top of page
  • Divyansh Sharma

Indian FDI Policy Changes: Can the Indo-China BIT Protect?

[Divyansh Sharma is a student at West Bengal National University of Juridical Sciences, Kolkata.]

Following the recent shift towards protectionism adopted by multiple countries in light of COVID-19, India has also jumped the bandwagon by seeking to regulate foreign inflows. In a press note, the Department for Promotion of Industry and Internal Trade stated that an entity from a country sharing its land border with India or where the beneficial owner of investment into India may be situated in these countries ‘can invest only under the Government route’, i.e., with prior state consent. The stated objective behind this is to curb potential opportunistic takeovers of Indian companies at throwaway prices in light of COVID-19. Such pre-investment screening would only apply to countries bordering India, while other foreign investors can still avail of the automatic FDI route and are thus subject to liberalized regulations.

Since other bordering neighbours of India, such as Pakistan and Bangladesh, were already regulated under the approval route, the recent move is said to be a trigger against increasing Chinese stakes in India’s largest mortgage provider, HDFC. Since this move effectively targets investors from China, this post will cover the legal implications arising under the India-China bilateral investment framework.

Is the Indo-China BIT applicable?

India and China signed a bilateral investment treaty (BIT) in 2007, which was unilaterally terminated by India in 2017. Interestingly, this was the fate of most Indian BITs after the risk-averse framing of the Indian Model BIT of 2016, as a lash out by India against its loss in White Industries v. India, wherein benefits from India-Kuwait BIT were imported into India-Australia BIT under the Most Favoured Nation (MFN) clause.

Even though terminated, the Indo-China BIT provides for a sunset provision in Article 16, under which it continues to be effective for fifteen years from the date of termination in respect of investments 'made or acquired before the date of termination'. Thus, in the recent debate on screening policy changes, it remains to be seen whether the MFN clause can yet again become a problem for the Indian state!

Non-discrimination standard under MFN

The MFN standard found under Article 14 of the BIT promises treatment no less favorable than the investors or investments of any third state. The purpose of such clauses is to provide an ‘equality of competitive opportunities’ such that there is a level playing field between investors from different countries. Given that the term ‘treatment’ is broad, the favorable standard of reference can be gathered not merely by the host state’s treaty promises to a third state, but also in situations where nationals of third parties are treated de facto more favorably. India’s actions target select countries and thus put the other foreign investors at a higher pedestal and curbs equal opportunity. However, two concerns may arise out of an MFN claim by the Chinese investors.

The test of ‘like circumstances’

First, the ‘in like circumstances’ test must be met before such a claim can succeed. Given that the market players are all foreign investors juggling the financial fallouts of a world pandemic, this threshold can be met since a reasonable classification has not been shown. The Methanax v. United States Tribunal, while judging the health impacts of the methanol production on the population, held that entities compared must be in the same industry and situation. Considering the objective of the host state may be relevant in determining ‘like circumstances’, the tribunal gave the host states an extensive power to distinguish between entities based on its policy motivations. In the Indian press release, the government does not provide reasons for the distinction that it may have perceived between the tendencies of Chinese investors from other investors towards ‘opportunistic’ takeovers. At this juncture, it may be relevant to note that the test on discrimination is not dependent on intent, and it is enough that a measure has a 'discriminatory effect'. This, in the present case, can be easily shown if the Indian state fails to provide a reasonable distinction between these two classes.

Scope of benefits covered

The second concern regarding MFN is the import of benefits that were not envisaged for Chinese investors, and are thus ‘non-existent’ under the Indo-China BIT. Although the Indian government’s approval route for investment is vague and does not mention the kind of investments it seeks to cover, the starting point is presuming that all the existing and future investments will be covered. While the future investors cannot come under the purview of the sunset provision, which only protects the investments made or established before the termination, the existing investors face an interesting challenge. They could import beneficial standards under India’s other bilateral commitments, such as the India-UK BIT and the India-Germany BIT.

Article 4 of the India-UK BIT is a hybrid of National Treatment and MFN clause; it promises protections regarding the “operation, management, maintenance, use, enjoyment or disposal” of investments. The Indo-China BIT does not employ this specific terminology and merely accords a vague ‘treatment’ protection. Execution of exit policies, such as Chinese firms attempting opting out of the Indian market, could be covered within the protected rights of ‘disposal’ under this clause, which is being infringed by requiring government approval. Further, the Indo-China BIT also provides an MFN with respect to ‘investors’ under Article 4 rather than mere ‘investments’. Thus, it could be argued, these attempts by ‘investors’ at increasing their stakes in investments must also be protected.

The flip side to this argument will be that these benefits were never intended for the Chinese, and therefore should not be imported under MFN. This finds textual support in Article 1 of the Indo-China BIT, where investments are entitled to treaty protections only post-establishment. This article further protects investments that are 'in accordance with the national laws of the Contracting Party'. Similar wording exists under Article 3, which obligates states to admit investments 'in accordance with its laws and policy'. Further, the impugned BIT, it could be argued, never textually promised to protect the investors in terms of the ‘disposal’ of their investments. In fact, “changes in the form of such investment” is also included within the definition of ‘investment’ under Article 1. Therefore, any stake raises may be deemed to constitute fresh investments and thus, fall outside the sunset protection. This observation becomes more pertinent in the context of the fact that BITs are instruments of mere internationalization of rights and not the ones that create fresh substantive rights.

Essential security interests: self-judging?

The obvious defense to these claims is the ‘Exceptions’ clause under Article 14 of the Indo-China BIT. This provision is a non-obstante clause that allows the host state to undertake measures 'for the protection of its essential security interests (ESI) or in circumstances of extreme emergency'. However, the rider to this appears is that such measures must be 'in accordance with its laws normally and reasonably applied on a non-discriminatory basis.'

Principally, financial problems could be covered under ESI, as held in LG&E v. Argentina and other Argentinian crisis cases. However, it remains to be seen whether India can solely decide on the ‘essentiality’ of these interests, i.e., whether ESI under Indo-China BIT is ‘self-judging’ categories or not. Interestingly, the Joint interpretative statement under India-Bangladesh BIT clarifies that the tribunals cannot review the host state’s invocation of this defense on merits and that the same shall be 'non-justiciable'. On a policy reasoning, this is similar to Phillip Morris Tribunal’s ‘greater deference’ to regulatory police powers of the state, given that they are the best judge of their local circumstances.

The Devas v. India Tribunal case was concerned with a similarly worded 'essential security interests' provision in Article 11(3) of the India-Mauritius BIPA. While India claimed this to be a self-judging standard, the Tribunal did not accept such a stance, given the absence of any explicit language to grant the state full discretion. Even under India-China BIT, the absence of any specific phrasing such as ‘in the view of the host state’ would expose this invocation to an objective standard. Even if a high customary law threshold of 'necessity' is not applied, some objective evidence in support would be required, as was observed with similar phrasing of Germany-India BIT in Deutsche Telecom v. India.


Since there has been no declaration of internal emergency in India yet, it remains to be seen whether the ‘world pandemic’ qualification by WHO would be fit in ‘essential security interests’ classification. Although financial problems could theoretically be covered, the Indian state will be required to provide a basis that these moves cater to its ‘essential’ interests. Even if this threshold is met, a reasonable justification would be required since these measures specifically restrict investments from the bordering nations. Selective targeting, intentional or not, would be a strong case for violation of Indo-China BIT. Thus, even though everyone around the globe may be jumping to protectionism, these will have to be shown as ‘essential’ moves for safeguarding the economy, or its sensitive sectors such as healthcare at the very least.


Related Posts

See All


bottom of page