Ban on Chinese Apps: What does it mean for India?

Citing reasons of national security, India had moved to ban over 50 Chinese mobile applications from the Indian market. The move has caused controversy with the Chinese government alleging violations of international investment law.

In June of 2020, several Chinese based mobile applications were banned by the Indian Ministry of Information Technology (MEIT) stating concerns of national security. The press release (also known as the Blocking Order) was released citing concerns of national security and threat to the sovereignty of India. The ministry felt that such apps were engaged in activities that were prejudicial to the sovereignty, integrity, defence, security of state, and public order of India. Nearly 58 applications were banned consisting of Tik Tok, Shareit, Clash of Kings, WeChat, Wesync, Weibo, etc.

The Chinese government has obviously protested this move claiming that banning such apps is a violation of international trade and investment law. China alleges that moving to ban the apps creates a hostile trading and business environment, which also runs against fair and transparent procedure requirements, and abuses national security interests in violation of WTO and international investment rules.

While India has refuted all allegations of violations of international law, the ban on Chinese apps also represented an opportunity for home grown Indian apps to breakthrough on the Indian  and international market. 

Blocking Order of 2020:

The Blocking Order was first released in June of 2020 by the MEIT wherein they banned 59 mobile applications, under Section 69A of the Information Technology Act, 2000 (IT Act). Subsequently, the Ministry released a second order banning 47 more Chinese mobile applications from the Indian market.

The reasons cited under both orders were concerns surrounding national security due to the lack of security protocols or checks presented in these applications. However, the Orders were issued at a time of growing tensions between India and China over security issues at the territorial borders between India and China.

The Blocking Orders have been enacted along with new FDI regulations that have restricted investment from neighbouring countries, mainly China, Pakistan and Bangladesh. Under these regulations, neighbouring countries can only invest under the government route i.e. with the prior approval of the central government. Even any changes in the ownership of Indian companies which allows entities from these neighboring countries to receive a majority stake have to be approved by the central government. 

Does the Ban Violate International Law?

To reduce uncertainty and to protect the interests of foreign investors, countries generally enter into bilateral investment treaties wherein they will decide the rights of investors that will be protected, and the recourses available in the event of any dispute settlements. India had entered into many such bilateral investment treaties; however, most of them have been terminated as of 2017.

Even though these treaties have been terminated, certain clauses continue to protect the interests of investments and investors introduced during the term of the treaty. These clauses allow the survival of the agreement beyond the termination of the agreement, to protect the investments introduced during its pendency. Such survival clauses are generally known as ‘sunset clauses’.

Such a clause was recently upheld in the famous tax arbitration in the case of the UK incorporated Cairn Company that was settled in 2020. Although the bilateral treaty between India and the UK had been terminated in 2017, the Permanent Court of Arbitration recognized that the investment in India had been created prior to 2017 and hence was still protected by the Treaty.

The India-China Bilateral Investment Treaty (The Bilateral Treaty) also had a sunset clause under Article 16. Hence a violation under the India-China treaty can also be brought for settlement at an international level, in case investment in any of the banned apps had been created prior to when the Treaty was terminated.

The ban on the Chinese applications could be challenged as discriminatory in the following ways:

1. Invalidating the returns of the investors:
Under the bilateral treaty, the investments of investors are protected from takeover by government ownership in ways which negatively impacts the investment. However, such protections are also provided against any indirect acts taken by a government towards invalidating the investments protected under the treaty.

In such scenarios, the host State is required to provide a fair and equitable compensation to the investors. Chinese investors could argue that the move by India invalidated the proceeds that could be received from the working of such apps in the Indian market.
 
2. Fair and Equitable Treatment: Under Article 3 of the The Bilateral Treaty, the  foreign investors are supposed to be provided the standard of fair and equitable treatment, which means a standard of providing transparent, consistent and non-ambiguous treatment under the law. However, the standard for such treatment has been set at a minimum threshold for India as per the case of Neer v. Mexico, which restricted any broad application of the standard. This would be a tougher argument to make against India, as India recognizes a more limited approach for the application of this standard.

However, Indian interests are also protected under The Bilateral Treaty.  Article 14 of the erstwhile India-China Treaty allows India to take any action that will protect public interest or Essential Security Interests, as long as the actions are applied on a non-discriminatory basis and are consistent with domestic laws. Since the action to ban the Chinese apps were taken to protect national security interests, India could easily argue that the action was taken in the interest of protecting the State, and was not meant to violate any international investment rights.  

Opportunity for Home Grown Apps:

With the issues caused by the pandemic crisis, India has also launched its own AtmaNirbhar Bharath programme. The programme aims to make India self-reliant while also nurturing the development of foreign investment in key sectors such as technology, infrastructure, and manufacturing. Innovation and entrepreneurship are considered the two pillars of an AtmaNirbhar Bharath India and it is safe to say that technology startups will be pushed as one of the biggest investment areas as part of this platform.   

As part of the programme, several schemes with tax and investment incentives have been announced for sectors such as startups, technology, infrastructure, manufacturing, etc. The MEIT has recently marked India as a ‘trillion dollar opportunity’ for technology development in the next decade.

Home grown apps have a greater advantage in India due to several of the following reasons:
  • Indian Market: The revenue estimated from the Indian technology market was nearly USD 191 billion for FY 2020, and it is estimated to reach USD 350 billion in the next few years. Beyond revenue, the Indian market represents a giant market of users with 50% of the population yet to still be connected to the internet. The opportunity of users in India is vast especially as more people enter the digital economy due to the exigencies caused by Covid-19.
  • Local Apps: Home grown apps have faced the disadvantage of having lesser resources and facing the tough competition from the international market. However, there is a greater focus on apps being developed in India with even giant internet companies like Google which is investing nearly USD 2 Billion for digital growth in India. Local apps may also become a competitive option for Indian users as they become more customizable to the Indian market, for e.g. like being able to provide customization depending on the vernacular languages in India, or catering to the needs of specific local areas.
  • Start-up schemes: To encourage innovation and entrepreneurship, India has launched several schemes for startup companies. Some of them are as follows:
 
 
1. DPIIT Recognition for start-ups: This scheme encourages easy incorporation for startup companies. Start-ups will be allowed self-certification for different compliances under environment and labour law. They will be allowed fast track patent application and IPR protection with up to 80% rebate in filing patents. Under this scheme, they are also provided with income tax exemptions for capital gains and investments for a period of up to three years.

2. Start-up India Seed Fund Scheme: An INR 1000 crore seed fund has been announced under the Start-up India scheme. The fund is meant to provide financial assistance to startup companies to fund the creation of their products and through the various stages of proof of concept, prototype development, product trials, market entry, etc.

3. Venture Capital Scheme: The Ministry of Finance provides an interest free loan to qualifying projects to allow them to meet the intense capital requirements of setting up a start-up.

With these schemes and more, greater opportunity is being provided to Indian companies to innovate without fear of running into issues of capital funding. With the ban on Chinese apps, this is a time when Indian technology companies can take up such opportunities to really flourish in the Indian market.