This post has been written by Founding Editor Saarthak Jain.


In our previous post, Siddharth had analysed the recent changes made in the FDI policy relating to e-commerce companies. The new rules, which came into effect from 1 February 2019 have introduced four major changes. First, marketplace entities have been prohibited from buying more than 25% from a single vendor. Second, restrictions have been placed on the discounts that can be offered by marketplaces. Third, entities in which a marketplace has equity participation cannot sell their products on that platform. Fourth, an e-commerce marketplace cannot mandate any seller to exclusively sell its products on its platform only. These changes have created major disruptions, with e-commerce giants such as Flipkart and Amazon forced to radically restructure their business models. Several analysts have noted the protectionist nature of these measures and their long-term impacton India’s fast growing e-commerce sector. However, one aspect that has not garnered much attention is the possibility of investment treaty arbitrations being initiated against India. In this post, I argue that the changes made with respect to FDI in the E-commerce sector can potentially give rise to a cause of action under International Investment Agreements (IIAs) signed by India.

Stakeholder Responses to the Revised Policy

Since the revisions were notified, several stakeholders have raised their concerns regarding the policy. A spokesperson for Flipkart, which was recently acquired by US retail giant Walmart, said that they are disappointed with the Indian government’s decisionto implement the changes in rules for e-commerce companies with foreign investment in “haste”. Another official of an e-commerce company stated that the measures were draconian and a bigger retrospective move than the Vodafone tax issue, which has resulted in the initiation of two investment treaty arbitrations against India. Further, the US government tried to intervenein order to protect the investments made by American entities, Amazon and Walmart, in the Indian market.

Concerns were also raised by the US-India Strategic Partnership Forum (USISPF), which asserted that the new rules are ‘regressive’ and were introduced without any process of consultation by the government.The USISPF President further alleged that the amendment “highlights the lack of transparency in policy making and creates unpredictability”.

The revised policy seemed to have caught most people by surprise, especially since there was no real public consultation by the government. Therefore, it is arguable that the investments made by foreign investors in the Indian e-commerce sector were unfairly treated. This forms the basis of a claim for breach of the Fair and Equitable Treatment (FET) standard, which is contained in almost all the investment treaties signed by India.

The FET Standard in Investment Treaties

The obligation to accord fair and equitable treatment to foreign investments has become a standard clause in the majority of IIAs. The FET standard has gained prominence since it has been often invoked by investors with a considerable rate of success. Since the FET clause is broadly worded in most IIAs, past tribunals have found a wide range of State’s regulatory measures to be infringing the FET standard. The provision has been interpreted to include several requirements such as the State’s obligation to act consistently, transparently, reasonably, without arbitrariness or discrimination, and to respect investor’s legitimate expectations. Further, arbitral tribunals have not limited themselves to the most serious breaches, and have found state measures that were simply unfair or unreasonable as violations of the FET standard.

Due to its unpredictable application and results, the FET standard has been often criticised since it undermines a State’s power to intervene for economic, social or developmental ends. This is more so in the case of developing countries such as India, where the State may be required to intervene in the economy more frequently.

The Revised E-Commerce Rules- A Breach of the FET Standard?

In my opinion, a case for breach of the FET standard can be made by e-commerce entities. State regulations introducing requirements that hinder the economic performance of a foreign investor have been challenged in the past. Specifically, such regulatory measures have been identified to be violating an investor’s legitimate expectations, which is a key constituent of the FET standard. Claims relating to the breach of legitimate expectations arise in circumstances when an investor is facing losses due to changes brought by State measures. In this regard, several awards have taken a “pro-investor” approach by reading in a requirement of a stable legal and regulatory frameworkin the FET clause.

For instance, in Tecmed v. Mexico, the investor claimed in respect of its loss of a landfill due to the Mexican authorities’ non-renewal of the licence necessary to operate the landfill. It was claimed that this was due to political considerations, and was a violation of the fair and equitable treatment standard guaranteed under the Mexico-Spain Bilateral Investment Treaty (BIT). The tribunal upheld this claim on the ground that the State failed in its obligation to maintain a stable legal and business framework. It stated: “The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations.”

Further, comparisons can also be made with the case of PSEG v. Turkey, where the tribunal held that legislative changes as well as differing attitudes and policies of the administration were contrary to the need to “ensure a stable and predictable business environment for investors to operate in.” The tribunal found that the “roller-coaster” effect generated by perpetual changes in the regulatory framework was antithetical to the FET obligation under the Turkey-US BIT.

In the context of the new e-commerce regulations, it can be argued that the measures were unfair and politically motivated, with an idea to win over the millions of small traders and retailers in India ahead of the general elections.Further, these changes are a part of a series of measures that have chipped away at the profitability of Amazon and Flipkart. To begin with, the DIPP sought to distinguish between ‘marketplace’ and ‘inventory’ model. FDI was not permitted under automatic route in entities engaged in business to consumer (“B2C”) model and in the inventory based model of e-commerce. Inventory based model of e-commerce was defined to mean an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. This was later amended to include a prohibition on selling the products of companies where the marketplace had equity participation of a controlling variety. With the latest changes, the FDI policy has been made even stricter by not allowing marketplaces to have anyequity participation in any of its vendors, among other restrictions.

These measures could take a massive toll on the earnings of Amazon and Flipkart. CRISIL Ratings estimate that both the companies will lose up to 40% in their revenues—between Rs. 35,000 crores and Rs. 40,000 crores—by 2020 due to the restrictive FDI policy changes. According to a draft analysis by PwC, these restrictions could reduce online sales by $46 billion by 2022. Considering these huge stakes, e-commerce companies may be forced to resort to treaty arbitrations if the status quo persists for long.


The recent changes made to the FDI policy have disrupted the e-commerce sector without any stakeholder consultation. These measures were abruptly introduced and the short deadline given for compliance (merely a month) was clearly inadequate. By introducing such measures, India may be opening the doors for investment treaty claims by foreign investors.

Further, India’s experience with investment treaty arbitrations has not been pleasant. Since the decision in White Industries, India has faced a barrage of investor state claims. Till date, 24 cases have been filed against it, 13 of which are still pending. Although Amazon and Flipkart have complied with the regulations while continuing to lobby with the government, it remains to be seen whether they would resort to treaty arbitrations in the time to come. Till then, there is an urgent need for introspection of the overall governance and decision-making processes of the government.