is not definite, if a new law is added or an existing law is amended, a foreign company that has already invested in an industry and set up a regional subsidiary may not be aware of the need for compliance which may lead to legal issues and functional deficiencies[5].
Certain Important International Investment Law Practices:
An important international practice that becomes the crux of an investment lawyer’s work is the use of stabilization clauses which guarantee foreign investors stability in their undertakings, irrespective of the future amendments in national laws[6]. While some policies guarantee protection in regards to all legislative changes, others only protect the rights of the investor in specific areas such as labour laws and custom duty[7]. These clauses are usually recommended in international standards since they act as a step towards encouraging foreign investments by creating a more liberalized regime, offering greater protection and security.
When dealing with the international standards of policy framework, an issue that arises is what is to be done when the rules and regulations of an investment policy governed by national investment laws are in conflict with the terms of an international investment agreement. This was dealt with in the case of SGS v. the Philippines[8] where it was held that IIAs must precede the rules on investment policies. This decision was not universally followed, and only about 30 countries have recognized the superiority of IIAs within their investment policies to provide investors with the rights under these treaties to resolve any arising dispute[9]. International investment lawyers become part of several investor-state arbitrations involving global economic and financial transactions, especially based on the terms of bilateral investment treaties and multilateral investment treaties that trading nations enter into. This could include matters under the Energy Charter Treaty, domestic investment policies and contracts, and under such rules under UNCITRAL and ICC.
Also, the rules for entry of a foreign company must be well-defined and existing policies either specify a definite list of sectors that are excluded from its coverage or provide a list of sectors where foreign investment is permitted, thus implying that foreign investments cannot be allowed in any other[10]. In some cases, the policy specifies that certain industries are only open to investments from domestic investors, including the defence sector and power sector[11]. These are essential to create more opportunities for local companies in matters of national interest such as health care and national security.
Most countries[12] have also set up regulatory bodies to govern investments and to deal with processes of licensing and approvals for foreign companies while some countries simply specify that the approval and relevant registration must be from industrial and governmental authorities[13]. These regulatory bodies monitor working under Statutes in force and the matters dealt with by investment lawyers are based on the rules established by these.
Apart from these provisions and practices commonly found in investment policies, the World Bank has also recommended that all policies provide certain basic rights and protections to investors including[14]:
- Right to protection against any discriminatory treatment
- Protection in case of expropriation, and
- The right to transfer capital and profits across national borders.
Most policies do incorporate these, especially in case of expropriation where the conditions for expropriation[15] to be lawful are mandatorily specified along with “fair compensation”[16] given by the respective government in case of default. Very few policies clearly differentiate between definite and indefinite expropriation, but most ensure protection and compensation. However, policies simply become a theoretical protection but cannot meet their functions unless effectively enforced by investment lawyers who must ensure that individual investor interests and transactions are guaranteed the same protections.
While it is clear that outward FDI still faces stringent restrictions, the policies for foreign investments into India are far more liberal since the laws of the country apply to companies set up by foreign investors as subsidiaries after certain basic conditions have been met based on the specific sector of entry. There are certain limits placed on the amount of equity that can be owned in certain sectors, but the process for approval is made transparent and fair for all international companies. The one common aspect for foreign and domestic investors is the benefits and incentives provided under the policy. The policy must thus focus on reducing restrictive conditions for outward FDI, geared towards encouraging competition between domestic companies for international investment opportunities.
It can also be concluded that the Indian government has failed to implement many of these suggestions since the flow of foreign investments into the economy has been below par mainly since the regime of investment policy governance has been weak[17]. While the policy has been liberalized since 1999 attempting to attract more investors, the regulatory bodies have failed to prioritize sectors due to which most of the FDI has flown into automobile and IT industries, and the energy sector. The government has to categorize sectors in order of profitability for investors. Further, the legislature must focus on a separate law which deals with the regulation and promotion of foreign investments such that the processes of obtaining external permits such as environmental NOCs are independently governed and sped up.
The Present Process of Approval Necessary for Investors:
A very basic and essential function of investment lawyers is to ensure that its clients are compliant with all the required permissions and approvals required by foreign investors to enter the Indian market. In the present structure, the approval has to first be obtained from the FPSB, following which applications to respective government and industrial authorities must be mandatorily obtained before the investment proposal can be implemented in India, and this leads to possibilities of bureaucratic delays.
This existing policy is governed by FEMA and also creates issues with lack of transparency since the governmental bodies are not held accountable to foreign companies. A separate law which expedites the process would solve these problems. The law could also recognize the need for central level permits to be provided by a regulatory authority, empowered under this law, and could further reduce limits on FDI in prioritized sectors such as infrastructure and healthcare which currently struggle under the existing regime. Regulations governing outward FDI, especially in international real estate and energy sectors, must be eased under this law and made more uniform to promote local competition for such opportunities.
Solutions that are directed at strengthening the framework of investment policies, including the provisions of governance have worked to improve the flow of FDI into developing economies such as Tanzania.
While India already has a liberal regime in its market towards domestic and international investors, the laws and systems in place are becoming irrelevant, in the wake of rapidly evolving political and economic conditions. Laws that govern labour laws and contract laws, competition laws, and other laws affecting industrial practices need to be amended to also consider the increased flow of foreign investments and increased presence of TNCs in the market.
Further, the regulatory authority so constituted under the investment policy must also be empowered within its provisions to focus on enacting rules to govern subjects of taxation on foreign companies and their Indian undertakings, deal with allocation of land and other capital assets, monitor the infrastructural development carried out under such investment opportunities in the particular sector, and expedite the processes of license approval and registration.
The government needs to focus on a future plan of development for its investment policy where the steps taken to encourage and bring in more investments are in line with the expected value generated in the economy. A short term solution is to amend and strengthen the existing policy framework and governance, based on international guidelines. A long term strategy would be the creation of an independent legislation, and prioritization of sectors to regulate inward flow, while also focusing on outward FDI.
Conclusion:
The scope of work for an international investment lawyer is not restricted by borders and boundaries. They become important tools in ensuring that foreign investors and large corporations can freely and confidently enter with enough knowledge and expertise to guarantee fair treatment, proper compliance and an effective approach to the legal requirements to minimize risk.
Investment lawyers, thus, have to possess trade knowledge, a network of contacts in the domestic market, technical business expertise, and a proper understanding of constantly changing foreign markets and their policies. The lawyers also have to deal with high-profile international disputes that arise out of Free Trade Agreements, especially under arbitration. This also includes policy disputes based on conflicts between national and international laws and rules against trade barriers that affect investor confidence and the freedom to trade in foreign markets.
Investment law requires a multidisciplinary understanding of aspects that include risk assessment. If an investment lawyer also possesses the technical expertise to analyze business opportunities, their value to an investor will increase because of a better evaluation of various processes including governmental compliance and market study to determine social factors that could affect a domestic market, apart from the usual political and economic factors.
[1] Manual on Industrial Policy and Procedures, SIA website, http://indmin.nic.in
[2] Annexure VI, Manual on Industrial Policy and Procedures in India
[3] National Investment Policies of Lithuania and Iceland
[4] National Investment Policy of Uzbekistan
[5] UNCTAD, “Investment Policy Framework for Sustainable Development”, 2012, Geneva, United Nations
[6] As per the UNCTAD Report, 2016, almost 27 developing countries have incorporated this clause
[7] National Investment Policy of Mauritania
[8] ICSID Case No. ARB/02/6
[9] UNCTAD Report, “Investment Laws – A Widespread Tool for the Promotion and Regulation of Foreign Investments”, Investment Policy Monitor, 2016
[10] World Trade Organization, “Trade Policy Review: Tanzania”, 2000, Geneva WTO
[11] Adopted in African laws according to the UNCTAD Report, “Investment Laws – A Widespread Tool for the Promotion and Regulation of Foreign Investments”, Investment Policy Monitor, 2016
[12] China, Australia and New Zealand are some examples
[13] National Investment Policy of Iceland
[14] World Bank , “World Development Report”, 2011, Conflict, Security and Development, Washington D.C
[15] It is the process by which a government lays claim on private property, without prior consent of the owner, ostensibly so that it can be used for public good such as construction of public infrastructure, roads and airports.
[16] African Laws
[17] As published in the Report of the Steering Group on FDI, 2002
YLCC would like to thank Dylan Sharma for his valuable inputs in this article.
