STUDY OF LAWS AFFECTING FOREIGN DIRECT INVESTMENT IN INDIA: PRAKHAR HARIT
Weeks
after the nationwide lockdown was imposed, Industries started reporting a
negative outlook from the imposition.[1]. Also,
concerns surrounding Beijing's trade practices, Chinese intellectual property
theft, and global overdependence on Chinese supply chains made several
countries in west and east to support businesses going through the financial
crisis.[2] On
the same note, Indian Government, vide notification dated April 17, 2020, notified
that investment from any country sharing a land border with India has to go
through the Approval route.[3]
This notification meant that any investment coming from countries sharing
borders with India[4]
has primarily to be approved by the Indian Govt. Before we dive down into pith
and substance of FDI, let us have a basic understanding of the same.
What is FDI?
Foreign Direct Investment or FDI is the cross-border
investment made by a party into a business or corporation to establish
long-lasting interest. Even a corporation reinvesting its profits to its
overseas location or intracompany loans to foreign subsidiaries are a part of
Foreign Direct Investment.
Laws governing FDI in India.
India introduced a new economic policy in the year
1991 under which it started liberalizing, privatizing, and globalizing the
economy. Also referred to as New Industrial Policy, Govt. started diluting its
stake in several industries and decreased various restrictive and regulated
practices thereby inviting the various domestic and foreign players to
establish its control in Indian Inc. However, there were problems with existing
laws regulating FDI which restricted foreign shareholdings in Indian Companies
to 40% and required approval from RBI for more than 40% stakeholding.[5] Considering such restrictive
provisions, Govt. of India brought Foreign Exchange Management Act, 1999 which
liberalized existing provisions concerning foreign exchange controls and amended
nature of several offenses to Civil, Thereafter, The Foreign Exchange
Management (Transfer or Issue of security by a person resident outside India)
Regulations, 2000 and thereafter the Foreign Exchange Management (Transfer of
Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO
2017) was brought to regulate FDI from the person (natural or artificial)
residing outside India to make
investments through a domestic asset management company. Such investments were
governed by the Department of Industrial Policy and Promotion (DIPP) (now
Department for Promotion of Industry and Internal Trade (DPIIT)). Tasked with
facilitation of FDI in the country, DPIIT issues consolidated FDI policies[6] every 6 months which
defines the limit of allowed FDI as well as other regulations. From 2010, DPIIT
started consolidating the FDI policies for various sectors which were updated
annually. The Central government on 17 October 2019 notified the Foreign Exchange Management (Non-debt
Instruments) Rules, 2019 (Rules 2019)[7] and The RBI exercising its
powers under Section 47 of the Foreign Exchange Management Act, 1999 notified the Foreign Exchange
Management (Debt Instruments) Regulations, 2019 (Regulations 2019)[8]
and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt
Instruments) Regulations, 2019 (Reporting Regulations 2019)[9]
which replaced TISPRO 2017
Regulations governing sectoral policies
Speaking of routes for FDI in India, there are two routes
through which foreign investments are permitted in India. They are:
i.
Approval Route:
Investments in sectors falling under the approval route must take approval from
the govt. and only once such investment is confirmed and allowed by the central
govt., it will be permitted. For a better understanding remember the first
para. With recent policy modifications, DPIIT made the approval route mandatory
for investments coming from countries sharing borders with India to
compulsorily go through the Approval route.
Previously, the
Foreign Investment Promotion Board (FIPB) was the single-clearance body which
used to clear proposals for FDI in India. However, through a notification,[10]
Central Govt. abolished the FIPB and gave each Central Ministries (competent
authorities) the power to allow to accept/reject the FDI proposal in India
through the approval route. To avoid any confusion about competent authorities,
DPIIT established Foreign Investment Facilitation Portal (FIFP)[11]
ii.
Automatic Route: As the
title suggests, for investments in sectors
falling under the automatic route, there is no need for prior approval, but
only certain post facto filings are required.
The 2019 rules classify sectors that fall under the
approval route or automatic route. Moreover, it also contains sectoral
requirements required to comply at the time of investment by any foreign
investor in those sectors. For ex., The Press Note No. 1 (2018 series) classify
that 100% foreign investment is permitted in the single brand product retail trading
for the products to be sold under the same brand used internationally.[12] Previously, out of that
100%, only 49% is allowed through automatic route and any investment beyond 49%
requires govt. approval for investment[13].
Moreover, FDI
transactions of more than INR 50 billion need the prior approval of the Cabinet
Committee on Economic Affairs.[14]
Further, any investment or payment made into India must be reported to the RBI
either through authorized dealers or directly to the RBI, depending on the nature
of investment or payment made into India.
In case of any merger or
amalgamation, there is another requirement of taking approval from the
Competition Commission of India. The 2019 amendment created a green channel clearance
option under which parties that are not engaged in a similar business and
aren’t vertically interconnected as far as the business is concerned, then a
'deemed approval' is given upon notification to CCI. However, if CCI
subsequently held that the business information notified through green channels
is incorrect or doesn't meet the requirements for such filing, then the deemed
approval will be void ab initio and CCI shall deal such transaction within
accordance with Competition and Anti-Trust Laws of India.
[1] Krishna Kant, Covid-19 lockdown: India Inc more
vulnerable now than in the recession of 2008; (April 14, 2020) (Available On https://www.business-standard.com/article/companies/covid-19-india-inc-more-vulnerable-now-than-in-the-recession-of-2008-120041301536_1.html)
[2] Japan announced a $2
billion subsidy program to get Japanese companies to relocate production from
China to Japan.. (Isabel Reynolds, Emi Urabe; Japan to Fund Firms to Shift
Production Out of China; (April
9, 2020) (Available On https://www.bloomberg.com/news/articles/2020-04-08/japan-to-fund-firms-to-shift-production-out-of-china?sref=gAQr8Hwd )) European Union asked
EU Countries to consider buying stakes in the homegrown countries and to
financially support them through investments, to tackle the threat of China's
takeover. (Vestager urges stakebuilding to block Chinese takeover; (April 12, 2020) (Available On https://www.ft.com/content/e14f24c7-e47a-4c22-8cf3-f629da62b0a7)
[3] Department for
Promotion of Industry and Internal Trade, Press Note No. 3(2020 Series) (Available
On https://dipp.gov.in/sites/default/files/pn3_2020.pdf)
[4] Significant trade flows
comes from China itself whereas Pakistan and Bangladesh are facing several restrictions.
[5] FDI POLICY IN INDIA
(Available on https://shodhganga.inflibnet.ac.in/bitstream/10603/95264/10/10_chapter%202.pdf)
[6] Department of
Industrial Policy and Promotion, Consolidated FDI Policies (Available On https://dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy)
[7] Ministry of Finance
Notification S.O. 3732(E) (Available On
[8] Reserve Bank of India
Notification No. FEMA. 395/2019-RB (Available On
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0)
[9] Reserve Bank of India
Notification No. FEMA 396/2019-RB (Available on http://egazette.nic.in/WriteReadData/2019/213316.pdf)
[10] Ministry of Finance;
O.M No. 01/01/FC12017-FIPB
(Available on https://fifp.gov.in/Forms/OMabolitionFIPB.pdf)
[11] Historical Background
of FIPB, Foreign Investment Facilitation Portal
(Available on https://fifp.gov.in/AboutUs.aspx)
[12] Department of
Industrial Policy and Promotion; Press Note No. 1 (2018 Series) (Available on https://dipp.gov.in/sites/default/files/pn1_2018.pdf )
[13] Mahima Kapoor; India Allows 100% FDI In Single-Brand
Retail Through Automatic Route
(Available on https://www.bloombergquint.com/business/india-allows-100-fdi-in-single-brand-retail-through-automatic-retail)
[14] Bhumesh Verma, New FDI
approval regime, (December 27, 2017) (Available on https://www.scconline.com/blog/post/2017/12/27/new-fdi-approval-regime/ )
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