Investment Law

[By Yash Arjariya] The author is a student of Hidayatullah National Law University, Raipur.   Introduction: The Regulatory Framework The issuance of partly paid units of Alternative Investment Funds (‘AIF’) has been a general market practice, with the same being expressly allowed by the Securities Exchange Board of India (‘SEBI’) in the AIF Regulations, 2012. Similarly, the Non-debt Instruments Rules, 2019 (‘NDI Rules’) also seemed to allow the issuance of partly paid units of AIF to Persons Resident Outside India (‘PROI’).  The definition of ‘units’ in rule 2(aq) of the NDI Rules read as “beneficial interest of an investor in an investment vehicle,” where an ‘investment vehicle’ included, amongst other things, an AIF as well. Thus, the permissible stance of the SEBI as to the issuance of partly paid units and no bar in the NDI Rules meant that, as a general trend, partly paid units were issued to PROIs in the AIF Industry.  There was a development in this regard in March 2024, where the Ministry of Finance amended the definition of ‘units’ in the NDI Rules 2019 to include partly paid-up units within the definition of ‘units. Thus, this looked like a clarification to the Industry, and it was thought that the Ministry had merely clarified that units under NDI rules always included partly paid units of the AIF. Therefore, as per the market’s understanding, this was a reiteration of the existing position by formal inclusion rather than a change in the law.   However, via its Circular dated May 21, 2024, the Reserve Bank of India (‘RBI’) introduced a new perspective on the March 2024 amendment in the NDI Rules. It interprets the amendment as enabling in nature, which means, as per the RBI’s understanding, there cannot be any issuance of partly paid units of AIFs to PROIs before the amendment in March 2024. The RBI’s Circular seeks to regularise the issuance of such units before the amendment by paying a ‘compounding fee.’ This shift in interpretation has left the Industry in a state of confusion and uncertainty, as it challenges the long-standing market practice.   This article delves into the amendment to NDI Rules and the subsequent RBI Circular, focusing on two crucial points. First, it examines the potential impact on the Industry’s legitimate expectations and the prevalent general practice. Second, it evaluates the alignment of the RBI’s interpretation with general principles of interpretation. The article concludes that the RBI’s understanding of the amendment to NDI Rules, as conveyed through the Circular, may not be viable or at least beneficial to the Industry, raising concerns about the potential negative implications on both the law and the Industry’s legitimate expectations.  Amendment to NDI Rules: Change or no Change On the point of law, it needs to be understood that the March amendment 2024 to the NDI Rules was only clarificatory in the sense that it did not substantially alter the definition of units but only clarified the existing position that partly paid units of AIF has always been included in the ambit of ‘units.’ Further, as a matter of general principles of interpretation, an explanation added to a provision always applies retrospectively unless otherwise explicitly provided [¶ 21, State of Bihar v. Ramesh Prasad Verma]. Thus, when the market had constantly been issuing partly paid units of AIFs to PROI, the explanation added by amendment can only be reasonably thought to outlay the position of law when the explanation has no explicit intent to operate prospectively. Therefore, this amendment could not be said to be a change of a substantial nature but only a clarification of what existed in law at all times.   Further, attention needs to be also paid to InVi form filings. The form InVi is filed by AIFs with Authorised Dealer Banks (‘AD’) when they issue the units of AIFs to PROIs. There has been a general and uniform practice till that ADs were accepting InVi form filings for partly paid units of AIFs to PROIs. Thus, it was not a case that the practice was not legitimised, instead the AIFs furnished the data to regulators in case of issuance of such partly paid units to PROIs.   Therefore, the RBI’s circular represents a significant and unexpected change in the market, disrupting the established trends and practices. It does so by interpreting the March 2024 amendment as a substantive change rather than a clarification, a departure from the general understanding of the amendment’s nature.  RBI Circular: Case of Interpretative perspective The amendment to NDI Rules 2024, initially perceived as a clarification by the industry, was not seen as a substantive change operating prospectively. However, when the RBI released its Circular, the nature of the amendment was altered, causing confusion. The Circular communicated that the amendment authorised the issuance of partly paid units of AIFs to PROIs, and any issuance prior to the amendment was deemed impermissible. This sudden change in interpretation has left many in the industry perplexed and in need of clear understanding.   There are three problems that arise with respect to the Circular. First, the nature of the ‘Explanation’ added to the definition of ‘units’ in NDI rules is not a substantive provision in any sense of the term. The plain meaning of the amendment brought as ‘Explanation’ itself shows that it is merely meant to explain or clarify certain ambiguities [¶ 46 (SCC Copy), S. Sundaram Pillai v. V.R. Pattabiraman]. And that such clarificatory or explanatory changes operate retrospectively, i.e., they are deemed to be there since the law (NDI Rules, in this case) was brought in place [¶ 8.1, Sree Sankaracharya University of Sanskrit v. Manu]. Thus, the RBI circular is flawed when it perceives change to NDI Rules, which is added as an explanation, as prospective without any indication of that effect in the Rules.   Second, the RBI seeks to regularise the issuance of partly paid units of AIFs to PROIs before the amendment through the payment of compounding fees. However, the regularisation needs to be clarified. The framework laid through

[By Hemant Tewari & Apoorva Singh Rathaur] The authors are students of Dharmashastra National Law University, Lucknow.   Introduction  Sovereign wealth funds (SWFs) have rekindled discussions about their role amid contemporary challenges like trade tensions and geopolitical unrest. With trillions of dollars at their disposal, these state-backed investment vehicles not only shape markets but also wield potential as instruments of national ambition and protectionist agendas.  In 2023, the discourse on SWFs has evolved, intertwining previous concerns about hostile takeovers with new issues such as climate change and ethical considerations. India’s National Investment and Infrastructure Fund (NIIF) exemplifies this duality. Despite its portrayal as a champion of clean energy, skepticism exists about whether it serves as a Trojan horse for protectionism. The aftermath of the 2022 Ukraine invasion has heightened worries about the politicization of SWFs, challenging their purported apolitical stance. In the case of India’s NIIF, despite its emphasis on infrastructure development, its investment decisions reflect a prioritization of national interests over global integration, potentially impeding India’s economic progress.  National Infrastructure Investment Fund  Established through the 2015 Finance Bill, NIIF occupies a distinctive position in India’s economic landscape. This unique “quasi-sovereign” fund, born as a strategic, non-commodity entity, straddles the boundary between a purely financial institution and a government instrument, prompting questions about its genuine motives and potential ramifications. While its stated objective is to maximize economic impact through national infrastructure investments, with a focus on revitalizing stalled projects and addressing matters of national significance beyond mere infrastructure, its actual actions suggest a more intricate agenda.  The ownership structure of NIIF adds another layer of complexity. With the Indian government holding nearly half of the stake (49%), and the remaining shares dispersed among influential international and local investors like Abu Dhabi Investment Authority (ADIA), Temasek, and HDFC Group, a delicate balance must be maintained. The question arises whether NIIF can truly harmonize the potentially divergent interests of commercial viability sought by its private partners with the national ambitions embedded in its government ties.  Deeper scrutiny uncovers a potential misalignment between NIIF’s professed objectives and its investment strategies. The pronounced focus on domestic projects, including those considered high-risk by private investors, suggests a prioritization of national interests over pure financial returns. This inward orientation, reflected in India’s broader trade policies marked by escalating tariffs and import restrictions, sparks concern regarding India’s commitment to a globalized economy driven by open markets and competition. NIIF’s expanding capital commitments, now surpassing  5 billion dollars across  four distinct funds, underscores its growing influence, emphasizing the critical need to comprehend its true role.  NIIF’s structure reveals its distinctive role, initially established as a tax-optimized trust featuring a governing council comprising government officials and financial experts, aiming for a balance between state interests and professional acumen. Despite the autonomy sought by its “arm’s length” investment team and CEO, concerns arise about potential government influence on investment decisions due to its presence.  The fund’s inaugural major investment, a collaboration with DP World in ports and logistics, highlights its initial focus on domestic infrastructure. Subsequent ventures, such as partnering with Ather Energy in electric vehicles, demonstrate a broader scope extending to emerging sectors like data centers and airports. However, a recent dip in profitability, with FY-2023 deployment at 43% and profits declining by over 50%, prompts questions about the fund’s financial performance and future direction.  India’s extensive infrastructure needs face challenges in securing long-term funding amid potential banking issues. NIIF’s patient capital and capacity to handle riskier projects emerge as a crucial solution, potentially addressing gaps left by cautious banks grappling with non-performing loans and concerns about delays and cost overruns.  Protectionist Tendencies  India is being positioned as a counterbalance to China in Asia, with the discomfort investors feel towards China’s Maoist ideology and Communist remnants contrasting with India’s pursuit of liberalization and extensive efforts to appease foreign investors. The narrative projected globally emphasizes India as a country welcoming and respecting foreign investors, alleviating concerns about expropriation and undue government interference. However, we assert that India operates fundamentally as a protectionist nation under the guise of liberalization, and the National Infrastructure and Investment Fund (NIIF) is viewed as a recent addition to these deceptive financial strategies.  Several incidents highlight India’s protectionist inclinations, with a discernible increase in trade protectionism shaping its economic strategy under Prime Minister Narendra Modi. Tariffs in India have surged by 25% over the past decade, rising from 8.9% in 2010-11 to 11.1% in 2020-21. Concurrently, the proportion of tariff lines exceeding 15% escalated from 11.9% to a noteworthy 25.4%. This trend in trade barriers aligns with the government’s growing reluctance to engage in new trade agreements. A 2019 report from the Office of the United States Trade Representative noted India’s highest average Most Favoured Nation (MFN) tariff rate among major economies, standing at 13.8 percent. Additionally, India amended Section 11(2)(f) of the Customs Act of 1962 in 2019, granting the government authority to restrict the import or export of any commodity to safeguard the economy, extending beyond its initial application to gold and silver, thus deviating from GATT Article XX(c).  Masquerading under the banners of “self-reliance” and Prime Minister Modi’s “Make in India” initiative, India promotes trade policies that are often unfavourable and occasionally contradictory. Sovereign Wealth Funds (SWFs) are not immune to such partial decisions, with certain SWFs openly acknowledging the impact of non-financial factors on domestic investments. These factors encompass considerations like local economic progress, job opportunities, and economic diversification. Even renowned entities like the Norwegian Government Pension Fund openly align their investments with political agendas, abstaining from funding companies involved in firearms, alcohol, and tobacco production or those not meeting specific labor relations criteria.  The central argument suggesting the protectionist nature of  NIIF revolves around its persistent emphasis on investing in domestic infrastructure projects. While most SWFs prioritize securing higher returns than those offered by central banks, India stands out by prioritizing its domestic infrastructure, a sector fraught with challenges and a source of headaches for both foreign and domestic investors.

[By Shreya Jain] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction India has emerged as a major investment hub in the recent years. According to the World Bank, India will be the most resilient of the large economies in 2023 with an impressive growth rate of 6.6%. Additionally, as per a new assessment by the International Monetary Fund (“IMF”), India is one of the bright spots in the global economy at present with a growth rate of 6.8% in 2022. India’s growth trajectory is largely propelled by the massive FDI inflows received. Even during the pandemic, when the economy of the rest of the world was in shambles, India received FDI flows at record levels. In the year 2020-2021, for instance, a record US$81.72 Billion poured in. As per a recent study of 1200 multinational businesses by  Deloitte, India remains an attractive investment destination for investors. However, the study also reveals that the perception amongst potential foreign investors needs to be drastically improved as the regulatory measures imposed by the government have deterred the investors to significantly invest in India. To further the vision of the ‘Make in India’ campaign and to emerge as an investor-friendly regime, it is paramount for India to make changes to the Model BIT of India, 2016 with respect to expropriation claims and the overall Fair and Equitable Treatment Standard as it is widely believed that a declaration of a State’s ideal policies (de lege ferenda) is provided by the Model BIT. It is imperative for India to keep up with the International Investment Law standard in order to emerge as a key player in terms of foreign investment. A study  examining the relation between BIT and FDI has pointed out,  the fact that the BITs signed by India with developed countries  had a positive impact on the FDI Inflows. The Nuances of the Law on Expropriation Expropriation is the taking of property belonging to a foreign investor by the State which results in substantial deprivation to the investor. An asset is capable of being expropriated so long as it constitutes an investment. The Salini Test, developed in the case of Salini v. Morocco, provides a holistic approach to the interpretation of the term “investment”. According to this test, “an investment is when there is a contribution of money or assets, a certain duration of the operation, an element of risk and a contribution to the economic development of the host state.” Expropriation can be categorised under two sub heads – direct expropriation and indirect expropriation. In instances of direct expropriation, there is a clear and unequivocal intent to deprive the owner of his property by an express physical act by the state. In the case of indirect expropriation, the states do not explicitly shift investors’ legal title over the investment but the economic value of the property is depreciated. The tribunal in the case of Spyridon v. Romania put forth the different kinds of indirect expropriation. Accordingly, an indirect expropriation occurs if the measure “result[s] in the effective loss of management, use or control, or a significant deprivation of the value, of the assets of a foreign investor.” ‘Substantial Deprivation’ implies a significant interference with the usage and execution of the investment of the investor. To meet the threshold of ‘Substantial Deprivation’ in the context of indirect expropriation, there is no requirement of actual takeover of the investment, recognisable at first sight. For instance, the tribunal in the case of Mamidoil v Albania stated that to meet the threshold of ‘Substantial Deprivation’,“the owner [must have] truly lost all attributes of ownership.” To ascertain the value of the expropriated property, recourse can be taken to the case of Metalchad v. Mexico, where the tribunal adopted the ‘Actual Expenses’ approach. The ‘Actual Expenses’ approach is consistent with the dicta laid down in the Chorzow case, where it was held that “any award should, as far as is possible, wipe out all the consequences of the illegal act and re-establish the situation which would in all probability have existed if that act had not been committed (the status quo ante).”   However, not all regulatory measures enacted by the state constitute an unlawful indirect expropriation. As per the case of Methanex v. USA– “a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, a foreign investor or investment is not deemed expropriatory.” Newer investment treaties have taken into consideration factors like the ‘economic impact of the measure, the legitimate expectations of the investor and the purpose of the regulatory measure to ascertain the lawfulness of the expropriation undertaken by the state.’ Scope for Reforms in the Indian Law on Expropriation Article 5 of the Model Text for the Indian BIT elaborates on the aspect of expropriation. As per Article 5.1, ‘regulatory measures enacted for reasons of public purpose, in accordance with due process of law and on payment of adequate compensation do not constitute unlawful expropriation.’ Furthermore, according to Article 5.3 , the economic impact of the measure, duration of the measure, character of the measure and the legitimate expectations of the investor needs to be taken into consideration to determine whether the measure has an effect equivalent to expropriation. The rationale for the introduction of the Model BIT 2016 was to counter the increasing number of Investor-State Dispute Settlement (“ISDS”) claims brought against India and to balance the regulatory rights of the host state with investment protection. However, the Model BIT with respect to the provisions of expropriation has been unable to tread the delicate balance and tilts towards the regulatory powers of the host state. The proportionality analysis which provides for a ‘restrictive means test’ as propounded in the case of S.D Myers exemplifies the way forward for India’s investment regime in the context of expropriation. A proportionality based approach would further the vision of the Model BIT 2016 as it would result in a balance between investment protection and