By Bhargav Mansatta
After much furore over opening up of the retail sector to foreign investment, Government of India (GOI) announced its decision to allow FDI upto 51% in multi-brand retail trading under the government route, subject to the terms and conditions as stipulated in Press Note No. 5 (2012 Series) dated September 20, 2012. GOI also allows 100% FDI in single-brand product retail trading by only one non-resident entity, whether owner of the brand or otherwise, under the government route subject to the terms and conditions as stipulated in Press Note 4 (2012 Series) dated September 20, 2012 (see end note 1).
The terms and conditions provided under the press notes may trigger inconsistency of the policy with the international trade law. One of the conditions reads as under (see end note 2):
“(1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions (see end note 3):
(i) …..
(ii) …..
(iii) ….
(iv) At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $ 100 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose. This procurement requirement would have to be met, in the first instance as an average of five years’ total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.”
The aforesaid term can be categorised as ‘local content requirement’. It is mandatory for the investor to source at least 30% of ‘manufactured/processed’ products from Indian ‘small industries’.
The policy of FDI in retail will have to be in conformity with the obligations under GATT 1994 & Trade Related Investment Measure (TRIMs).
At the outset it needs to be noted that GATT 1994 which regulate trade in goods is applicable to requirements imposed by governments in an investment context in so far as such requirements involve trade-distorting measures (see end note 4). Article III of GATT 1994 provides that imports be treated no less favourably than the same or similar domestically-produced goods once they have passed customs (see end note 5). The aforesaid condition directly contravenes the principle of national treatment under Article III of GATT 1994. Mandatory requirement to source the products manufactured locally results in less favourable treatment to the imported goods.
TRIMs Agreement desires to promote investment while ensuring free competition. TRIMs do not provide for regulation of foreign investment as such but only intends to regulate trade related aspects of foreign investment (see end note 6). Accordingly, Article 1 of the TRIMs Agreement provides that the ‘Agreement applies to investment measures related to Trade in Goods (TRIMs) Only’. The law permitting FDI in multi-brand retail will undoubtedly qualify as TRIMs. Insertion of local content requirement will further ensure that the law is directly covered within the scope of TRIMs.
The Panel in Indonesia — Autos (see end note 7) held that local content requirements were necessarily trade-related:
“[I]f these measures are local content requirements, they would necessarily be ‘trade–related’ because such requirements, by definition, always favour the use of domestic products over imported products, and therefore affect trade. An examination of whether these measures are covered by Item (1) of the Illustrative List of TRIMs annexed to the TRIMs Agreement, which refers amongst other situations to measures with local content requirements, will not only indicate whether they are trade-related but also whether they are inconsistent with Article III:4 and thus in violation of Article 2.1 of the TRIMs Agreement.”
The aforesaid observation is categorical with regard to the characterization and position of the ‘local content requirement’ under both GATT 1994 and TRIMs Agreement. The law which is covered within the description of Annex to the TRIMs Agreement will necessarily be considered as inconsistent with Article III:4 of GATT 1994 and Article 2.1 of the TRIMs Agreement. A ‘local content requirement’ is specifically covered within the scope of Item (1) of the Illustrative list in the Annex to the TRIMs Agreement. As required under Item 1 of the illustrative list
i. requirement is in fact mandatory or enforceable under domestic law or under administrative rulings or when compliance with it is necessary to secure an advantage.
ii. the purchase or use by an enterprise of products of domestic origin or or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.
Local content requirement clearly satisfies the aforesaid criteria and is therefore inconsistent with Article 2.1 of the TRIMs Agreement and Article III:4 of GATT 1994.
Further, the policy on FDI in multi-brand retail discriminates domestic and foreign investors or domestic and foreign investments per se by its ‘enabling policy clause’ (see end note 8). The clause provides as below (see end note 9):
"(viii) The above policy is an enabling policy only and the State Governments/Union Territories would be free to take their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those States/Union Territories which have agreed, or agree in future, to allow FDI in MBRT under this policy…"
India has signed eighty two bilateral investment treaties (BITs) (see end note 10). It incorporates national treatment obligation and is common in all the BITs. It provides as below (see end note 11):
“Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State ."
Pursuant to the aforementioned provision, India is under an obligation to accord no less favourable treatment to foreign investments than what it accords to its own investors. The enabling policy contravenes the national treatment provision under the BIT. In all likelihood, not all states will permit implementation of the policy. Consequently, unlike domestic investors, foreign investor from a BIT country will not be allowed to set up shops in certain Indian states. This clearly provides less favourable treatment to the foreign investments than what is accorded to domestic investments. Existence of federal structure is not a permissible defence against the obligation under international agreement especially obligations arising out of international trade agreements.
[The author is a Senior Associate, International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]
End notes:
1 See A.P. (DIR Series) Circular No. 32, RBI/2012-13/217, September 21, 2012.
2. Circular 1 of 2012-Consolidated FDI Policy, dated 10-4-2012,para 6.2.16.5
3. Similar condition is provided in case of single brand product retail trading wherein FDI beyond 51% will be permitted only when 30% of the sourcing for goods is done from India. The characterization of such clause for the purpose of international trade law is likely to be no different from the condition under multi-brand retail.
4. See generally, GATT Panel Report, Canada-Administration of the Foreign Investment Review Act, BISD 30S/140, 1984, 25 July 1983
5. See Article III:1 and Article III:4 of GATT 1994.
6. Preamble, TRIMS Agreement
7. Panel Report, Indonesia-Certain Measures affecting the Auto-mobile Industry, WT/DS64, paras. 14.82–14.83
8. Enabling policy clause is not provided in single brand retail.
9. Supra note 2
10. List of countries with which India has signed BITs
11. Illustratively, See Article 4, BIT between India and United Kingdom. Atleast, three of the top five retailer companies of the world are based in UK, Germany and France. India has signed BIT with all the three countries.
After much furore over opening up of the retail sector to foreign investment, Government of India (GOI) announced its decision to allow FDI upto 51% in multi-brand retail trading under the government route, subject to the terms and conditions as stipulated in Press Note No. 5 (2012 Series) dated September 20, 2012. GOI also allows 100% FDI in single-brand product retail trading by only one non-resident entity, whether owner of the brand or otherwise, under the government route subject to the terms and conditions as stipulated in Press Note 4 (2012 Series) dated September 20, 2012 (see end note 1).
The terms and conditions provided under the press notes may trigger inconsistency of the policy with the international trade law. One of the conditions reads as under (see end note 2):
“(1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions (see end note 3):
(i) …..
(ii) …..
(iii) ….
(iv) At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $ 100 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose. This procurement requirement would have to be met, in the first instance as an average of five years’ total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.”
The aforesaid term can be categorised as ‘local content requirement’. It is mandatory for the investor to source at least 30% of ‘manufactured/processed’ products from Indian ‘small industries’.
The policy of FDI in retail will have to be in conformity with the obligations under GATT 1994 & Trade Related Investment Measure (TRIMs).
At the outset it needs to be noted that GATT 1994 which regulate trade in goods is applicable to requirements imposed by governments in an investment context in so far as such requirements involve trade-distorting measures (see end note 4). Article III of GATT 1994 provides that imports be treated no less favourably than the same or similar domestically-produced goods once they have passed customs (see end note 5). The aforesaid condition directly contravenes the principle of national treatment under Article III of GATT 1994. Mandatory requirement to source the products manufactured locally results in less favourable treatment to the imported goods.
TRIMs Agreement desires to promote investment while ensuring free competition. TRIMs do not provide for regulation of foreign investment as such but only intends to regulate trade related aspects of foreign investment (see end note 6). Accordingly, Article 1 of the TRIMs Agreement provides that the ‘Agreement applies to investment measures related to Trade in Goods (TRIMs) Only’. The law permitting FDI in multi-brand retail will undoubtedly qualify as TRIMs. Insertion of local content requirement will further ensure that the law is directly covered within the scope of TRIMs.
The Panel in Indonesia — Autos (see end note 7) held that local content requirements were necessarily trade-related:
“[I]f these measures are local content requirements, they would necessarily be ‘trade–related’ because such requirements, by definition, always favour the use of domestic products over imported products, and therefore affect trade. An examination of whether these measures are covered by Item (1) of the Illustrative List of TRIMs annexed to the TRIMs Agreement, which refers amongst other situations to measures with local content requirements, will not only indicate whether they are trade-related but also whether they are inconsistent with Article III:4 and thus in violation of Article 2.1 of the TRIMs Agreement.”
The aforesaid observation is categorical with regard to the characterization and position of the ‘local content requirement’ under both GATT 1994 and TRIMs Agreement. The law which is covered within the description of Annex to the TRIMs Agreement will necessarily be considered as inconsistent with Article III:4 of GATT 1994 and Article 2.1 of the TRIMs Agreement. A ‘local content requirement’ is specifically covered within the scope of Item (1) of the Illustrative list in the Annex to the TRIMs Agreement. As required under Item 1 of the illustrative list
i. requirement is in fact mandatory or enforceable under domestic law or under administrative rulings or when compliance with it is necessary to secure an advantage.
ii. the purchase or use by an enterprise of products of domestic origin or or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.
Local content requirement clearly satisfies the aforesaid criteria and is therefore inconsistent with Article 2.1 of the TRIMs Agreement and Article III:4 of GATT 1994.
Further, the policy on FDI in multi-brand retail discriminates domestic and foreign investors or domestic and foreign investments per se by its ‘enabling policy clause’ (see end note 8). The clause provides as below (see end note 9):
"(viii) The above policy is an enabling policy only and the State Governments/Union Territories would be free to take their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those States/Union Territories which have agreed, or agree in future, to allow FDI in MBRT under this policy…"
India has signed eighty two bilateral investment treaties (BITs) (see end note 10). It incorporates national treatment obligation and is common in all the BITs. It provides as below (see end note 11):
“Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State ."
Pursuant to the aforementioned provision, India is under an obligation to accord no less favourable treatment to foreign investments than what it accords to its own investors. The enabling policy contravenes the national treatment provision under the BIT. In all likelihood, not all states will permit implementation of the policy. Consequently, unlike domestic investors, foreign investor from a BIT country will not be allowed to set up shops in certain Indian states. This clearly provides less favourable treatment to the foreign investments than what is accorded to domestic investments. Existence of federal structure is not a permissible defence against the obligation under international agreement especially obligations arising out of international trade agreements.
[The author is a Senior Associate, International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]
End notes:
1 See A.P. (DIR Series) Circular No. 32, RBI/2012-13/217, September 21, 2012.
2. Circular 1 of 2012-Consolidated FDI Policy, dated 10-4-2012,para 6.2.16.5
3. Similar condition is provided in case of single brand product retail trading wherein FDI beyond 51% will be permitted only when 30% of the sourcing for goods is done from India. The characterization of such clause for the purpose of international trade law is likely to be no different from the condition under multi-brand retail.
4. See generally, GATT Panel Report, Canada-Administration of the Foreign Investment Review Act, BISD 30S/140, 1984, 25 July 1983
5. See Article III:1 and Article III:4 of GATT 1994.
6. Preamble, TRIMS Agreement
7. Panel Report, Indonesia-Certain Measures affecting the Auto-mobile Industry, WT/DS64, paras. 14.82–14.83
8. Enabling policy clause is not provided in single brand retail.
9. Supra note 2
10. List of countries with which India has signed BITs
11. Illustratively, See Article 4, BIT between India and United Kingdom. Atleast, three of the top five retailer companies of the world are based in UK, Germany and France. India has signed BIT with all the three countries.