Changes in Foreign Direct Investment rules in India due to Covid19 impact

Foreign direct investment (FDI) in India, is one of the major sources of monetary income which helps boost the economy of India. Mostly, FDI has been booming at an exponential rate because foreign companies

Foreign direct investment (FDI) in India, is one of the major sources of monetary income which helps boost the economy of India. Mostly, FDI has been booming at an exponential rate because foreign companies invest directly due to the fast growing pace of private Indian businesses and thus take the benefits of cheaper wages and the ever changing business environment of India. 

Economic liberalisation began in our country in the wake of the 1991 economic crisis and since then FDI has only grown steadily in India, which eventually generated more than one crore jobs in the country. According to the Financial Times, in 2015 India had surpassed China as well as the United States as the primary destination for Foreign Direct Investment. During the first half of the 2015 itself, India attracted an investment of nearly $31 billion compared to $28 billion and $27 billion of China and the USA respectively.

However, on 17 April 2020, India changed its foreign direct investment (FDI) policy for the protection of  Indian companies from "opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic", according to the Department for Promotion of Industry and Internal Trade. Despite the new FDI policy not being restrictive upon foreign investments and markets, the policy does ensure  that all FDI will now be under the scrutiny of the Ministry of Commerce and Industry within our country.

In theory, there are primarily two routes through which India gets FDI within the country, namely:-

1. Automatic route: Through this route FDI is allowed without the prior approval of Government or the Reserve Bank of India.

2. Government route: The prior approval of the government is required via this route. The application needs to be made through the Foreign Investment Facilitation Portal, which will facilitate the single window clearance of FDI application under Approval Route. The application shall then be forwarded to the respective ministries which shall act upon the application as per the standard operating procedure. The Foreign Investment Promotion Board (FIPB) which was the responsible agency to oversee this route was abolished on May 24, 2017 and it held its last meeting on 17 April, which was the 245th meeting of the Board. On 24 May 2017, the Foreign Investment Promotion Board was scrapped by the Union Government and thus the work relating to the processing of applications for FDI and the approval of the Government thereon under the extant FDI Policy and FEMA, shall now be handled by the concerned Ministries/Departments in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT) , Ministry of Commerce, which will also issue the Standard Operating Procedure (SOP) for processing of applications and the decision of the Government under the extant FDI policy.

Recent FDI Amendment

As of very recently, the Government of India has amended the FDI policy with a view to increasing the FDI inflow. Back in 2014, the government had increased the foreign investment upper limit from 26% to 49% in the insurance sector. It has also launched the Make in India initiative in September 2014 under which the FDI policy for 25 sectors had been liberalised further. As of April 2015, the FDI inflow in India had increased by 48% since the launch of "Make in India" initiative.

India which had been ranking 15th in the world in 2013 in terms of FDI inflow, rose up to the 9th position in 2014,while in 2015 India became the primary destination for foreign direct investment. The Department for Promotion of Industry and Internal Trade and Invest India has developed the India Investment Grid (IIG) which provides a pan-India database of projects from Indian promoters for promoting and facilitating foreign investments within the country..

Coronavirus pandemic impact

With the spread of the coronavirus pandemic all over the world, India felt the need to bring about much required changes within its FDI schemes and policies. On 18 April 2020, the government of India passed an order in order to protect Indian companies from FDI during this pandemic. All countries sharing a land border with India would now face much needed scrutiny from the Ministry of Commerce and Industry before any FDI is embarked upon.

The changes brought about by this amendment can be summaries below:-

  1. Restriction on Foreign Investment from the Countries with which India shares Land Borders

As per the extant provisions of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Amendment Rule’) a person resident outside India can make an investment in an Indian Company by way of subscribing, purchasing or selling equity instruments.

Only a person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan cannot purchase equity instruments of an Indian Company except with prior government approval.

Investment by a person resident outside India, other than a citizen or an entity incorporated in Bangladesh or Pakistan, are subject to sectoral cap and conditions, if any.

Now, in order to curb the hostile acquisition of shares from Indian Stock markets at relatively low prices due to the COVID-19 impact, DPIIT has issued a press release wherein it has directed to acquire Government Approval for acquisition/purchase of shares by the entity (ies) or individual (s) of a country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country.

Also, where in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the above countries which share land borders with India subsequent change in beneficial ownership shall also require government approval.

India shares its land borders with Seven (7) countries which comprises of  Pakistan, Afghanistan, China, Bangladesh, Nepal, Bhutan and Myanmar. Thus, it is clear that DPIIT must have issued the above press release in response to the acquisition of shares of HDFC Bank by the China’s Central Bank from open market.

Furthermore, in order to give effect to the above press release there was a requirement to modify the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 therefore, the Ministry of Finance through its Department Economic Affairs introduced the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 for incorporating the changes made through the press release by DPIIT. This amendment will substitute the exiting proviso in sub clause (a) in the Rule 6.

  1. Acquisition of Shares through Renunciation of Rights

The extant provisions of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘the Rules’) is silent on the acquisition of shares by a person resident outside India through renunciation of Rights in case of Rights Issue of a Company. To incorporate such a provision, the Ministry of Finance through its Department Economic Affairs introduced the Foreign Exchange Management (Non-debt Instruments) Second Amendment Rules, 2020 wherein a new Rule 7A is inserted after the existing Rule 7.

In terms of the new Rule, a person resident outside India can now acquire equity instruments other than the share warrant through renunciation of rights by an existing shareholder in case of Rights Issue of a Company after following the pricing guidelines specified within the rules.

  1. 100% FDI in Insurance Intermediaries:

The MoF through its Department Economic Affairs introduced the Foreign Exchange Management (Non-debt Instruments) Second Amendment Rules, 2020 which itself modified the existing FDI limit of 49% through automatic route for Insurance Intermediaries by increasing it to a 100% through automatic route.

The above changes have been made effective by inserting serial Number F.8.2. after the existing serial number F.8.1. and existing serial Number F.8.2. is renumbered to F.8.3. The Other Conditions as specified under serial Number F.8. has been so revised to give effect to the changes introduced within the Act.

A quick recoup of how this affects the various industries has been provided below:-

Infrastructure

  • 10% of India's GDP is based on construction activity. Indian government has invested $1 trillion on infrastructure from 2012–2017.
  • 40% of this $1 trillion had to be funded by private sector.
  • 100% FDI under automatic route is permitted in construction sector for cities and townships.

Automotive

  • The FDI within the automotive sector had increased by 89% between April 2014 till February 2015. 
  • India is 7th largest producer of vehicles in the world with 25.5 million vehicles annually.
  • 100% FDI is permitted in this sector via automatic route. Automobiles shares 7% of the India's GDP.

Pharmaceuticals

  • The Indian pharmaceutical market is 3rd largest in terms of volume and 13th largest in terms of value.
  • The Indian pharma industry is expected to grow at 20% compound annual growth rate from 2015 to 2020. 
  • 74% FDI is permitted in this sector.

Service

  • The FDI within the service sector was increased to 46% in 2014–15. It is US $1.88 billion in 2017.
  • The Service sector includes banking, insurance, outsourcing, research & development, courier and technology testing. FDI limit in insurance sector was raised from 26% to 49% in 2014.

Railways

  • 100% FDI is allowed under the automatic route in most of areas of railway, other than the operations, like High speed train, railway electrification, passenger terminal, mass rapid transport systems etc. 
  • The Mumbai-Ahemdabad high speed corridorproject is the single largest railway project in India, the other being the CSTM-Panvel suburban corridor.
  • Foreign investment of more than ₹90,000 crore (US$13 billion) is expected in these projects so far.

Chemicals

  • The Chemical industry of India earned revenue of $155–160 billion in 2013. 100% FDI is allowed in Chemical sector under automatic route.
  • Except Hydrocynic acid, Phosgene, Isocynates and their derivatives, production of all other chemicals is de-licensed in India. 
  • India's share in global specialty chemical industry is expected to rise from 2.8% in 2013 to 6–7% in 2023.

Textile

  • Textiles is one major contributor to India's export. Nearly 11% of India's total export is textile.
  • This sector has attracted about $1647 million from April 2000 to May 2015.
  • 100% FDI is allowed under automatic route. During year 2013–14, FDI in textile sector was increased by 91%. Indian textile industry is thus expected to reach up to $141 billion till 2021.

Airlines

  • Foreign investment in a scheduled or regional air transport service or domestic scheduled passenger airline is permitted to 100%.