Introduction & background
India since the early 90s has been trying to liberalize and globalize India so as to improve its foreign relations thereby reinforcing the trust in the Indian economy by foreign entities. India has taken steps to make foreign-Indian transactions easier to deal with. Foreign investment in India is governed at the central level by the Foreign Exchange Management Act, 1999 (FEMA) and its subsidiary rules and regulations. The RBI in its attempt to regulate foreign investments had published, under the FEMA umbrella, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 and subsequently the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2017 (TISPRO 2017). Apart from the Central legislations and rules/regulations, foreign investors are also required to adhere to the compliance requirements of the relevant sector of business and the state-specific laws.
In the year 2010, the Department for Promotion of Industry and Internal Trade (DPIIT), which is the nodal departmental for the formulation of government policy on foreign direct investment, set up a policy framework that consolidated the different requirements of different sectors and further set up conditions to be complied with by the foreign investors investing in Indian businesses. This department is also responsible for the maintenance and management of the data received on the inward flow of FDI in India, based on the remittances reported by the RBI. The FDI policy is reviewed on a regular basis, so as to make it easier & friendlier for the foreign investors to conduct business with Indian entities. The government has set up a policy to attract more FDI, by increasing the limit of FDI up to 100% in most sectors of business. The DPIIT is actively playing its part in further liberalizing and rationalizing the FDI policy. The latest amendment to the FDI policy was the consolidated one of 2020. India received its highest FDI inflow of US$83.57 billion in FY2021-22.
Amendments
There is not much change or improvement made in the last FY. However, there were minor changes made by the DPIIT to the current laws and regulations governing FDIs in India in some of the previous years. They are:
An amendment was made to the Foreign Exchange Management (Non-Debt Instruments) Rules of 2019 (NDI rules) and pursuant to that, foreign entities can now make an investment of up to 20 percent in the Life Insurance Corporation of India which is the largest public sector insurance company in India.
Pursuant to another amendment made to the NDI Rules, prior approval from the government will be a pre-requisite for issuing the share-based employee benefits by the Indian companies to the citizens of Bangladesh or Pakistan and in sectors that mandate government approval. The issuance of these share-based employee benefits must also be in compliance with the applicable rules and regulations which include the applicable sectoral caps.
There was another amendment made to the NDI Rules on 22nd April 2020, pursuant to which, any legal entity of any country which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of such country sharing the land border, would be able to invest only under the government approval route.
Another new amendment bill is in the works in recent memory, which is the Competition (Amendment) Bill 2023 which was passed by both the Rajya Sabha and the Lok Sabha on the 3rd of April, 2023. It received presidential assent on 11th April 2023. The Amendment Bill is still yet to be passed as of the current date. Some important provisions of this Bill affecting foreign investors are discussed in brief below:
The Bill has mandated that transactions that exceed a deal value of 20 billion rupees shall have to be notified to the Competition Commission of India (CCI), which is subject to the target business having substantial business operations in India.
The Bill also makes it a priority to tighten the review timeline for the CCI, which is currently at a period of 210 days from the date of the notification, to a period of 150 days, with a provision permitting an extension of up to 30 days during which period the CCI has to complete their review process and form an opinion.
Also, the Bill sets up a lower threshold of ‘control’, which is the ability to exercise material influence, in any manner, over strategic commercial decisions. The material influence, as per the practice of CCI, includes factors such as shareholding pattern, special rights, status and expertise of a person, board representation or commercial/financial arrangements.
The Amendment Bill exempts public financial institutions, foreign portfolio investors, banks, or Category 1 alternate investment funds from the requirement to notify a share subscription, financing facility, or acquisition pursuant to a provision within a loan agreement or investment agreement.
Routes for Inflow of FDI in India
There are primarily two routes for the inflow of FDI in India. One is the automatic route and the other is the government approval route. Which route an investing entity would choose would wholly depend on the sector of business in which the investee entity lies as well as the value of the investment.
The Automatic Route
Under this route of investing, no prior approval or license from the government is required before the FDI is allowed neither is there any requirement for any application for the same. However, the amount of investment has a permitted cap that differentiates per business sector. Some sectors like the manufacturing or the telecom and financial services sectors allow foreign investors to invest up to 100% of an Indian entity.
The Government Approval Route
The sectors which fall under this route would require government approval or the approval of the RBI or both. Any foreign investors choosing this route will have to file their FDI proposal (online application) at the Foreign Investment Facilitation Portal (FIFP) which is managed by the DPIIT and is then forwarded to the competent authority and the relevant stakeholders like the RBI, the Ministry of External Affairs and in the case of a sector requiring security clearance, the application should be forwarded to the Ministry of Home Affairs (MHA) also by the DPIIT. One example of a business sector falling under this route would be the multi-brand retail trading sector wherein an FDI of up to 51% is permitted on the assumption that regulatory prerequisites are met. Another example would be the brownfield pharmaceutical sector where any FDI exceeding the cap of 74% would attract government approval. Any FDI transactions which are more than 50 billion rupees would attract the approval of the Cabinet Committee on Economic Affairs.
To initiate the approval process, either the investing entity or the investee entity has to submit an online application at the FIFP website. This online application includes some other requisite documents, which are (1) a summary of the foreign investment proposed; (2) Certificate of incorporation, MOA, AOA of both the investing and investee entity; (3) the audited financial statements of the investor and investee entities of the previous financial year; (4) the income tax return for the previous financial year; (5) representation of the cash flow from the original investor to the investee entity and the shareholding pattern pre and post the investment; (6) foreign inward remittance certificates to shed light upon the fund flows; (7) a copy of the board resolution of the investee entity in case of a fresh issue of shares.
In case the online application/FDI proposal submitted to the FIFP website is rejected, the applicant can appeal to the Competent Authority to request reconsideration of the proposal. The decision made by the CCI is also subject to appeal by the NCLAT, with a subsequent right of appeal to the Supreme Court of India.
References
Foreign direct investment reviews 2023: India | White & Case LLP (whitecase.com)