The Existing Framework that determines the work of an Investment Lawyer:
In India, an essential part of the legal framework of an investment policy, whether domestic or foreign, is to provide for the ability of a company to freely and confidently invest in/from a foreign country such that all capital from the investment can then be transferred back to their country of origin. Investment policies provide for the repatriation of capital earnings. 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 means that approval of repatriated earnings was automatic with no conditions to be satisfied unless the particular industry provides for additional guidelines.
Most countries create investment policies that place few restrictions on such transfers, only subject to laws of taxation so that the environment for international inflows is encouraging. Similarly, other provisions within investment policies focus on governing and protecting the interests of investors so as to make the market seem more inviting and to ensure ease of business. However, while the laws are theoretically sound in dealing with this aspect, they require stringent implementation and enforcement. This responsibility falls on State bodies such as SEBI and on individual investment lawyers.
Without the constant monitoring, review and enforcement of these laws and policies, governance of the market becomes increasingly difficult and disorganized, leading to loss of investor confidence and increasing volatility within the financial market.
The Need for Investment Lawyers to Facilitate Investments:
Under the investment policy, in an attempt to further encourage FDI opportunities, certain provisions were enforced to facilitate the process by reducing conditions and restrictions on foreign investments. To make the process less complex, the policy requires that approval only be granted by the FIPB, and the application for approval can be sent by online communication means through its website. The provision provides that the acceptance or rejection of such applications must be given to the investor within 30 working days. This becomes a smoother process when handled by legal professionals who are well-aware of implications and possible consequences.
But, while the policy aims to make the process faster, foreign investors must follow necessary laws and regulations such that when the approval has been granted in such a short time period, they must also obtain mandatory clearance from governmental agencies such as environmental NOC, land acquisition permits, and permits from regulatory bodies of specific industries such as the Authority for Insurance Regulation and Development where an investment is made. To avoid any issues with discrimination and unfair regulation, the provision lists the same requirements for domestic companies as well. All of these compliances and due processes are monitored and handled by investment lawyers on behalf of investors.
The Need for Periodic Reviews of an International Investment Policy as a part of Effective Governance:
However, while investment lawyers are necessary to ensure ground-work compliance and to ensure protection of an investor’s rights and interests, they also play an important role in the actual governance system established by Governments.
Once an independent committee comprising legal professionals or a regulatory authority has been designated under an investment policy for its governance, there is a need for the committee to regularly communicate with the representatives of the foreign company, especially in the case of transnational investors regarding the effect of international agreements of trade so as to attract more investments and better protect the rights of ongoing undertakings[3]. For this, the designated authorities have to systematically review the terms and conditions under such agreements and treaties at definite periods to ensure that a feasible environment for transnational investors between two countries is maintained. This review would also have to uphold measures which check compliance with the commitments made by each under the investment agreement. When an investment policy provides for lesser restrictions regarding the kind of sectors available to international investors, the policy also guarantees security on the basis on internationally set standards, especially against issues like expropriation such that their rights and duties are not adversely affected when they decide to invest[4].
Constant reviews of these laws and conditions under international agreements by the independent body may reduce the extent of control that a respective government will have in carrying out its national investment policy, but will successfully reduce any risks and unpredictable changes in market conditions that arise in the duration of an undertaking. Especially in countries with transitioning economies where the investment environment is never definite and terms of trade irregularly change to suit economic needs, existing policies or certain guidelines under it could suddenly become redundant which could then affect the practices already in place by a previous investor[5]. To deal with these challenges, every country/company must focus on reviewing the conditions and provisions under investment policies and international agreements. The review is not meant to direct amendments or additions but is to check whether existing conditions and provisions are relevant as against the economic environment. When investment policies cover large jurisdictions, the review process must also check whether steps are being taken to comply with the specified coverage, especially in the case of bilateral investment agreements signed by both governments. By constantly reviewing the extent of FDI inflow covered by such an agreement, this factor can be effectively monitored by designated authorities.
However, one challenge that arises when monitoring international agreements is that the authority has to set a uniform means of review since the interpretation of each term may vary between different countries, wherein the kind of sectors recognized and the exceptions to these are not the same globally[6]. A further review may be conducted to report on the kinds of institutions existing in a country and the roles they are assigned towards monitoring their country’s existing laws and policies. This will provide information about any future plans of amending such policies or enforcing new regulations towards international trade. But, this kind of review cannot be done solely by a designated body as it depends on international cooperation and transparent communication with stakeholders in an international investment[7].
There is no universally accepted time period within which these reviews must be done periodically and countries usually establish this based on the number of treaties and agreements existing, the scope of each and the jurisdiction under its policy[8]. This freedom given to an individual government is so that transitional periods in the economy can be considered and the personal capacity of its relevant authorities can be factored in when deciding on the period for reviews.
The Changing Scope of Work under the New Investment Policy Regime:
The FDI policy that was in force in India has undergone amendments by the DPIIT[9] so as to reduce cases of predatory investments which are usually made when the financial condition of the country is in distress[10]. Under the new regulations, if a country bordering India decides to invest; such proposals have to be vetted by the government and all provisions dealing with transfer of control and ownership in the capital asset would also need prior approval from the government.
Under the previous policy regime, this approval was necessary for investments coming from Pakistan and Bangladesh due to political issues, and the amendment implies the new regulation will now also apply to China, in the wake of political tension. But, this has raised issues as the restrictions for specific countries go against the universal principles non-discrimination proposed by the WTO[11].
When the objective of investment policies is to liberalize and encourage global trade and to promote transparent, fair and accountable financial environments for more FDI, this new policy is termed invalid under international investment laws[12].
However, since the governance of FDI by a nation does not fall under the mandate of the WTO, the guidelines proposed by the WTO can only apply to trade of goods and services. When a dispute arose between Canada and the US in 1987[13], the objective of GATT[14] which later evolved into WTO was recognized as regulating the terms of trade agreements adopted by a State, and not to regulate the foreign investment policy specifically. Further, WTO recognizes that policies can have exceptional conditions if a period of political or economic emergencies prevails. Under this, if a nation adopts necessary measures to protect its own national interests, it will not be a contravention of global principles of non-discrimination.
Further, in the “Traffic in Transit” case[15], it was decided that a country has complete freedom to determine the situations that would classify as “in the interest of national security” so that measures to protect this interest can be taken in regards to trade agreements.
Under international investment laws, when any issue is raised by a country against the provisions contained in the investment policies of another country, this will be raised through the procedures established in the dispute resolution section of bilateral investment agreements[16]. Since India and China have no existing trade agreements, no effective challenges can be made against this new FDI regime. Further, under the BITs with other neighboring countries, clauses exist which mention certain cases of national security as exceptions to the rules against discrimination and act as overriding clauses over the commitments arising out of investment agreements[17].
The 2020 Amendment to India’s FDI is based on the guidelines proposed by the European Commission which states that poor economic conditions could severely affect public sectors such as healthcare where foreign companies may attempt to take advantage of this situation by paying low capital costs to invest in this sector.
Conclusion:
Investment policy structures do not simply include the policy provisions and regulations provided, but also the measures incorporated by the State and specific regulatory authorities of sectors for effective governance and implementation of its provisions. The system also requires investment lawyers who are well-aware and will function based on the objectives of the investor and the sector of investment. Most governments are required to ensure that the restrictions and conditions placed on foreign investors and domestic investors have the same effect on their undertakings, such that the guidelines for outward FDI is not seen as restrictive. Policies also have to consider the level of risk that may be associated with an investment opportunity, depending on the changing nature of its economy and financial conditions so that the security afforded under the policy is sufficient to encourage investors. Based on these factors, there is a growing trend for large corporations to hire investment lawyers who can effectively monitor the values to ensure issues of non-compliance or bad investment decisions are minimized.
Certain issues that clearly hamper progress for growth of FDI proposals are the weak implementation, monitoring and governance by assigned financial institutions and regulatory bodies and the strict compliance with these laws. Investment lawyers have to ensure better guarantees of protected rights of ownership and control on the capital asset as provided within investment policies, while keeping in mind the traditional norms of use and the concerns with legal compliance in relation to the asset.
[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] UNCTAD, “Promoting Investment and Trade: Practices and Issues”, 2009, Investment Advisory Series, vol. 4, Geneva
[4] World Bank, “World Development Report – A Better Investment Climate for Everyone”, 2005, Oxford University Press
[5] UNCTAD, Promoting Investment for Development: Best Practices in Strengthening Investment in Basic Infrastructure in Developing Countries”, 2011, A summary of UNCTAD’s Research on FDI in Infrastructure, Geneva
[6] World Bank, “Doing Business in a More Transparent World”, 2012, Washington D.C
[7] ibid
[8] OECD, “OECD Guidelines for Managing Conflict of Interest in the Public Service”, 2003
[9] Department for Promotion of Industry and Internal Trade, 1995
[10] Ameya Singh, “The Logic Behind India’s New Investment Policy”, Pacific Money, The Diplomat, 2020
[11] Statement by the Chinese Embassy Spokesperson, Ji Rong, 2020, G20 Summit
[12] ibid
[13] W. REs. J. INT’L L. 251, 265 (1979)
[14] General Agreement on Tariffs and Trade
[15] Russia – Measures Concerning Traffic in Transit, WT/DS512/7, 2019
[16] UNCTAD, “Foreign Direct Investment and Development”, 1999, UNCTAD Series on issues in international investment agreements
[17] Ameya Singh, “The Logic Behind India’s New Investment Policy”, Pacific Money, The Diplomat, 2020
YLCC would like to thank Dylan Sharma for his valuable insights in this article.
