The new FDI policy of India

A Blog authored by Simran Verma, 2nd year Law student of New Law College, Pune

Introduction to FDI

The two most important international economic activities integrating the world economy are said to be International Trade and Foreign Direct Investment (FDI). There has been increase in the mobility of factors of production across countries, which has implied FDI to become an integral part of a firm’s strategy so that it can expand its international business.  

A crucial role is played by FDI in the development process of host economies and also in enhancing the exports of the host country.  In simple terms, FDI is meant to as an acquiring ownership in an overseas business entity.  FDI is supposed to occur when an investor who is based in one country acquires an asset which is present in another country (host country) having the intent to manage it. The policy provides a kind of mechanism of investment in one of the country and which is done by another enterprise in some another country. Due to such reasons, FDI is said to play one of the most crucial role in the growth of both developing as well as developed countries.

Why to have FDI in India ?

Foreign Direct Investment (FDI) has now become one of the integral parts of the national development strategies globally for almost all the nations. It has become an indispensable tool for initiating economic growth for countries due to its positive output and global popularity in augmenting of domestic capital, employment and productivity. In recent times, FDI in India has contributed effectively to the overall growth of the country. The inflow in FDI has an impact on India’s transfer of innovative ideas and new technology; improving the infrastructure, and therefore it makes a competitive business environment. India as a country can grow without FDI and in fact developed with very little or without FDI till 1980s but the rate and the pattern of growth has been entirely different from the post 1990s years.

Influence of FDI on Indian Economy

There has been a continuous crisis and also the ever increasing importance of the foreign capital, due to which continuous efforts have been taken by the Indian Government to attract the FDI during the post-liberalization period. It includes announcing tax holidays, providing concessions in taxes and also increasing the investment cap in different sectors of the Indian Economy. The government of India has taken continuous efforts which have resulted in steady rise in the inflow of foreign capital on one hand, and overall success in different sectors of the Indian economy on the other hand.[1]   The inflow of foreign capital has resulted in tremendous progress in various sectors of the Indian economy. In addition, there has been improvement in various other areas as well which include the improvement in employment position, infrastructure development, standard of living, health and hygiene, GDP and NDP due to the FDI inflows in India.

Logic behind India’s new Investment Policy

The Indian Department for Promotion of Industry and Internal Trade has revised its Foreign Direct Investment (FDI) policy with an aim to curb the chances of predatory foreign investment which is exploiting the financial distress of COVID-19 hit Indian companies. The amendment made to India’s FDI policy states that from now onwards, any investment from a country that shares a border with the country needs to proceed through the government of India. COVID-19 crises have been classified as a “public health emergency of international concern” by WHO. Therefore, the revised FDI policy of India, which clearly plans to protect an essential security interest, cannot be considered inconsistent with the appropriate WTO Agreements. The amendment of India’s FDI policy follows the footsteps of various other countries who are trying to prevent China’s predatory purchasing of low valuation assets during the crisis of COVID-19. In conclusion, it is unlike to bully India as its FDI moves are on extremely strong legal footing and yes, the policy targets the China country- but there has been no legal case against doing so.

New FDI Rule

Why in News

  • Approval has been made by the Government of India for Foreign Direct Investment (FDI) by neighbouring countries mandatory.
  • The aim of this revised FDI Policy is to curb the acquisitions/opportunistic takeovers of Indian companies due to the current COVID-19 pandemic.

Key Points

  • FDI in India is allowed under two modes-either through the automatic rule, for which no government approval is needed by the companies or through the government rule, for which a go ahead is needed from the centre to the companies.
  • According to this new policy,

An entity of a country, where the beneficial owner of an investment into India or which shares its land border with India is situated in or is a citizen of any such country; investment can be made only under the Government route.

  • A FDI deal of transfer of ownership which benefits any country that shares a border with India will also require government approval.

Impact

  • The earlier FDI policy was limited to allowing only Pakistan and Bangladesh via the route of government in all the sectors. But the new and revised rule has now brought different companies from China under the government route filter.[2]

Government Initiatives

  • In May 2020, FDI in defence manufacturing was increased by the government under the automatic route from 49% to 74%.
  • In April 2020, amendment was made in the existing consolidated FDI policy for the aim of restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations.
  • In March 2020, non-resident Indians (NRIs) were permitted to acquire up to 100% stake in Air India.
  • In December 2019, 26 per cent FDI in digital sectors were permitted by the government.
  • In Union Budget 2019-20, proposal was made of opening FDI in aviation, media and insurance sectors in consultation with all the stakeholders.
  • 100 per cent of FDI is permitted in the insurance intermediaries.

Road ahead

In future, India is going to be the most attractive emerging market for all the global partners’ investment for the upcoming 12 months according to a recent market attractiveness survey which was conducted by Emerging Market Private Equity Association (EMPEA).  Also, the annual FDI inflow in India is likely to rise to US$ 75 billion over the next 5 years according to a report by UBS. The aim currently of Indian government is to achieve US$ 100 billion worth of FDI inflow in the upcoming two years.

 Grey areas in new FDI rules of India

  • The new rule has the basic aim to make sure that all the foreign companies who have the access to the funds don’t take undue advantage of the economic damage during this lockdown crisis. The novelty is the mere applicability of the new rule which is being restricted to the countries who are ‘bordering the Indian country’-read: China, who is most likely to be the current follow-on investment made by the People’s Bank of the country China in HDFC.
  • There is a lack of clarity
  •  How the capital would be raised, if an Indian entity is a subsidiary of a Chinese company? The mere fact that its parent company is a Chinese corporation would not make any difference even if the Government of India doesn’t give the approval for future fund raises. This situation becomes quite relevant in case of companies whose roots are not in China, but which are now indirectly controlled by the Chinese corporations being a result of mergers and acquisitions in the Europe and US.[3]
  • The note also doesn’t clarify what would happen if, say, the parent of any Indian company which is based out of Singapore gets acquired by a Chinese corporation.
  • Even the private equity industry would be supposed to examine the financial and structural links to China.
  • The dependence of India on China is likely to continue in the short to medium term. During this COVID-19 crisis as well, India is relying quite a bit on equipment and test kits coming from China. In the long run, India would surely want to see itself stepping out of China’s shadow.

Summing up

In conclusion, the new FDI rules in India are bound to open a new point of dispute between India and China. The aim of this move by the country is to protect its interests and pre-empt any such kind of opportunism on the part of Chinese in the wake of the COVID-19 pandemic. Although, the Chinese may perceive this move as a snub, as its statements have shown. There is an impact due to this new rule for foreign investment in India on individual stock investors or traders. The event in the world definitely has a bearing on the markets but despite of this, the individual investors or the traders should continue to focus on sectors and also on the companies that have a good growth potential. This new policy has no impact on the existing investments made in the country. There would be a closer look at the investments that India receives from its neighbouring countries due to the volatility in the market because of the COVID-19 pandemic.  All these new amendments will be effective once the requisite amendments are done to Rule 6 of the FEMA Rules, 2019. The impact of this new rule on the GDP of Indian country in view of this FDI policy decision is very unclear at this stage.


[1] A report of Reserve Bank of India (RBI) says that India has received total Foreign Direct Investment (FDI) inflow of $50.1 bn since 1991

[2] Footprint of China in the business of India has been expanding quite rapidly, especially since 2014.

[3] For example, Volvo is a Swedish auto brand and a subsidiary of China’s Geely.

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