Overseas Investment in India: The Legal Framework

Posted On - 16 February, 2023 • By - King Stubb & Kasiva

Overseas Investment in India has been a popular strategy for companies and individuals looking to diversify their portfolios and profit from the country’s rapid economic growth. India offers significant prospects in a variety of areas, including information technology, manufacturing, retail, and healthcare, due to its huge, youthful population, favorable demographic trends, and expanding middle class. Despite its difficulties, such as complicated regulations and bureaucracy, India is seen as a stable and appealing market for foreign investment. The Government of India (“GOI”) has taken strides in recent years to simplify regulations and streamline processes for international investors investing in India and improving the attraction of the Indian market.

The advancement of digital technology, as well as increased internet penetration, have made it easier for international corporations to start and operate operations in India. Foreign direct investment(“FDI”) has been critical to India’s economic development, notably in infrastructure and capital-intensive industries.

This article aims to trace the developments as witnessed by foreign direct investment in India and understand the legal and regulatory framework governing FDI in India in the following manner:

Recent developments in the Foreign Investment Regime
The regime governing Overseas Investment in India
Paving way for the foreign investors in India

Recent Developments in the Foreign Investment Regime

Over the last two decades, India has seen a tremendous increase in FDI. According to the Department for Promotion of Industry and Internal Trade (“DPIIT”), the country’s FDI inflows have increased 20-fold from April 2000 to June 2022, totaling US$ 871.01 billion. India got US$ 22.03 billion in FDI inflows in the first quarter of 2022, with US$ 15.59 billion in stock inflows.[1]This expansion can be ascribed to GOI’s attempts to streamline corporate procedures and loosen FDI restrictions.

The Government has undertaken and developed several schemes which have aided in the development and boosting of foreign direct investment in India. Some of these developments and schemes are:

GOI increased FDI in the defence sector to 74% via the automatic route and 100% via the approval/ Government route.
The amendment in the rules of the Foreign Exchange Management Act (FEMA)[2] allows up to 20% FDI in LIC, the insurance company, through the automatic route.
The Government also undertook schemes such as PM Gati Shakti, single window clearance, and GIS-mapped land bank to boost FDI inflows.
FDI in the telecom sector was increased to 100% via the automatic route.

The regime governing Overseas Investment in India

Several primary legislations control India’s foreign investment policy, such as:

The Foreign Exchange Management Act, 1999 (“FEMA”)
The Foreign Exchange Management (Non-Debt Instruments) Rules of 2019
The Consolidated Foreign Direct Investment Policy, 2020[3]

These rules and regulations lay the groundwork for foreign investment in India and specify the terms and conditions under which international investors may enter the Indian market through various foreign direct investment types.

The DPIIT’s FDI Policy describes the industries in which foreign investment is permitted and the investment caps that apply to each sector. The FDI Policy further divides foreign direct investment types into two categories: automatic, which requires no previous clearance from the GOI or the Reserve Bank of India (“RBI”), and government route, which requires prior approval.

In addition to the FDI Policy, the RBI and the GOI have adopted several rules and regulations under the FEMA to provide additional advice on foreign investment in India. These regulations specify forbidden foreign investment activities and provide for sector-specific requirements. For example, the RBI has specified the minimum amount of capital that foreign investors must bring into India, as well as the conditions under which capital can be repatriated.

Foreign investors must be aware of the FDI Regulations to be compliant with the Indian legal framework. Noncompliance with these standards may result in penalties and other consequences, such as the repatriation of invested funds and restrictions on future investment in India.

Paving Way for Foreign Investors in India

Given India’s enormous workforce and developing economy, the GOI is concentrating on attracting foreign investments to promote India as a preferred manufacturing hub. Initiatives such as “Make in India,”[4] “Atmanirbhar Bharat,”[5] and the production-linked incentive scheme, combined with relaxed FDI laws, among other things, have boosted the country’s economic growth significantly.

The GOI is also considering foreign investment in public sector undertakings (“PSUs”) and strategic divestiture of government-owned firms to decrease its fiscal imbalance. Examples include the sale of the whole government share in Air India to the Tata Group and the launch of the LIC initial public offering. The DPIIT also sold its stake in NeelachalIspat Nigam Limited to Tata Steel Long Products Limited, while the Cabinet Committee on Economic Affairs approved the sale of Central Electronics Limited and Pawan Hans Limited. Other PSUs, such as the Shipping Corporation of India and a renowned public sector bank, are also slated to be disinvested.[6]

Conclusion

Foreign investment has been critical to India’s economic growth and development. The government’s attempts to increase business ease, reduce FDI regulations, and boost manufacturing in the country have resulted in a considerable inflow of foreign capital. The FEMA and its accompanying regulations establish a comprehensive framework for controlling foreign investment in India. Foreign investments are regulated transparently and predictably thanks to the division of industries into automated and government routes, as well as sector-specific requirements and a list of prohibited activities.

The government’s disinvestment of its stakes in public-sector enterprises, as well as the introduction of initial public offerings, are additional initiatives by the government to tap into global investments. India is an appealing destination for international investors due to its vast market size and a large pool of qualified workforce. The Indian government’s commitment to economic reforms and continued liberalization of the business climate are projected to encourage foreign investment inflows in the next years.

FAQs

Is the regulatory framework for foreign investment in India?

The Foreign Exchange Management Act 1999, the Non-Debt Instrument Rules of 2019, and the Consolidated Foreign Direct Investment Policy of 2020 govern India’s foreign investment. The DPIIT’s FDI Policy describes the industries and investment caps that are open to foreign investment. Sectors are classified as either automatic or government, with automated requiring no clearance and government requiring prior approval. FEMA regulations provide additional guidelines on foreign investment and outline prohibited practices as well as industry-specific rules. The RBI establishes minimum capital requirements and repatriation rules for foreign investors.

Why is foreign investment regulation required?

Foreign investment regulation is required to promote domestic economic stability and growth, defend national security, and safeguard domestic businesses and resources. It also aids in the maintenance of the foreign trade balance, the observance of international agreements, and the prevention of damaging foreign activities such as money laundering and tax evasion. Furthermore, foreign investment regulations seek to level the playing field for domestic and international investors while also creating a favorable climate for foreign investment to prosper.

Why is India good for FDI?

India is appealing to foreign direct investment because of its vast market size, burgeoning middle class, favorable demographic profile, and increasing openness to global commerce and investment. The Indian government has also implemented various reforms and measures to ease corporate operations, such as the Make in India campaign, the Goods and Services Tax, and the Foreign Direct Investment Policy, making India an appealing destination for foreign investors.

[1]https://dpiit.gov.in/sites/default/files/FDI_Factsheet_June_2022.pdf.

[2]https://legislative.gov.in/sites/default/files/A1999-42_0.pdf.

[3]https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf.

[4]https://www.makeinindia.com/.

[5]https://aatmanirbharbharat.mygov.in/.

[6]https://dipam.gov.in/strategic-disinvestment.

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