Updated: June 9, 2014 9:00:43 am
Global investors seem supportive of the new government in the hope that it will set right some of the UPA’s mistakes — the policy flip flops and paralysis that were blamed for the economic slowdown. It will be ironic then if the Narendra Modi government rolls back the FDI in multibrand retail policy as commerce and industry minister Nirmala Sitharaman indicated might happen. Political tussling has prevented any large-scale FDI in multibrand retail since the introduction of the policy. However, there are a few multinational players, such as Tesco, that have started the process to establish their presence in India.
Tesco, for instance, has already got the green light from the Foreign Investment Promotion Board and the Competition Commission of India for its joint venture with Trent.
But unilateral action by the Central government to abolish FDI in multibrand retail may face a strong legal challenge. There is no denying that the government has the power to amend, repeal or rescind an extant policy. Similarly, it is also within the jurisdiction of the RBI to amend the relevant regulations issued under the Foreign Exchange Management Act to prevent FDI in multibrand retail. However, this may violate bilateral investment treaties (BITs), under which an investor could challenge the change in policy to protect its investments.
India is a signatory to BITs with over 80 nations, of which 72 treaties are operational. BITs grant protection to investments made by investors of one contracting state in the other .“Investments” are usually defined to include tangible and intangible property, shares and other similar interests in a company and rightful claims to money or performance under contract having financial value. Among other protections, such foreign investments have to be accorded national treatment and fair and equitable treatment (FET), and protected against direct or indirect expropriation. BITs also lay down the dispute resolution mechanism — international investment arbitration.
National treatment has two components. Under the India-UK BIT, for example, India has to accord no less favourable treatment to an investor from the UK than to an Indian investor, and vice versa. Similarly, an investor from a third state cannot be granted more favourable treatment than an investor from the UK. A change in the FDI policy that results in an investor being forced to divest its investments may imply a violation of the national treatment provision because organised Indian retail chains will be allowed to continue operations.
FET is the second potential ground for challenging a change in the FDI policy. Several tests have been applied to determine the scope of FET. One of the approaches used by various international investment tribunals is to apply the test of “legitimate expectations”. In Tecnicas Medioambientales Tecmed SA vs.
Mexico, while interpreting the BIT between Spain and Mexico, the arbitral tribunal applied the good faith principle of international law and stated that investments must be treated in such a manner that does not belie the expectations that were taken into account while making the investment. The tribunal also laid emphasis on the expectation of the foreign investor that the host country would act in a consistent manner and not revoke any existing decisions or permits. Similarly, in Occidental Exploration vs Republic of Ecuador, the tribunal noted that a stable legal and business environment is an essential element of FET.
In India, a foreign investor could make the argument that it entered the market relying on the existing policy and various approvals granted by government agencies, with the expectation that the FDI policy and approvals would not be revoked. It is likely that such an argument may succeed in establishing that there has been a breach of legitimate expectations and hence the Indian government’s obligation to ensure FET.
A reversal of the FDI policy could also fall foul of the government’s obligation against expropriation. Instances where government action and policy affects the economic value of an investment have been held to amount to indirect expropriation. Expropriation is usually permitted only for public purposes and against just and equitable compensation. A foreign investor could argue that repealing the policy is tantamount to indirect expropriation as the change would affect its ability (without having a corresponding impact on domestic players) to enjoy the investment and considerably reduce its value.
In the recent past, policy flip flops have been one of the principal causes of investor disenchantment. A rollback of multibrand retail FDI may have unintended adverse consequences. Besides affecting investor confidence, the government would also be exposing itself to a powerful legal challenge under BITs. India has already faced the ignominy of losing the only such arbitration that it had to face in White Industries Australia Limited vs Republic of India. It could face a similar prospect if the FDI policy is rolled back.
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