By Sameera Arif–
Foreign Direct Investment[1] has emerged as a catalyst spurring the growth of a country’s economy. Foreign Direct Investment as a strategic component of investment can be a boon for a country and its sustained economic growth and development as it aids the creation of jobs, expansion of existing manufacturing industries, and advancement in the arena of education and research. Owing to these factors various developing countries have been trying to attract foreign investors, India being one of them, and in the process of attracting foreign investors, the policy regime of the country has gone through various changes over a while. This article aims to highlight the changes in the policy regime over time and the latest developments in the arena of Foreign Direct Investment in India.
Introduction
Foreign Direct Investment (FDI) in broader terms, is long term investments by an entity that does not reside in the host country.[2] Typically, the idea of a Foreign Direct Investment encompasses an initial investment followed by subsequent investments to avail the benefits of the host country that can be advantageous for the investor’s business. These benefits generally include cheaper resources, access to a market of consumers, government policies conducive for their business, etc. This long term relationship is a win-win situation for both the investor and the host country as the former gets access to an environment that is advantageous for their enterprise and the latter gets access to technical know-how, various jobs, and advancement in the infrastructure.
What makes India the cynosure for Foreign Direct Investment?
In the year 2016, India was ranked 9th in terms of FDI flow by UNCTAD.[3]The factors that lead to India being a center of attraction in terms of Foreign Direct Investment are:
- Political stability- India’s deep-rooted democratic regime provides a stable political environment.
- Repository of resources – the country’s vast geography makes it a rich repository of resources.
- Consumer base- India is home to an ever-growing consumer base making it an extremely conducive market for manufactured goods and services.
- Skilled workforce- The country has skilled and educated workers in abundance.
- Cost-effectiveness – The investor has access to all the above resources at a cost much lower than their home country.
- Policy regime- The government to attract investors has offered various subsidies and tax concessions.
Route to Foreign Direct Investment in India
There are two routes to FDI in India which are:
The Automatic Route: This route does not require any prior approval either by the Government or the Reserve Bank.
The Government Approval Route: Under this route, the proposals are considered in a time-bound and transparent manner by the FIPB.
Procedure for Government Approval
Investors can facilitate Foreign Direct Investment through Foreign Investment Facilitation Portal (FIFP), the new online single point interface of the Government of India, designed to process the single window clearance of applications through the approval route. The applications are processed as per the Standard Operation Procedure (SOP) by the concerned administrative department.
The notified sectors/activities requiring government approval are mining, defense/cases relating to FDI in small arms, print media, broadcasting, civil aviation, telecom, private security agencies, trading(single, multi-brand and food products), satellites, financial services not regulated or regulated by more than one regulator/ banking public and private (as per the FDI policy) and pharmaceuticals.
FDI Reporting Requirements
The Indian company, within 30 days of receipt of money from the foreign investor, has to report to the Regional Office of Reserve Bank of India (RBI) under whose jurisdiction its registered office is located. The Certificate from the Company Secretary of the company accepting investment from persons resident outside and the Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India along with a report in Form FC-GPR should be filed with the Regional Office of RBI within 30 days from the date of issue of shares.
India’s Foreign Direct Investment Policy Framework
Pre-Liberalisation
During this period, India was very cautious while formulating its FDI policy and ensured they were framed encompassing the idea of the ‘import-substitution strategy’ of industrialization.[4] The industrial policy of 1965, enabled Multinational Corporations to venture in India only through technical collaboration. Focusing on the objective of self-reliance, the policy adopted was two-fold where a foreign investor’s technical collaboration was welcomed in the areas requiring high technology to encourage national capability and discouraged in areas requiring low technology to protect domestic industries. These collaborations were regulated by the Foreign Exchange Regulation Act (FERA), 1973 which allowed foreign equity holding in a joint venture only up to 40 percent keeping investors at bay. This phase was marked by high restrictions and heavy licensing in the industrial sector which led to a severe deficit of the balance of payment in the mid-1980s.
Post Liberalisation
The Balance of Payment crises called for economic reforms and persuaded the government to introduce FDI to the Indian Economy under more liberalized circumstances. This led to the abolishment of industrial licensing and promoted privatisation. The post-liberalisation phase led to major economic reforms and amendments in the Indian FDI policy.
Major reforms post- 1991:
This phase witnessed many reforms like FERA being replaced by Foreign Exchange Management Act (FEMA) in 1999 to facilitate foreign exchange management in the capital account, various sectors now allowed foreign participation, Many sectors allowed automatic approval of FDI post- 2000, the introduction of Dual route of approval of FDI, i.e., RBI’s automatic route and Government’s approval (SIA/FIPB) route, automatic permission for technology agreements in high priority industries along with the removal of restriction of FDI in low technology areas as well as liberalisation in technology imports, allowing Nonresident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 percent in high priorities sectors, signing of Convention of Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments was signed, Bilateral investment and double tax avoidance agreements were signed to benefit and assure foreign investors and Fiscal incentives to foreign investment.
Major FDI reforms since 2010:
After 2010 there were amendments made to the FDI policy allowing 100 percent foreign direct investments in single-brand retail trading and up to 51 percent FDI in multi-brand retail trading, allowing foreign airlines up to 49 percent direct investment in Indian companies, FDI was increased from 49 percent to 74 percent in certain broadcasting sectors, up to 49% FDI was allowed in power exchanges, FDI limit was increased from 26% to 49% in the insurance sector, allowing 49% FDI in sectors like petroleum and natural gas, commodity and stock exchanges, power exchanges, asset reconstruction, single-brand retail and telecommunications, sectors such as asset reconstruction and telecommunications were made eligible for 100% FDI upon FIPB’s approval. The defense sector was made eligible for greater investment and FDI in the insurance sector was allowed up to 49 percent under the automatic route.
Major FDI reforms since 2018 :
Some major amendments to the policy were made allowing100% FDI under automatic route for Single Brand Retail Trading and Construction Development, foreign airlines were allowed to invest up to 49% under approval route in Air India, FDI rules related to E-commerce were revised allowing 100 percent FDI in the marketplace-based model of E-commerce, permitting 100 percent FDI in insurance intermediaries, allowing 100 percent FDI under the automatic route in coal mining for open sale, allowing 26 percent FDI in digital sectors. In March 2020, the Government allowed up to 100 percent stake in Air India to be acquired by non-resident Indians (NRIs).
Foreign Direct Investment in India after the COVID-19 outbreak
The FDI policy was revised making the government’s prior approval mandatory for FDI by an entity residing in a country that shares borders with India. This means that India’s neighboring countries, namely, China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan cannot invest in India through the automatic route. The motive behind this amendment is to restrict opportunistic takeovers as the share prices fall due to the economic impact of COVID-19. This amendment could emerge as adversity for companies with existing FDI by China as various majorly popular companies in India are backed by Chinese investors but the government has expressed how this step was necessary to protect the Indian entities in the longer run.
Conclusion
India has come a long way as far as it’s FDI policies are concerned. From being a closed and highly selective economy post-independence to realizing the benefits of FDI for its economy, today it is the center of attraction for foreign investors. The last two decades have changed the face of FDI in India as they were marked by amendments that highly liberalised the Indian economy. The COVID-19 outbreak is going to throw various challenges for economies all over the world and while the government’s amendment of the FDI policy may be exasperating for various companies with Chinese investments and various startups, it is going to protect the Indian entities in the face of adversities brought by the economic implications of the COVID outbreak.
REFERENCES
Gautam, Aditya & Gautam, Indu. (2014). FDI in India: Past Present and Future. 1. 34-38.
Stuti Pandit / International Journal of Management Research & Review IJMRR/August 2017/ Volume 7/Issue 8/Article No-4/836-840 ISSN: 2249-7196
[1] Foreign Direct Investment will be abbreviated as FDI.
[2] Gautam, Aditya & Gautam, Indu. (2014). FDI in India: Past Present and Future. 1. 34-38.
[3] FDI Policy and Process,FDI INDIA available at https://www.fdi.finance/guidelines/fdi-policy last seen on 09/07/2020.
[4] Foreign Direct Investment Flows to India, Reserve Bank of India available at https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513 last seen on 09/07/2020.