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Regulation of FDI: Amendment to FDI in India

fdi

Foreign Direct Investment (FDI) is an investment made by a company or an Individual from his country into business interests located in another country is called foreign direct investment.

  • Generally, FDI is when a foreign entity acquires ownership or controlling stake in the share of a company in one country, or establishes businesses there.
  • It’s different from foreign portfolio investment where the foreign entity merely buys equity or shares of a company.
  • In FDI, the foreign entity has a say in the day-to-day operation of the company.
  • FDI help to regulate the inflow of money, technology, knowledge, skills, expertise & etc.
  • It’s a major source of non-debt financial resource for economic development and generally take place in an economy which has the prospect of growth and also a skilled workforce.

FDI in India

In India, the Investment climate changes tremendously since 1991 when the government opened up the economy and initiated the LPG strategies.

  • Improvement in this regard is commonly ascribed to the easing of FDI norms.
  • Many sectors also started foreign investment partially or wholly since the economic liberalization of the country.
  • Currently, India has moved 14 places to be 63 rd among 190 nations in the world bank ease of doing business and still expected an increasing position at the of 2020 despite the Corona pandemic.
  • In 2019, India was top ten receivers of FDI, totaling $49 billion inflows as per a UN report. This is a 16% increase from 2018.
  • In February 2020, the DPIIT notifies policy to allow 100% FDI in insurance intermediaries.
  • From March to June, the Govt. amend many existing FDI policies to block the emerging threat of an “opportunistic” Chinese takeover of Indians firms.

FDI Routes in India

India has 3 route through which FDI flows:

  • 100% FDI permitted through AUTOMATIC ROUTE.
  • Up to 100%FDI permitted through GOVERNMENT ROUTE.
  • Up to 100%FDI permitted through AUTOMATIC +GOVERNMENT ROUTE.

Regulatory Framework for FDI in India

In India, several laws are regulating FDI inflows. They are:

  • Companies Act
  • Foreign Exchange Management Act (FEMA)
  • Foreign Trade (Development and Regulation) Act, 1992
  • Civil Procedure Code, 1908
  • Indian Contracts Act, 1872
  • Arbitration and conciliation Act, 1996
  • Competition Act, 2002
  • Income Tax Act, 1961
  • Foreign Direct Investment Policy (FDI Policy)

Foreign Exchange Regulation Act, 1973 (FERA) was replaced by the Foreign Management Act, 1999 (FEMA) & was enacted by the Parliament of India & came into force on 1st June 2000. There are 49 sections divided into 7 chapters. FERA was replaced because it was not suitable for the prevalent environment and it contained harsh provisions such as imprisonment but, FEMA was introduced with the changes of the new liberal and changing environment. Earlier FERA was passed due to the insufficient foreign exchange in the country and FEMA came intending to relax the controls on foreign exchange in India. The head office of FEMA is in New Delhi.

Objective

  • To reinforce and amend the law relating to foreign exchange and simplify as well as ease the external trade and payments.
  • To promote and systematized the development and maintenance of healthy foreign exchange markets in India.
  • To remove disparity of payment and controls, direct the employment business and investment of the non- residents.
  • To utilize foreign exchange resources effectively for the country.

Features of FEMA

FEMA does not apply to the Indian citizens who live outside India. To consider by FEMA the person has stayed in India for more than 182 days in the preceding financial year.

FEMA gave authority to Central Government to impose restrictions on and supervise 3 things- payments made to any person outside India or receipts from them, forex, and foreign security deals. The area was specified for holding of forex that required specific permission from the Reserve Bank of India (RBI) or the Government.

Two types of transaction done under FEMA which is current and capital account.

Amendment in the regulation of FDI

To protect the country from the opportunists to takeover and acquisition on India companies due to the COVID-19 pandemic, FEMA amends the rule which was effected from 22 April 2020 through this rule it is now necessary for the investor (Entities) to take the prior approval the govt. here entities are those entities who share the boundary with India like Nepal, Bhutan, Pakistan, Sri Lanka, Bangladesh, Myanmar, Afghanistan, but most importantly China. This amend is also applies to the transfer of Beneficiary Ownership of any existing or future FDI either directly or indirectly.

How this impacts us

  • Raising funds- it will impact the rescue funding or ongoing deals for the long term and for taking approval it will take time.
  • Urgent funding- now after amendment regulatory approval in India became time-consuming (like 7 months) so urgent funding concept now became difficult.
  • (ECBs) External commercial borrowings- structuring ECB availed from entities is now restricted under new FDI amend by which the investee company will be affected.
  • Ongoing transaction- if the transaction is required govt. approval that is already signed and is on verge of closing, then the timeline will be a significant impact, closing accounting, and post-closing payout or earn-outs, etc.
  • Another country opportunists- although this amendment is meant for a bordering country like china it’s also now affected by other countries like EN or the UN.

Gray areas

  • Beneficial ownership- The rule and regulation for Bois not clear after the amendment
  • Existing Investment- fresh investment or existing investment or any other, are not there change in shareholding or change of control still would be subject to govt. approval.
  • Listed transaction- the FDI doesn’t appear to apply to investment by a foreign venture capitalist or foreign portfolio investment which is regulated by SEBI.
  • Indirect acquisition – it’s unclear that if amendment applied to global acquisition by entities from border countries resulting in Indian subsidiaries being indirectly acquired, indeed if the approval is required then it is unclear who is responsible for making this application.

Future changes

  • Chinese investor like Alibaba, Fosun, Tencent have to start their business elsewhere
  • FDI has been liberalized from the past decade, there is a trend of localization and on-soil requirement in financial, online intermediary regulation and privacy. India’s local business interests usually lobby for and welcome such restrictions.

References

1.https://blog.ipleaders.in/foreign-exchange-management-act-1999

2.https://byjus.com/free-ias-prep/fdi/

3.https://www.dripcapital.com/en-in/resources/blog/all-you-need-to-know-about-rbi-fema-guidelines

 

By Saakshi Gupta, B.B.A L.L.B, F.I.M.T (GGSIPU), New Delhi

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Written by Saakshi Gupta

Saakshi Gupta is a BBA LLB student at the Fairfield Institute of Management and Technology (GGSIPU), New Delhi. Her passion for law and business brought her to pursue law. She has a keen interest in business law, environmental law and also wants to explore more in the field of law. Apart from legal academia, she is a volunteer at a govt. program (National Service Scheme).

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