FDI in Indian economy

Amendment in the FDI Policy for curbing opportunistic takeovers/acquisitions of Indian companies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FDI in India

Mains level : Features of India's FDI Policy

The Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19.

Context

  • The Indian policy revision is meant for sectors and enterprises other than defence, space, atomic energy and sectors and activities “prohibited for foreign investment”.
  • It was understood that the Indian decision was a response to the news of an incremental purchase of shares in HDFC by the People’s Bank of China.

FDI is an all-season hot topic for both prelims as well as mains. Reading the newscard will make you aware of its scope. We can expect a mains question like –  Recent amendment in the FDI Policy aims for curbing opportunistic takeovers/acquisitions of Indian companies. Elucidate.

Background

FDI in India

  • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
  • There are two routes by which India gets FDI.
  1. Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.
  2. Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single-window clearance of FDI application under Approval Route.
  • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
  • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

What is the amendment about?

  • The govt. has amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.
  • 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, such subsequent change in beneficial ownership will also require Government approval.

The present position and revised position in the matters will be as under:

Present Position

  • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  • However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Revised Position

  • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.

[spot the difference]

  • However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
  • Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

In response to China

  • China accused that India’s recently adopted policy goes against the principles of the World Trade Organisation (WTO).
  • It tends to violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.

Impact

  • The amended policy brings every kind of Chinese investors to India within the ambit of government approval reducing the space for private business negotiations.
  • The decision would face difficulties, especially if the government tried to attribute nationality to venture capital funds.

Back2Basics: Foreign Direct Investment (FDI)

  • An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
  • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
  • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
  • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
  • In a narrow sense, it refers just to building a new facility, and lasting management interest.
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