Foreign investors to get less weightage over domestic ones

In a significant transition with respect to comprehensive trade and investment agreements, the Indian government is likely to stop treating overseas investors on par with domestic ones until they establish a business in the country.

Technically, the government is unlikely to allow what is known as 'pre-establishment national treatment' in trade and investment agreements. With the government looking to overhaul India's strategy for trade engagement, the view is that this level playing field should be available to foreign investors only once they have a presence — 'post-establishment' — not when they're still considering investment, reported the Economic Times.

This move would be of a piece with the Finance Ministry—concerned that the country has given too much away in such accords—gaining a role in the negotiation of investment agreements.

An official told the financial daily: "The thinking is that only post-establishment treatment entailed in the bilateral investment promotion agreements should be offered in such trade deals."

Trade experts have welcomed the move, describing it as a course correction. "There was an unnecessary rush to formalise trade deals and India offered pre-establishment national treatment to many of them," said Biswajit Dhar, trade expert and professor at Jawaharlal Nehru University (JNU).

"Pre-establishment national treatment gives foreign investors far more rights than domestic investors," he said, adding such treatment allows foreign investors to pursue international arbitration against the government over regulatory clearances such as environmental approvals, something that domestic investors can't do.

Ram Upendra Das, professor at Research and Information System for Developing Countries, said that foreign direct investment-related pre-establishment rights to foreign investors can scuttle a government's sovereign policy-making space vis-a-vis foreign investment inflows.

FINANCE MINISTRY'S ROLE

The Finance Ministry had never been ready to allow pre-establishment national treatment under the India-Asean trade deal but was overruled by the Manmohan Singh cabinet.

Many countries don't allow pre-establishment treatment as it takes away government flexibility in regulating foreign investments. The argument in its favour is that it increases investor comfort. The Finance Ministry, which is the administrative agency in charge of all forms of investment, will now be part of the country's team negotiating investment agreements beginning with the Regional Comprehensive Economic Partnership (RCEP).

The ministry takes care of all bilateral investment promotion agreements that give post-establishment national treatment to foreign investors.

CHEQUERED HISTORY

The dispute over post and pre-establishment treatment of investment brought to the fore sharp differences between the Finance Ministry and the Commerce and Industry Ministry over this crucial aspect of the country's engagement with the world in the United Progressive Alliance government.

A fierce war ensued between the Departments of Industrial Policy and Promotion (DIPP) and Economic Affairs as the latter was not consulted before commitments were made regarding the investment component in the IndiaAsean Comprehensive Economic Promotion Agreement. DIPP is part of the Commerce Ministry while the Economic Affairs department is in the Finance Ministry.

A formal note on the matter was issued and forwarded by the Cabinet to the Finance Ministry by the Prime Minister's Office after its views weren't found in the previous note.

The Asean deal was passed by Cabinet after overruling the finance ministry's concerns. Subsequently, the DIPP claimed authority to negotiate bilateral investment promotion agreements that had been under the domain of the finance ministry, citing administrative control of the foreign direct investment policy. It even sought control of the Foreign Investment Promotion Board (FIPB), housed in the finance ministry.

After taking over in May last year, Prime Minister Narendra Modi decided that the inter-ministerial body would continue to be part of the finance ministry and it will have the mandate with regard to bilateral investment promotion agreements (BIPAs).

(Image: Indiatimes)