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Indian Legal Framework on Foreign Investment and Protection

Foreign Investment Policy govern direct investment into production or business in a country by an individual or company of another country. These investments are an important source of non-debt financial resource for the economic development of the country. Foreign Direct Investment of the Government of India and Foreign Exchange Management Act, a regulatory mechanism established in 1999 enabling RBI to enforce regulations and the Central Government to implement rules regarding foreign exchange in accordance with the Foreign Trade Policy of India, governs the process of foreign investment in the country.

India procures foreign direct investment through two routes:

  • Without prior approval by Government or Reserve Bank of India
  • An application submitted through Foreign Investment Facilitation Portal, which will clear the investment with prior approval by Government
The Government of India has attempted different liberal arrangement choices to make the entire procedure of foreign interest in India without obstacles. The Securities Market in India is managed by Securities and Exchange Board of India (SEBI).

The foreign investment policies consist of and includes:

  • The list of entities that fall under the ambit of automatic approval route implemented by the Ministry of Industry for foreign investments which has been expanded.
  • The maximum furthest ranges of the rate of foreign investment in India has been raised to 74% from the prior 51%; some instances this has been expanded to 100%.
  • Indian organizations do not require clearance from the RBI for internal settlement of foreign exchange or for issuance of shares to foreign investors.
  • The regulations related to the control of exchange have been altered by the administration.
  • The boycott against the utilization of foreign brand names/trademarks has been expelled.
  • The rate of corporate tax levied on foreign companies has been diminished from 65% to 55% by the Government in the budget of 1994-95.
  • The long- term capital gains rate for overseas companies had been reduce to twenty percent by the Government
  • Under the Indian Income Tax Act, export earnings are excluded from corporate income tax for domestic and foreign companies.
  • The complete inflow of foreign investment is allowed in vital sectors such as roads, tunnels, ports, harbors and highways as long as the investment does not exceed Rs. 1500 crore.
  • Approval from the Foreign Investment Protection Board is not required in the cases of increase within the prescribed limit.
As of 2019, India reviewed its policy on foreign investments and has made it stringent to prevent the opportunistic takeovers of Indian firms by neighboring countries such as China whose foreign direct investment has cultivated five-fold since 2014 which is comparatively more than investments by other countries. These amendments do not prohibit investments but pave an approval route for the foreign countries to invest. There is an ambiguity to whether the scope of government approval extends to issuance of bonus shares, right shares, warrants to their existing foreign shareholder located in Border states or to the entity whose beneficial owner is situated in these countries.

This article aims to provide more knowledge on foreign investments and the international minimum standards drafted under international law to protect these investments in India.

What is Foreign Investments?

Foreign investment is when a firm or company or individual from one nation invests in assets or ownership stakes of a firm or company situated in other countries. Globalization has enhanced the process of foreign investments leading huge companies or influential individuals to branch out and invest.

Greater Investments = Country as economically stable.

Foreign Investment in India has been the immediate result of the liberal exchange arrangements attempted and executed by progressive governments. The advancement program of the administration goes for quick and generous development of the nation's economy what's more an amicable coordination with worldwide economy. While outside interest in India contains speculations made by overseas company or organizations in India, the invert i.e. outpouring of remote venture from India is likewise predominant in the Indian economy. Foreign investments in India has made some wonderful chances or opportunities in the nation regarding making work and enhancing the essential foundation of the nation.

Types of foreign investments

  1. Foreign Direct Investment:
    The FDI policies were designed after our independence by the policy makers after realizing the need to bring in advances technology for development and obtaining foreign exchange resources.

    FDI is an investment made by an organization or person who is a substance or an entity in one nation, through controlling possession in business interests in another nation. FDI could be as either setting up business activities or by going into joint ventures by mergers and acquisitions, establishing new offices and so on. It is not permitted in Betting and Gambling or Lottery Business, Nidhi Company, Housing and Real Estate business, Business of Chit Fund, Transferable Development Rights, Retail Trading, Plantations, Atomic Energy and Agricultural activities.

    The amendments made in the FDI policy are:
    • Any non-resident entity from Pakistan, China, Nepal, Myanmar, Bhutan and Afghanistan can invest in India only after obtaining approval from the Government,
    • The beneficial owner of investment made in India is situated in or a citizen from these countries need approval from the Government.
    • These restrictions are imposed in the event of transfer of ownership of any future or existing FDI in an entity in the country, indirectly or directly, resulting in the beneficial ownership which falls under the imposed restrictions.
    • The investments made prior to the effect of the new policy is grandfathered
  2. Foreign Portfolio Investment:
    Foreign Portfolio Investment (FPI) is a venture by foreign elements and non-residents in Indian securities including shares, government securities, corporate securities, convertible securities, framework securities and so on. The aim is to guarantee a controlling interest for India at a speculation or investment that is lower than FDI, with adaptability for entry and exit.

    In the light of corona virus, SEBI has adopted measures to safeguard foreign investors and reduce the burden on operations of their businesses by implementing relaxation of the requirements of FPIs to renew their licenses.
  3. Foreign Institutional Investment:

    FII refers to an investment made by an investor in foreign markets. To make investments under the concept of FII, the companies need to only get registered in the stock exchange. It includes a mutual fund, a pension fund, an insurance company or a reinsurance company, an investment trust which proposes to invest in India. The ceiling for overall investments under FII is 24 percent of the paid- up capital of the Indian company. These investments are important in our country because they are net sellers and improve the breadth and depth of Indian markets including become a major source of speculation.

    The distinctions in FPI and FII are for the most part in the kind of financial specialists and subsequently the terms FPI and FII are utilized conversely.

Amendments made in the FPI policy and rules:

  • The FPIs have been reclassified into two categories instead of three existing categories
  • The registration process for FPIs have been simplified including reduction of registration timelines.
  • The FPI route to companies that did not meet the threshold of 20 investors are liberalized due to the relaxation of broad- based eligibility criteria for foreign institutional investors.
  • The scope of FPI registration has been extended to central banks which are not a member of the Bank for International Settlements
  • The companies established in accordance to the International Financial Service Centre fall under the jurisdiction for FPIs under the amended rules
  • Foreign Portfolios are permitted to perform off- market transfer of securities which are suspended to a foreign or domestic investor, dispose such securities and attain liquidity.
  • The floating of offshore funds by Indian mutual funds fall under the ambit of the regulations of FPI to avoid regulatory arbitrage and rationalization of the regulatory framework.
Since foreign investments are exposed to higher hazards and risks than domestic investments, the modern foreign investment law has developed international minimum standard of treatment. The primary goal of these standards was to protect the foreign investors in the host countries.

Although it is hard to recognize the content of the international minimum standard, the rule which relates to compensation for expropriation of foreign property or investment and the dispute settlement or reconciliation of such issue through international tribunals have been embodied by the standard. The minimum standard was acknowledged as a standard of civilized justice or civilization.

The international minimum standard includes:

A. Fair and equitable treatment:

Fairness and equity are basic elements of this treatment which offers a primary level of protection to foreign investors. However, because of the difficulties in identifying the concrete meanings of the term 'fair and equitable treatment' and its different interpretations, there is much controversy of this standard under extends the fair and equitable treatment beyond customary international law; conversely, the narrow approach which restricts the treatment under customary international law. The latter approach has been supported by the NAFTA Free Trade Commission's interpretation of Article 1105.

In practice, for purposes of reducing the confusion of applying the term 'fair and equitable treatment', four major approaches have been used by relevant treaties:
  • omitting the references of fair and equitable treatment
  • the treatment of fairness and equity should be offered by the States, but it is not a legal requirement
  • as a matter of law, the States have to accord this treatment of investment
  • a legal requirement to the States that combine this treatment with other standards of treatment, for instance, most � favored- nation and national treatment.

B. Full Protection and security:

The provisions of the many investment treaties (such as BITs and FTAs) on treatment standard include the entitlement of foreign investors to 'full protection and security'. This standard is one of the firmer underpinnings in customary international law has been developed by the United States. It has been recognised that if a host country fails to provide protection to foreign investors when their investment is threatened or attracted by civil conflict or physical violence, the host country responsibility is created.

C. Protection against expropriation and standard of compensation in customary international law:

As a time-honoured tenet of foreign investment law, protection of foreign investment against expropriation provides several measures of taking foreign investor's property. That is to say, if host countries cannot meet such measures, foreign investors and their property can be protected and they can be against such expropriation. The expropriation of foreign property will be recognised when it:
  • is for a public purpose;
  • should be non-discriminatory;
  • is consistent with applicable laws and due process; and
  • is accompanied by full compensation

D. USA (LF Neer) v United Mexican States

was the first case in history which had applied the minimum standard of treatment to solve the issue of personal security of aliens. The compensation in the payment of the claim is received by governments or home states, not injured nationals. Because of the presence of the feature i.e., national character of the claim, home states have right to settle, release or abandon the claim.

However, in Mondev International Ltd. v United States of America, the Tribunal articulated the grounds for evaluation on whether a judicial action meets the standards set under this treaty.

The treaty often includes general standards of treatment as well as specific treatment standards, the latter in regards to, inter alia, monetary transfers and expropriation. The general standard of treatment consists of two kinds: -

Absolute standards:
The absolute standards, such as fair and equitable treatment or guarantees of full protection and security, sets a minimal standard of treatment that the contracting parties must uphold.

Relative standards:
The level of protection offered by the standard of fair and equitable treatment is very interesting for the dynamic inconsistency problem since this standard imposes boundaries on the host states actions.

Regulations regarding expropriation

Expropriation or confiscation is the taking of remote property by a state, regardless of whether for open purposes or different reasons. Notable occasions of seizure included inside and out takings of property, yet these days expropriation is most generally a consequence of roundabout legislative estimates that have the identical impact of a formal taking of property. In Goetz v. Burundi, the judgement held that the expropriation must be in accordance with the legal procedure enforced by the host State.

The judgement passed was in accordance to the provision clause in the BIT. Worldwide law shielding nonnatives from the taking of their property started to be consolidated into arrangements in the nineteenth and twentieth hundred of years. In the interim, legal proclamations, especially in the result of World War II, made ready for standard worldwide law on this issue.

This incorporated the improvement of least measures for legal taking of outside property, including that seizure must be for an open reason; connected in a nondiscriminatory way; did with fair treatment of law; and joined by installment of incite, satisfactory, and successful remuneration. These days, the universal lawful system for directing the privilege to take remote property is to a great extent contained in global venture assentions (IIAs).

IIAs consolidate the base models for legal expropriatory estimates created in standard global law, yet additionally give extra guidelines on the kinds of property ensured, necessities for such insurance, and the activities from which property is secured. One of the greatest inquiries looked by worldwide speculation courts translating IIAs is the refinement between compensable backhanded seizures and genuine, non-compensable administrative measures. Arbitral councils are additionally yet to concede to standards for measuring remuneration and criteria for esteeming dispossessed property.

Direct expropriation today is rather uncommon (or at least not very problematic), but indirect expropriation presents a few difficulties.

Direct expropriation

Direct expropriation includes taking of property, where the property at hand can constitute a material object as well as, inter alia, intellectual property and contractual property. In the instances of direct expropriation, there is a cogitate intent to bereave the owner of their property through unequivocal seizure. At present, investment treaties related to protection contain necessary clauses specifying market value as amount of compensation. This expropriation is usually considered by tribunals in comparison with indirect expropriation.

Indirect expropriation

Indirect expropriation is when the host state is using its regulatory or legislative powers to derive benefits from the investor and claim these benefits for themselves, without change to the legal relationship between the investor and the investment. An example of indirect expropriation could be that through elevating taxes and fees removing any possible profits from the investment, thus removing any reason to actually own it. Usually the host state would deny that indirect expropriation is even taking place, but if an investor sues the host state through investor- state arbitration finds that an indirect expropriation is indeed occurring, prompt, adequate and effective compensation will have to be paid for the investors expenses.

When determining whether an action constitutes indirect expropriation or not the arbitrators usually focus more on the effects the alleged action has on the investment, than on the intent of the host state or the form of the action.

D. Most- Favoured- Nation treatment (MFN)

One thing has to be clarified at the beginning of this section is that even though the MFN is very important to both foreign investment law and international trade law, it is not counted as a principle of CIL. Because of this, the content of MFN depends on the treaty's provision. The reason why taking the MFN principle into account of protection of foreign investment in CIL is that this principle has not only avoided discrimination against foreign investors, but also presented the equality of competitive chances between foreign investors from different nations. A traditional definition of the MFN principle is the minimum of discrimination and the maximum of favours conceded to any third State".

Under foreign investment, the MFN treatment which is based on the principle of reciprocity is defined that a host country treats investors from one foreign country no less favourably than investors from another country". In practice, because this definition has been interpreted differently by each treaty, it caused the difficulty of applying the MFN treatment to dispute settlement among the treaty's parities. However, there is an agreed account of MFN treatment which is examined through each case is that unless a treaty applies a different method for resolution of disputes clearly, the MFN provision should be applied to dispute settlement.

In addition, some treaties have extended the MFN treatment to pre-entry situations. Of course, if the MFN treatment does not include pre-investment conditions, the treatment of MFN is only available to the foreign investors who have already made investments in host countries. In contrast, if a pre-establish phase is contained in the MFN treatment under the treaty, it is respected that contracting parties have not only created non-discriminatory clauses to new foreign investors but also provided like circumstance" between these new investments and the existing investment.

Thus, considering the contents of the MFN treatment are not same from one treaty to another, the contracting parties can make up their own mind to define the MFN clearly, for example, whether include the pre- and post-entry clause in MFN standard or extend the MFN to dispute settlement.

The changes to be implemented in the country's foreign policy has been termed as discriminatory against China but Australia, the United States, Spain, Italy and the European Union has implemented similar measures. The use of neighbouring countries in the amendment does violate the provisions on discrimination under the General Agreement on Trade in Services thus, there is a need to widen its scope i.e., apply to all countries.

The current policy raises more quantum of investment for rapid economic development by simplifying procedures and practices. At first, there was one window agency for matters relating to FDI but that has been changed to the automatic route where only few sectors are banned. The Government proceeds to liberalize the restriction or limit on various sectors by providing proper justification and protect the interest of Indian industries.

There is diversity in the way the fair and equitable treatment standard is formulated in investment agreements. Certain agreements, in particular some BITs, expressly define the standard by reference to international law while others do not make such reference to international law. Because of the differences in its formulation, the proper interpretation of the fair and equitable treatment standard depends on the specific wording of the particular treaty, its context, the object and purpose of the treaty, as well as on negotiating history or other indications of the parties' intent.

For example, some treaties include explicit language linking or, in some cases limiting, fair and equitable treatment to the minimum standard of international customary law. Other treaties which either link the standard to international law without specifying custom, or lack any reference to international law, could, depending on the context of the parties' intent, for example, be read as giving the standard a scope of application that is broader than the minimum standard as defined by international customary law.

Most investors and States do not believe that the international minimum standard does not imply the same framework as fair and equitable treatment. Independently of the way governments interpret the fair and equitable treatment standard, it is understood that the minimum standard refers to an evolving international customary law which is not frozen in time, but may evolve over time depending on the general and consistent practice of states and opinio juris, as may be reflected in jurisprudence related to the interpretation and application of these treaties. International minimum standard focuses on alien rather than investor thus, the scope of protection under the term is limited.

An analysis of the opinions of the arbitral tribunals which have attempted to interpret and apply the fair and equitable treatment standard identified a number of elements which, singly or in combination, have been treated as encompassed in the standard of treatment. Most of the arbitral opinions in the present survey mention two elements, due diligence and due process (including non-denial of justice and lack of arbitrariness), while only a few mention transparency and good faith.

Due diligence and due process including non-denial of justice and lack of arbitrariness are elements well-grounded in international customary law while transparency is an element which is often defined in international agreements as an obligation under a separate provision. Good faith seems to be considered more a basic principle underlying an obligation rather than a distinct obligation owed to investors pursuant to the fair and equitable treatment standard.

The identified elements appear to have sufficient legal content to allow cases to be judged on the basis of law in accordance with the Vienna Convention on the Law of Treaties, and decisions are not exclusively made by approaching ex aequo et bono process. It would be inappropriate at this stage to establish a definitive interpretation of the fair and equitable treatment standard. The jurisprudence which has applied it and identified elements of its normative content is relatively recent and is not uniform, and therefore does not allow for a firm and conclusive list.

  1. Foreign Investment in India ( ministry/foreign-investment.html
  2. Raghavan P, 'Explained: Why India Tightened FDI Rules, And Why It'S China That'S Upset' Indian Express (2020) china-thats-upset-6374693/
  3. ('Foreign Direct Investment (FDI) - Overview, Benefits & Disadvantages' (Corporate Finance Institute)
  4. RBI Guidelines
  5. Types of Foreign Investment in India - Indiafilings' (IndiaFilings - Learning Centre)
  6. L F H Neer and Pauline Neer (USA) v United Mexican States [1926] Claims Commission, 4 (Claims Commission)
  7. Mondev International Ltd v United States of America [2002] Arbitral Tribunal under NAFTA
  8. Kaur H, 'Expropriation of Investment: Concept, Laws and Cases' (Latestlaws, 2020) kaur/#_ftn31
  9. Tecmed v Mexico [2000] ICSID
  10. G. C. Christie, 'What Constitutes a Taking of Property under International Law?' (1962) 38 British Yearbook of International Law 305, 309, 310
  11. 'Indirect Expropriation" And The "Right To Regulate" In International Investment Law' (OECD Working Papers on International Investment, 2004/04, 2004)
  12. ('Most-Favoured-Nation Treatment In International Investment Law' (OECD Working Papers on International Investment, 2004/02, 2004)
  13. Tokios Tokeles v Ukraine [2007] ICSID (ICSID)

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