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Subject: BoP,FDI,FPI,External Financing

  • [3rd October 2026] The Hindu OpED: India’s Model BIT: a decade later, amid changes

    [3rd October 2026] The Hindu OpED: India’s Model BIT: a decade later, amid changes

    Question (2020, GS3 – 15 Marks): Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.
    Linkage: A Bilateral Investment Treaty is effectively a macro-level concession/protection agreement between a host state and foreign private investors. Designing a BIT requires balancing public interest safeguards against the private entity’s need for capital security and predictability.
    [2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?
    (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
    (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
    (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
    (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India

    Mentor’s Comment

    India’s treaty practice has already moved ahead of its model. The UAE, Uzbekistan and Israel agreements shortened the remedies period and allowed counterclaims while the 2015 text stayed unchanged. The revision matters only if it writes this practice into the model. If it does not, the model remains a reference that negotiators bypass.

    Why in the News

    The Union Budget 2025-26 announced that India’s Model Bilateral Investment Treaty (BIT) would be revamped and made more investor-friendly, and the revised model is reportedly finalised and awaiting Cabinet approval. The real question is not whether investors get more or less protection, but what India has learnt from a decade of treaty practice.

    What is a Model BIT, and why was the 2015 version cautious?

    1. What it is: A BIT protects one country’s investors in the other. A Model BIT is India’s opening template, like a standard contract form, showing the protections it offers and obligations it expects.
    2. Why it turned cautious: The White Industries Australia Limited vs Republic of India award (2011) and worries about investor-state dispute settlement (ISDS), where investors sue states before international tribunals, made India defensive.
    3. Design of the 2015 Model: It narrowed what counts as an investment and kept regulatory exceptions for state action. Investors had to exhaust local remedies for five years, using Indian courts first, before arbitration.
    4. The takeaway: After nearly a decade, the revision decides whether India keeps this defensive design or trades some of it for investor confidence.

    How has India’s own treaty practice moved since 2015?

    1. New-generation agreements: Since 2015, India has concluded newer investment agreements with the United Arab Emirates (UAE), Uzbekistan and Israel.
    2. Shorter local remedies: The India-UAE BIT and the India-Israel Bilateral Investment Agreement, in force since July 2026, cut the local remedies period to three years.
    3. Greater flexibility: These treaties show India has already departed from its own model in practice.

    How has the global investment regime changed?

    1. UNCTAD’s shift: UN Trade and Development (UNCTAD) records treaties moving toward investment facilitation, making investing procedurally easier, with narrower protections. They rely less on ISDS.
    2. UNCITRAL reform agenda: The UN Commission on International Trade Law (UNCITRAL) is examining a permanent tribunal with an appellate mechanism to correct errors. It is also studying rules on damages and dispute prevention.
    3. Rule-shaper, not rule-taker: Scholar Makane Moïse Mbengue argues a developing state can shape investment law through its treaties, so India’s model must answer this new regime, not merely edit the old text.

    How should the new model handle the MFN clause?

    1. What MFN does: A Most Favoured Nation (MFN) clause lets one partner’s investor claim any better treatment India gives under another treaty. Most Indian treaties omit it, and a new clause needs precise scope.
    2. Maffezini vs Spain: An investor used MFN to bypass an 18-month local-court requirement by borrowing friendlier dispute rules from another treaty.
    3. Plama vs Bulgaria: The tribunal refused to import such dispute provisions where the treaty did not clearly allow it.
    4. Carve-out practice: Recent treaties expressly exclude dispute settlement from MFN, so a waiting period cannot be bypassed.

    What else must the new model get right?

    1. Counterclaims: The India-Uzbekistan BIT lets a state file a counterclaim, suing the investor back in the same case. The new model can list investor obligations and when counterclaims apply.
    2. Dispute prevention: The model can add consultation and dispute-prevention steps before arbitration, now discussed at UNCITRAL Working Group III (WG III).
    3. Precise protections: Expropriation (the state taking an investment) and fair and equitable treatment (FET) (a broad promise of fair handling) need clear wording. Precise terms protect the state’s right to regulate.
    4. Binding, balanced text: Responsible investment must be written as a legal duty, not a declaration. The model should be clearer for both sides and leave room to adjust each treaty.

    Challenges

    1. MFN imports: Tribunals have used MFN to import stricter standards. Eg. White Industries borrowed an “effective means” duty from the India-Kuwait BIT.
    2. Tax claims: Easier arbitration exposes sovereign tax measures to challenge. Eg. The Vodafone and Cairn Energy awards of 2020.
    3. Thin treaty network: India terminated most older BITs after 2016, so few partners hold treaties under any model.

    Way Forward

    1. MFN carve-out: The Department of Economic Affairs should exclude dispute settlement and procedural rights from any MFN clause.
    2. Closed FET list: Define FET as a closed list of breaches, such as denial of justice and manifest arbitrariness.
    3. Active WG III role: India should help design the permanent tribunal so its appellate review reflects developing country concerns.

    Conclusion

    India must write a model that reassures investors without surrendering the space to regulate in the public interest. Whether the Cabinet-approved text settles MFN scope and investor obligations, or leaves them to tribunals, will show if the decade’s lessons were learnt.

  • We have a model investment treaty. And are losing billions because of it

    Why in the News

    India’s bilateral investment treaties (BITs) in force fell from 73 in 2015 to eight by 2021 after the 2016 Model BIT tightened its terms for foreign investors. Eighteen months after the Finance Minister promised Parliament a revision, the model is unchanged and foreign investment stays weak.

    What is the 2016 Model BIT, and why is it called restrictive?

    1. What it is: A BIT protects one country’s investors in the other and lets them take disputes to international arbitration, a neutral tribunal. The 2016 Model is India’s negotiating template.
    2. Five-year local litigation rule: A foreign investor must litigate in Indian courts for five years before arbitration. Indian courts rarely finish a case in that time, so the rule brought only delay.
    3. Global norm: Other countries require only a three to six month consultation period, like a cooling-off period before a divorce, to try to settle.
    4. Partial easing: Newer treaties with the United Arab Emirates (UAE) and Israel cut the wait to three years; proposals for two give no stated reason.
    5. The takeaway: The model made arbitration hard to reach, so India’s treaty network shrank.

    What has the 2016 model cost India?

    1. Treaty network dismantled: The new model produced only six new treaties. None of the eight still in force covers a significant source of foreign capital.
    2. Investment forgone: American investment is large even without a treaty; the cost is the extra investment a treaty would add.
    3. Obstruction charge: India is described as the most obstructionist member of the World Trade Organization (WTO), with a matching treaty model. Deregulation and a US trade deal have also stalled.

    Why does a record FDI inflow hide a weak picture?

    1. Gross versus net: Net foreign direct investment (FDI) is money coming in minus money going out. Gross inflow hit a record, but net FDI was only $7.65 billion last year.
    2. Money going out: Foreign investors took home or sold off $53.6 billion, and Indian firms invested $33.3 billion abroad.
    3. Reinvested earnings: Profits foreign firms reinvest in India reached $25.6 billion, over three times net FDI. This is not a fresh commitment.
    4. Older definition: Excluding reinvested earnings, as India once did, gives a net direct investment outflow of about $18 billion.
    5. Portfolio exit: Indian shares trail other emerging markets by about 30 percentage points this year. Foreign investors have pulled out another $10.5 billion.

    Is counting long-held portfolio investment as FDI a fix?

    1. What separates the two: Direct investment is a stake large enough to give a say in running the business; portfolio investment is too small for that.
    2. Reported proposal: Counting portfolio investment held over three years as direct investment, a reported plan, adds no new dollar and changes only the headline.
    3. International standard: The Organisation for Economic Co-operation and Development (OECD) Benchmark Definition, the global rule for counting FDI, bars extra conditions. No country uses holding period.

    Challenges

    1. Arbitration exposure: Easier arbitration exposes India to treaty claims over tax. Eg. The Vodafone and Cairn Energy awards of 2020.
    2. Slow commercial courts: Commercial case backlogs make local litigation a denial of remedy for investors.
    3. Statistical credibility: Redefining FDI to flatter the headline would weaken trust in balance of payments data.

    Way Forward

    1. Revised model: The Department of Economic Affairs should publish a revised Model BIT replacing local litigation with a short consultation window.
    2. Priority partners: India should first negotiate with its largest capital sources, such as the European Union.
    3. Stake-based definition: The Reserve Bank of India (RBI) should keep FDI defined by size of stake, in line with the OECD standard.

    Conclusion

    India’s problem is not the headline inflow but whether foreign capital makes fresh, long-term commitments. Whether the promised revised model drops mandatory local litigation is the decision to watch.

    Key numbers

    1. Gross FDI inflow, 2025-26: $94.5 billion, a record.
    2. Net FDI, 2024-25: 0.02% of GDP.
    3. Net FDI, 2025-26: about 0.18% of GDP, the second-lowest in three decades.
    4. Reinvested earnings: excluded from India’s FDI data until 2000-01.
    5. BITs in force: 29 (2017) and 16 (2019).
    6. Newer BITs: UAE (2024) and Israel (2025).

    Government Initiatives on Foreign Direct Investment

    1. Liberalised routes: Most sectors allow 100% FDI through the automatic route, without prior approval.
    2. Invest India: The national investment facilitation agency since the Foreign Investment Promotion Board (FIPB) was abolished in 2017.
    3. EFTA pact: The India-European Free Trade Association (EFTA) Trade and Economic Partnership Agreement commits $100 billion of investment over fifteen years.

    Matching Previous Year Question

    “[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ? (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India Answer: D”

  • Market plunges, more bad weather may lie ahead

    Why in the News

    Indian equities saw a sharp, broad-based selloff on Monday, with the BSE Sensex falling 1,124 points. Global shocks and steady selling by foreign portfolio investors (FPIs) are driving the fall even as corporate earnings stay healthy, so investor concerns run deeper than company results.

    What is the Sensex, and how deep is the fall?

    1. What it is: The Sensex is the Bombay Stock Exchange’s index of 30 large companies. It works like a thermometer for investor mood.
    2. A broad fall: Monday’s 1.52 per cent drop hit public sector bank, fast-moving consumer goods (FMCG), utilities, auto and financial services stocks alike.
    3. A long slide: The Sensex has fallen almost 15 per cent since the start of 2026.
    4. The takeaway: A fall this broad and long reflects a reassessment of India’s risks, not a one-day shock.

    Why has market sentiment soured?

    1. West Asia conflict: The conflict in West Asia and the high energy prices it has caused weigh heavily on India, which imports most of its crude oil.
    2. Hormuz shock: Oil prices spiked after the US President rejected Iran’s proposal to reopen the Strait of Hormuz, the narrow sea passage through which much of the Gulf’s oil is shipped.
    3. Rising bond yields: The 10-year US bond yield stands at 5.2 per cent. When safe US bonds pay more, global investors move money out of riskier emerging markets such as India.
    4. Tighter global money: Tightening global financial conditions, meaning costlier and scarcer credit worldwide, leave less money for equities.

    Why are foreign investors selling despite healthy earnings?

    1. What FPIs are: Foreign portfolio investors buy shares and bonds for returns without seeking control, so they can exit quickly. They are net sellers again, selling more than they buy.
    2. Scale of the exit: FPIs have taken $26.2 billion out of Indian equities so far in 2026, after heavy outflows the previous year.
    3. Deeper doubts: Brokerage Bernstein argues the “case for a structural India allocation has become harder to make”, meaning a lasting place for India in global portfolios.
    4. Earnings still healthy: Ratings agency ICRA expects Indian companies’ second quarter revenue to grow 13 to 15 per cent. Operating margins, the share of sales left after running costs, are under pressure.

    What will drive markets in the near term?

    1. US interest rates: After the US Federal Reserve‘s recent rate hike, markets will read upcoming data for clues on the path of interest rates.
    2. Energy markets: How long and how hard the West Asia conflict runs will shape oil prices, and so the markets.
    3. El Niño: El Niño, a warming of the Pacific Ocean that often weakens India’s monsoon, can cut crop output and raise food prices.
    4. RBI policy: The Reserve Bank of India (RBI)‘s Monetary Policy Committee (MPC) meets next week amid expectations of a rate hike, which would tighten domestic policy further.

    Challenges

    1. Imported inflation: Costly oil raises fuel and transport costs, pushing up prices across the economy.
    2. Rupee pressure: FPI outflows raise demand for dollars, weakening the rupee and making imports dearer.
    3. Growth versus inflation: A rate hike raises borrowing costs for firms already facing margin pressure.
    4. Food supply risk: A weak El Niño monsoon can cut farm output and add to food inflation.

    Way Forward

    1. Calibrated monetary policy: The MPC should weigh imported inflation against growth in sizing any hike.
    2. Deeper domestic investor base: Channel household savings into equities through mutual and pension funds to cushion foreign exits.
    3. Energy buffers: Expand strategic petroleum reserves and diversify crude supply away from Hormuz.
    4. Food supply planning: Use buffer stocks and open market sales to contain El Niño-linked food inflation.

    Conclusion

    India’s market fall is driven more by global shocks and foreign investor doubt than by weak corporate earnings. The MPC’s decision and the course of the West Asia conflict will show whether the pressure eases or deepens.

    Key numbers

    1. FPI equity outflow, September 2026: $2.1 billion.
    2. FPI equity outflow, 2025: $18.9 billion.

    Back2Basics: Monetary Policy Committee

    1. What it is: A statutory body under the Reserve Bank of India Act, 1934, created by a 2016 amendment. It sets the repo rate, the RBI’s lending rate to banks.
    2. Composition: Six members: three from the RBI, including the Governor as chair, and three external members appointed by the Centre.
    3. Mandate: Keep retail inflation at 4 per cent, within a tolerance band of two percentage points either side.
    4. Decisions: Taken by majority vote, with the Governor holding a casting vote in a tie.

    Matching Previous Year Question

    “[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ? (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India Answer: D”

  • FCNR(B) deposits: Understanding who finally bears the foreign exchange risk

    Why in the News

    The Reserve Bank of India (RBI) opened a special swap facility in June to draw money from non resident Indians into FCNR(B) deposits. The full name is Foreign Currency Non Resident (Bank), and such a deposit is held and repaid in foreign currency rather than in rupees. The step answered pressure on the rupee from high oil prices and an aim of building up foreign exchange reserves. The facility protects banks against exchange rate loss on the principal. It does not cover the interest, which is owed in dollars and has to be arranged by the banks themselves. That split is what decides who finally carries the currency risk.

    What is an FCNR(B) deposit and what did the special swap facility offer?

    1. A deposit denominated in foreign currency: A non resident places dollars or another permitted currency with an Indian bank, and the bank repays in that same currency, so the depositor carries no rupee risk.
    2. The term of the money: These deposits typically run for three to five years, which is when the principal and the accumulated interest fall due.
    3. What the swap added: The bank passes the foreign currency to the central bank for rupees and receives a commitment to reverse the exchange at an agreed rate on maturity.
    4. The window is shut: Fresh deposits under the facility stopped on 31 August 2026.

    Why was the window opened, and what did it actually raise?

    1. The response overshot the target: Banks mobilised more than $127 billion through these deposits against an initial target of about $50 billion.
    2. Funding turned cheap: The scheme gave banks foreign currency at a lower cost than borrowing abroad on their own credit would have carried.
    3. Reserves rose with it: The foreign currency handed to the central bank added substantially to India’s reserve stock.

    What does protecting the principal cost the central bank?

    1. The hedging bill sits with the central bank: It bears the cost of covering the currency exposure on the principal, put at up to 3% a year by BofA Securities Research and taken at about 3% a year by SBI Research.
    2. The annual and cumulative numbers: On an assumed mobilisation of $65 billion to $70 billion at that rate, SBI Research calculated a notional cost of about $2.1 billion a year and about $10.5 billion over five years.
    3. Measured against the reserve stock: Against reserves of around $700 billion, the five year cost works out to 1.45% of the stock.

    What offsets that cost?

    1. The reserves themselves earn a return: BofA Securities Research estimated a yield of around 4.5% to 5% on the reserves generated, enough to more than cover the hedging cost across a five year holding.
    2. Placement is chosen for yield: Part of the money may be invested in United States government securities because those yields are higher.
    3. Part of the outgo is already recovered: SBI Research said the central bank had rebuilt $31.2 billion of its foreign currency assets by 7 August 2026, equal to 55% of the amount mobilised to that point.

    Why have most banks left the interest leg unhedged?

    1. The swap stops at the principal: Banks have to source the dollars for interest payments and manage that exposure on their own books.
    2. The split runs by ownership type: Foreign banks are largely hedging this exposure. Most state run banks and several private sector Indian lenders have left it open.
    3. Cost is the stated reason: Bankers cite the price of cover on a three to five year exposure, which is of the same order as the cost the central bank carries on the principal.
    4. The payment timing invites the gamble: Interest on these deposits is paid only at maturity, so some banks plan to buy dollars in the spot market when the payment actually falls due.

    What happens to an unhedged bank if the rupee weakens?

    1. The arithmetic of one payment: Interest of $1 million costs Rs 9.5 crore at Rs 95 to the dollar, and Rs 10 crore if the dollar reaches Rs 100 at maturity.
    2. Cover decides who absorbs it: A hedged bank is protected against that movement, and a lender that left the exposure open bears the higher rupee cost.
    3. The risk is correlated across lenders: A sharp fall in the rupee would push many banks to buy dollars at the same time, adding to dollar demand and to pressure on the currency.
    4. The exposure has not gone away: The scheme moved currency risk between parties rather than removing it from the system.

    Challenges to the FCNR(B) swap route to reserve building

    1. Reserves built this way are borrowed reserves: Non resident deposits count within India’s external debt, so the reserve stock rises with a matching liability against it. Eg. Non resident deposits are among the largest components in the Finance Ministry’s quarterly external debt statement.
      The Fix: Publish the debt creating share of any reserve addition alongside the headline reserve figure.
    2. Maturities bunch at one point in time: A window opened over a single quarter falls due over a single quarter, which concentrates the outflow. Eg. The concessional swap window of 2013 raised about $34 billion and came up for redemption together in late 2016.
      The Fix: Stagger the maturities permitted under a window across quarters rather than letting the market settle on one tenor.
    3. The open exposure sits with the thinnest buffers: Public sector lenders hold less capital against a valuation loss than the foreign banks that are covering the same risk. Eg. Several public sector banks required recapitalisation from the Union Budget through the second half of the 2010s.
      The Fix: Set a supervisory ceiling on the share of foreign currency interest liability a bank may leave uncovered.
    4. The facility substitutes for adjustment: Attracting deposits to steady the currency postpones the correction that a persistent current account gap eventually forces. Eg. The rupee continued to depreciate through the years after the 2013 defence of the currency ended.
      The Fix: Tie any such window to a stated reserve adequacy target, so it closes as a one time step instead of becoming a standing instrument.

    Conclusion

    The swap changed the address of the currency risk without retiring it. The central bank now holds an exposure that depositors were unwilling to take, and lenders hold the portion the central bank declined. Whether that is prudent rests on a rupee path nobody can commit to. The supervisory question to watch is whether banks will be required to cover the foreign currency leg they have chosen to leave open.

    Back2Basics: Non resident deposit accounts

    1. NRE account: A Non Resident External account is held in rupees, and both principal and interest are freely repatriable.
    2. NRO account: A Non Resident Ordinary account is held in rupees for income earned in India, and repatriation out of it is capped.
    3. Where the currency risk sits: In a rupee denominated non resident account the depositor bears the exchange risk, which is the reverse of a foreign currency denominated account.

    Matching Previous Year Question

    “[2019] Consider the following statements: 1. Most of India’s external debt is owed by governmental entities. 2. All of India’s external debt is denominated in US dollars. Which of the statements given above is / are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 ANSWER: (d)”

  • A BIT of a reset, with a wider debate

    Why in the News

    India is revising its model bilateral investment treaty (BIT), and the revised text will soon be placed before the Union Cabinet. The Finance Minister signalled the intention to revamp the 2015 Model BIT in the Union Budget speech of 2025. The 2015 model was itself the product of an appraisal launched after several foreign investors sued India for treaty breaches. That appraisal produced two outcomes: unilateral termination of existing treaties, and a new model text as the basis for fresh negotiations. Debate on the current revision has concentrated almost entirely on what the treaty should say. The process by which the text is written has attracted almost no attention, and that is where the democratic deficit sits.

    What is the 2015 Model Bilateral Investment Treaty?

    1. What a model treaty is: A model bilateral investment treaty is the template text a country negotiates from when it concludes investment protection agreements with other countries.
    2. What such a treaty does: It grants legal protections to investors of one country investing in the other. It also gives those investors a route to bring a claim directly against the host state before an international arbitral tribunal.
    3. The two objectives it must balance: Investment treaties sit between investment protection at one end of the spectrum and the state’s right to regulate at the other.
    4. When India adopted it: India circulated a draft in 2015 and adopted the revised version in December 2015.

    Why has the 2015 model produced so few treaties?

    1. The record: India has concluded only a handful of treaties on the basis of the 2015 model in the last decade or so.
    2. The imbalance in the text: The model tilts heavily towards the state’s right to regulate and away from the protection of the investment.
    3. What capital exporting countries read into it: Countries that export capital to India doubt the legal protection available to their investments under such a text.
    4. What compounds the doubt: High regulatory risk, governance models that are not well developed, and a slow judicial system add to that concern.

    What legal changes are being proposed, and what is being left out?

    1. Easier access to arbitration: Experts have argued for making it easier for a foreign investor to take a treaty claim to international arbitration.
    2. Stronger substantive protections: The protections given to foreign investment in the text would be enhanced.
    3. Investment facilitation: The revised model would carry more measures aimed at facilitating investment rather than only protecting it.
    4. The half of the review that is missing: A treaty review has two components, the substantive and procedural changes to the law, and the process followed to make the outcome robust. Only the first has been deliberated.

    What is the democratic deficit in treaty making?

    1. The all-affected principle: International economic treaties have a conspicuous impact on citizens, which raises the question whether those affected should have a right to participate in the decision.
    2. What the term means: Democratic deficit refers to insufficient oversight of the technocrats, bureaucracies and political executive who negotiate treaty frameworks behind closed doors.
    3. Where it originated: The term originated in European debates on the accountability of decision making removed from elected legislatures.
    4. The first form the gap takes: Parliamentary supervision of the treaty making process is absent or inadequate.
    5. The second form: There is no external consultative process with other stakeholders, including subject matter experts and civil society organisations.

    What do other countries do before adopting an investment treaty text?

    1. United Kingdom and Australia: Both mandatorily place the text of a negotiated treaty on the floor of Parliament before ratification, so the legislature can express its views on it.
    2. Norway: Two rounds of public consultation were held on an updated draft model BIT, in 2008 and in 2015.
    3. Colombia: The country released its model BIT for public consultation.
    4. What the set demonstrates collectively: Consultation is applied to the model text itself and not only to a concluded treaty, which means the template a country negotiates from is treated as a public policy document rather than an internal instruction.

    What did India’s own 2015 consultation produce?

    1. The public comment stage: India circulated its draft 2015 model BIT for public comment in March 2015.
    2. The expert study it enabled: That opening allowed the Law Commission of India to assemble a team of experts to study the draft text.
    3. The report: The Law Commission’s 260th report made recommendations on how to improve the draft model treaty.
    4. What was carried through: Not all of the recommended changes were reflected in the version India finally adopted.

    What consultative process is proposed for the revision?

    1. What has presumably already happened: Intra-governmental deliberation on the model text has been undertaken inside government.
    2. A core team of external experts: Form a team outside government of international lawyers and economists drawn from universities, research institutions and think tanks, to act as a sounding board.
    3. Wider stakeholder engagement: Invite industry bodies, arbitrators, law firms and other civil society organisations to offer their views on the model text.
    4. A public draft: Prepare a draft and place it in the public domain, inviting comments from the public at large.
    5. Parliamentary scrutiny: Place the draft model treaty on the floor of Parliament for discussion, and rope in the relevant department related parliamentary committees.
    6. The standard the exercise must meet: The process must engage with dissenting views rather than run as a box ticking formality.

    Challenges to revising the Model Bilateral Investment Treaty

    1. A model text does not bind the counterparty: A model is a negotiating template, so a partner with stronger bargaining power will press its own text and the model’s provisions will be traded away one by one. Eg. Investment provisions have been among the unresolved items in India’s long running negotiations with the European Union.
      The Fix: Publish the provisions treated as non-negotiable separately from those open to trade-off, so a concluded treaty can be judged against a stated position rather than against the template.
    2. The local remedies requirement is long relative to the delay it addresses: The 2015 model requires an investor to pursue domestic remedies for five years before starting international arbitration, in a system whose delay is itself the investor’s complaint. Eg. White Industries Australia v Republic of India (2011), the first adverse award against India, arose from delay in Indian courts enforcing a commercial arbitration award.
      The Fix: Tie the domestic remedies condition to a defined procedural stage being reached rather than to a fixed number of years.
    3. Termination does not end exposure: A terminated treaty carries a survival clause that keeps protections alive for investments made before termination, so liability continues for years after the instrument goes. Eg. The 2020 Vodafone award was rendered under the India-Netherlands treaty after India had begun issuing termination notices in 2016.
      The Fix: Negotiate replacement treaties with express provisions displacing the survival clauses of the instruments they replace.
    4. Taxation is carved out of the model’s scope: The 2015 model excludes taxation measures from treaty protection, which removes the very category of dispute that produced India’s largest awards. Eg. The 2020 Cairn Energy award, made under the India-United Kingdom treaty, concerned a retrospective tax demand.
      The Fix: Bring expropriatory tax measures within the treaty’s scope while keeping bona fide tax policy outside it.
    5. Consultation without a legal basis is discretionary: No Indian law requires the executive to lay a treaty text before Parliament, so every consultation depends on the willingness of the government of the day. Eg. Treaties are concluded under executive power and reach Parliament only where implementing them requires a change in domestic law.
      The Fix: Enact a treaty scrutiny statute setting out which categories of treaty must be laid before Parliament and for how long before ratification.

    Conclusion

    The revision is being handled as a drafting exercise. The gap it does not close is that India has no settled procedure for producing a treaty text at all, so the quality of the next model rests on the discretion of whoever drafts it. A text written without external scrutiny will attract the same legitimacy objection whichever direction it moves the balance in. What to watch is whether the draft reaches the public domain and the floor of Parliament before the Union Cabinet clears it, or only after.

    Bilateral Investment Treaties in India

    1. What they are: A bilateral investment treaty is an agreement between two countries setting the terms on which each protects investors from the other in its own territory.
    2. How disputes under them are settled: Most such treaties allow an investor to bring a claim directly against the host state before an international arbitral tribunal, without routing it through its own government.
    3. India’s treaty stock: India signed its first such treaty with the United Kingdom in 1994 and went on to sign more than 80. From 2016 it began terminating them and moved to renegotiate on the 2015 model.
    4. What has been concluded since: Treaties concluded on the newer template include those signed with the United Arab Emirates and with Uzbekistan in 2024.

    Constitutional Framework Governing Treaty Making

    1. Article 246 with Entry 14 of the Union List: Places entering into treaties and agreements with foreign countries, and implementing them, within Parliament’s exclusive legislative field.
    2. Entry 13 of the Union List: Covers participation in international conferences and associations, and the implementing of decisions taken at them.
    3. Article 253: Empowers Parliament to make law for the whole or any part of India to implement any treaty, agreement or convention with another country.
    4. Article 73: Extends the Union executive’s power to every matter on which Parliament may legislate, which is the basis on which the executive concludes a treaty without prior legislative approval.

    Back2Basics: Law Commission of India

    1. What it is: A non-statutory executive body constituted by the Government of India to advise on law reform.
    2. How it is constituted: It is set up for a fixed term by an order of the Ministry of Law and Justice, and is chaired by a retired judge.
    3. What it does: It examines existing laws and specific references made by the government, and submits reports carrying recommendations.
    4. The weight its reports carry: Its recommendations are not binding, and a change in law follows only where the government accepts them.

    [2010] A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economies like UK and France. Why?

    (a) India has preference, for certain countries as regards receiving FDI

    (b) India has double taxation avoidance agreement with Mauritius

    (c) Most citizens of Mauritius have ethnic identity with India and so they feel secure to invest in India

    (d) Impending dangers of global climate change prompt Mauritius to make huge investments in India

  • Norms allowing e-comm cos to keep inventory notified by govt

    Why in the News

    The Department of Economic Affairs, in the Ministry of Finance, has amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 to let e-commerce entities hold inventory. The permission is confined to goods meant for export. Those goods must be manufactured or produced in India. Foreign Direct Investment (FDI) in inventory based e-commerce retailing remains barred, so a foreign funded platform still cannot own the stock it sells to Indian consumers. The change separates a platform’s right to own goods from its right to sell them in India.

    What is inventory based e-commerce, and how does it differ from the marketplace model?

    1. Inventory based model: The platform owns the goods it lists and sells them directly to the buyer.
    2. Marketplace model: The platform runs a digital facility connecting independent sellers to buyers. It does not own the stock it displays.
    3. The investment line between them: Foreign investment up to 100 percent under the automatic route is permitted in the marketplace model. Foreign investment in the inventory based model is not permitted.

    What has the amendment changed?

    1. A permission tied to export: An e-commerce entity may now maintain inventory where the goods are meant for export.
    2. A domestic origin condition: The goods so held must be manufactured or produced in India.
    3. The retail bar is untouched: Foreign investment in inventory based e-commerce retailing has not been permitted.
    4. The route taken: The Department of Economic Affairs inserted the provision into the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, which is the instrument that carries India’s foreign investment conditions in law.

    Why does an export only carve out change what a foreign funded platform can do?

    1. Ownership of stock becomes lawful for one purpose: A foreign funded platform may buy, own and warehouse Indian made goods, provided the buyer sits outside India.
    2. The domestic retail rationale survives: The bar exists to stop a platform holding foreign capital from selling its own stock to Indian consumers at prices small retailers cannot match. An export sale does not enter that market.
    3. Exports gain an aggregator: A small manufacturer without overseas logistics can sell to a platform that takes title to the consignment and ships it out.
    4. The test shifts from ownership to destination: Compliance now turns on where a consignment ends up, which is a harder thing to observe than who owns it.

    Challenges to the export only inventory permission

    1. Diversion into the domestic market: Stock held under the export permission can be sold at home unless each consignment is matched to a foreign buyer. Eg. Duty free inputs meant for export production have repeatedly been the subject of Directorate of Revenue Intelligence cases over domestic diversion.
      The Fix: Require the platform to reconcile inventory held under this permission against shipping bills filed with Customs, and treat an unreconciled balance as a contravention.
    2. No stated threshold for what counts as made in India: The condition turns on goods manufactured or produced in India, and a low value assembly operation meets that description. Eg. Domestic value addition has been a running dispute under the Production Linked Incentive scheme for electronics, where imported kits are assembled locally.
      The Fix: Attach a stated domestic value addition threshold to the permission, as the Production Linked Incentive schemes already do.
    3. Enforcement acts long after the sale: Contraventions under the Foreign Exchange Management Act, 1999 are penalised or compounded after the fact, so a breach is corrected once the goods have already moved. Eg. Proceedings against large foreign funded e-commerce platforms over foreign investment conditions have run for years without a settled outcome.
      The Fix: Require an annual statutory auditor’s certificate on compliance with the export condition, filed with the Reserve Bank of India.
    4. The marketplace disputes are left where they were: The standing complaints of small retailers concern preferential seller arrangements inside the marketplace model, which this permission does not touch. Eg. The Competition Commission of India’s investigation into preferred sellers and deep discounting on major platforms began in 2020.
      The Fix: Conclude the pending competition proceedings on preferential seller arrangements, so the marketplace conditions are enforced on their own terms.

    Conclusion

    India’s foreign investment rules now treat ownership of goods and sale of goods as two separate permissions. The carve out is drawn narrowly, so its practical worth depends entirely on how the export destination is verified rather than on the width of the wording. The marker to watch is whether operating conditions specifying that verification follow, and whether foreign funded platforms build export volumes large enough to make the permission material.

    Back2Basics: Foreign Exchange Management (Non-debt Instruments) Rules, 2019

    1. What they are: Rules made under the Foreign Exchange Management Act, 1999 governing investment by a person resident outside India in equity and other non-debt instruments.
    2. Who issues them: The Department of Economic Affairs in the Ministry of Finance notifies them.
    3. What they carry: Sectoral caps, entry routes and the specific conditions attached to foreign investment in each sector.
    4. Why they matter: A change announced as foreign investment policy takes legal effect only when these Rules are amended.

    Matching Previous Year Question

    “[2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (a) It is the investment through capital instruments essentially in a listed company. (b) It is a largely non-debt creating capital flow. (c) It is the investment which involves debt-servicing. (d) It is the investment made by foreign institutional investors in the Government securities. ANSWER: (b)”

  • Needed: More stable foreign capital

    Why in the News

    Inflows through the Reserve Bank of India’s (RBI) forex swap facility reached $136.3 billion by 31 August. The facility was part of a set of measures announced in June to draw capital into the country, and it was opened against doubts about how much could be raised in tight global financial conditions. Foreign exchange reserves have touched a record $729 billion and the rupee’s slide has been arrested. The same inflow has pushed the banking system’s liquidity surplus to Rs 6.7 lakh crore, at a point when inflation is edging up and the Monetary Policy Committee (MPC) may need to raise rates. Most of the money arrived as Foreign Currency Non Resident Bank, or FCNR(B), deposits, which are repayable debt rather than the stable equity investment a current account deficit requires.

    What is the FCNR(B) and swap route?

    1. The deposit is a foreign currency liability of the bank: An FCNR(B) deposit is a term deposit placed by a non resident Indian in foreign currency with an Indian bank. The bank repays principal and interest in that same currency, so the depositor carries no rupee exchange risk.
    2. The swap converts those dollars into rupees at a fixed cost: Under a swap facility the bank sells the mobilised dollars to the RBI for rupees, with an agreement to reverse the transaction at a pre agreed rate on a fixed future date.
    3. A concessional swap rate is what makes the route attractive: The central bank absorbs part of the hedging cost, which lifts the effective return the bank can offer a depositor without taking currency risk itself.
    4. Two borrowing channels run alongside: External Commercial Borrowings (ECB), meaning foreign currency loans raised abroad by Indian companies, and Overseas Foreign Currency Borrowings (OFCB) raised by banks, carry the balance of the flows.

    How large were the inflows, and what did they buy?

    1. The response exceeded expectations: $136.3 billion came in by 31 August, of which $63.5 billion arrived in the last ten days alone.
    2. The deposit route dominated: $127 billion came through FCNR(B), with the balance through the ECB and OFCB channels.
    3. Reserves hit a record: Foreign exchange reserves reached $729 billion on 21 August, which strengthens the buffer for external stability.
    4. The currency stabilised: The rupee’s fall was stemmed and it touched a two month high of Rs 94.60 to the dollar on 3 September.
    5. The window is not exhausted: About $9 billion more remains available through an ECB and OFCB swap window that stays open till December.

    Why does the same inflow complicate monetary management?

    1. Every dollar swapped injects rupees: The liquidity surplus in the banking system rose from over Rs 3 lakh crore at the beginning of August to Rs 6.7 lakh crore by the end of it.
    2. Independent estimates put the overhang higher: Surplus liquidity stood at Rs 9.71 lakh crore on 2 September, against a preferred level of about Rs 2.7 lakh crore.
    3. One absorption tool is doing all the work: The central bank has responded with variable rate reverse repo auctions, in which banks bid to park surplus funds with it for a fixed term. More tools will be needed at this scale.
    4. The timing runs against the policy stance: Inflation is edging upwards and the MPC may need to tighten, and a large surplus pushes short term rates below the policy rate in the opposite direction.
    5. Growth gives the committee room: Robust first quarter growth provides the space and comfort to tighten if the inflation trajectory demands it.

    Why is debt type inflow not a substitute for stable capital?

    1. The underlying deficit is unaddressed: India runs a current account deficit, which has to be financed every year regardless of what a one time window raises.
    2. Equity flows remain thin against the need: Foreign portfolio investors have been net equity buyers over recent months and net foreign direct investment is inching upwards, neither at a scale that finances the deficit on its own.
    3. Deposits are dated money: FCNR(B) deposits are repayable on maturity, so a large single vintage creates a redemption cliff for the central bank to plan around.
    4. The external environment governs the next round: Tighter global financial conditions will influence flows, so a window that worked this year cannot be assumed to work again.

    Challenges to the FCNR(B) and swap route

    1. Redemption bunches at a single future date: A large tranche raised in one window matures together, so the central bank has to arrange dollars for repayment in one narrow period. Eg. The $26 billion raised through the 2013 FCNR(B) swap window came up for redemption together in 2016 and had to be managed through forward market operations.
      The Fix: Stagger maturities across tenors at the point of mobilisation rather than offering a single uniform term.
    2. The subsidy sits on the central bank’s books: A concessional swap rate transfers hedging cost from the banking system to the central bank, which bears the loss if the currency moves against it. Eg. The 2013 window was priced at a concessional swap rate well below the prevailing market forward premium.
      The Fix: Publish the fiscal and balance sheet cost of the concession alongside the inflow figure, so the instrument is judged on net terms.
    3. It raises the debt share of external financing: Deposits and borrowings add to external debt, and equity investment does not. The composition of external financing worsens as the headline reserve number improves. Eg. Short term external debt on residual maturity has repeatedly been flagged in the RBI’s own external debt statistics as a vulnerability indicator.
      The Fix: Tie the window to a parallel timetable for the sectoral foreign direct investment reforms that have been pending, so the debt raised buys time for an equity fix.
    4. Sterilisation of the rupee injection is costly: Absorbing the liquidity created requires paying interest to banks on funds parked with the central bank, which erodes its income. Eg. The surplus is currently being drained through variable rate reverse repo auctions at rates close to the policy rate.
      The Fix: Use longer tenor absorption instruments, including open market sales of government securities, so the drain matches the maturity of the inflow.
    5. The instrument is used as a currency defence rather than a funding decision: A window opened when the rupee is under pressure attracts money for the concession rather than for the economy’s return profile. Eg. Both the 2013 and the current windows followed a sharp depreciation episode.
      The Fix: Keep a standing, non concessional deposit and borrowing framework open through the cycle, so mobilisation does not depend on a crisis trigger.

    Conclusion

    The window has bought external stability and has handed the central bank a domestic liquidity problem in exchange. Neither outcome changes the structural position: a deficit country that finances itself with borrowed money stays exposed to the next tightening in global conditions. What to watch is the composition of financing over the coming quarters rather than the reserve headline, and specifically whether net foreign direct investment rises fast enough to reduce dependence on windows of this kind before the deposits fall due.

    Matching Previous Year Question

    “[2020] If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India? (1) Not depending on short-term foreign borrowings (2) Opening up to more foreign banks (3) Maintaining full capital account convertibility Select the correct answer using the code given below: (a) 1 only (b) 1 and 2 only (c) 3 only (d) 1, 2 and 3 ANSWER: (a)”

  • Gross FDI hit 15-year high of $30.7 billion in April-June 2026

    Gross FDI hit 15-year high of $30.7 billion in April-June 2026

    Why in the News

    Reserve Bank of India (RBI) data shows gross Foreign Direct Investment (FDI) inflows reached $30.7 billion in April-June 2026, the highest quarterly figure in fifteen years. Net FDI, which nets out repatriation and disinvestment by existing foreign investors, turned positive again in June 2026 at $1.3 billion, after a period of elevated repatriation had kept it depressed. Singapore, the Netherlands, the United States and Canada led the inflows, concentrated in manufacturing. The tension is between the strength of the gross inflow figure and the much smaller net figure, since heavy repatriation by existing foreign investors has been offsetting fresh inflows for several preceding quarters.

    What does the data show?

    1. Fifteen-year high in gross inflows: Gross FDI of $30.7 billion in a single quarter is the highest recorded in fifteen years, reversing a period of relatively subdued inflows.
    2. Net FDI turns positive: Net FDI turned positive in June 2026 at $1.3 billion, after running negative or near zero in preceding months.
    3. Source and sector concentration: Singapore, the Netherlands, the United States and Canada were the leading source countries, with manufacturing the leading destination sector.

    Why does the gap between gross and net FDI matter?

    1. Repatriation pressure: A large gap between gross and net FDI signals that existing foreign investors have been exiting or repatriating profits at a pace close to new inflows. This is a different signal from headline inflow growth alone.
    2. Policy implication: A durable improvement in net FDI, not gross inflows alone, is the more reliable indicator of investor confidence in staying invested in India over the medium term.

    Gross FDI vs Net FDI

    • Gross FDI: Fresh foreign investment entering India.
    • Net FDI: Gross inflows after accounting for repatriation and disinvestment.
    • A large gap between gross and net FDI indicates that substantial investment is also flowing out through existing investors.
    • Therefore, high gross FDI does not necessarily mean high net FDI.

    “[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?
    (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
    (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
    (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
    (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India

  • Did Press Note 3 relaxations help attract more FDI?

    Why in the News

    The government’s March 2026 relaxation of Press Note 3 (2020) now allows the automatic route for foreign investors from land-border-sharing countries where the resulting stake is below 10 percent. Press Note 3 (2020) had required prior government approval for any foreign direct investment from an entity based in, or beneficially owned by, a country sharing a land border with India, a restriction imposed after India’s border tensions with China. Since the relaxation, 29 Foreign Direct Investment (FDI) projects together worth ₹4,895.65 crore have been reported as raised through the automatic route. The scale of that inflow is now being tested against whether it represents genuine new investment or capital that was already structured to qualify.

    What is Press Note 3 and why was it imposed?

    1. Origin in 2020 border tensions: The Department for Promotion of Industry and Internal Trade issued Press Note 3 in April 2020 requiring government approval for FDI from any country sharing a land border with India, a category that in practice targets China.
    2. Stated rationale of opportunistic acquisition: The measure was framed as a safeguard against opportunistic takeovers of Indian companies whose valuations had fallen sharply during the COVID-19 pandemic.
    3. No de minimis threshold in the original rule: The 2020 version applied government-approval scrutiny regardless of the size of the resulting stake, so even a marginal shareholding increase by an investor linked to a bordering country required clearance.
    4. Applied to beneficial ownership, not just direct investment: The restriction reaches an investment structured through a third country if the ultimate beneficial owner is based in a bordering country, closing a routing loophole.

    What has the March 2026 relaxation changed?

    1. Automatic route restored below a 10 percent threshold: Investment from a bordering-country-linked entity resulting in a stake below 10 percent in the Indian company no longer requires prior government approval.
    2. Retains approval requirement above the threshold: Any investment crossing the 10 percent stake mark, or any greenfield or strategic-sector investment, continues to require case-by-case government clearance.
    3. 29 projects reported since relaxation: ₹4,895.65 crore in FDI has been reported as raised through the automatic route across 29 projects since the relaxation took effect.

    Did the relaxation actually attract more FDI?

    1. Reported inflow is modest against India’s total FDI base: ₹4,895.65 crore is a small fraction of India’s annual FDI inflow, so a Press Note 3 relaxation limited to sub-10 percent stakes has not shifted aggregate FDI in a way that will show clearly in headline balance-of-payments data.
    2. The 10 percent cap limits which capital responds: A relaxation confined below the threshold attracts portfolio-style minority stakes rather than the strategic or controlling investment that would signal deeper industrial commitment.
    3. Difficult to isolate the relaxation’s own effect: FDI flows respond to multiple factors simultaneously, including global interest rates and India’s own growth outlook, making it hard to attribute the 29 reported projects solely to the policy change.
    4. Sectoral destination of the reported inflow remains the open question: Whether the ₹4,895.65 crore has gone into manufacturing capacity or into financial and services stakes shapes how much the relaxation has actually served its stated industrial goal.

    Conclusion

    The Press Note 3 relaxation has produced a measurable but modest reported inflow, ₹4,895.65 crore across 29 projects, since March 2026. Whether this represents a genuine widening of investor participation from land-border-sharing countries or capital that was already positioned to enter below the new threshold will become clearer as more reporting cycles pass.

    Back2Basics: Press Note 3 (2020)

    1. Issued by the Department for Promotion of Industry and Internal Trade under the Foreign Direct Investment policy framework, not a standalone statute.
    2. Requires government approval for FDI from, or beneficial ownership traced to, any country sharing a land border with India: China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan.
    3. Applies to both fresh investment and a change in beneficial ownership of an existing investment resulting from a transfer.
    4. Enforced through the Reserve Bank of India’s foreign exchange reporting framework under the Foreign Exchange Management Act, 1999.

    Matching Previous Year Question

    “[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?
    (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
    (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
    (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
    (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
    ANSWER: (d)”

  • FDI policy rejig for border nations spur Rs 5k cr investment: DPIIT

    Why in the News

    A relaxation in India’s rules on investment from land bordering countries has drawn 29 foreign direct investment (FDI) proposals worth ₹4,895.65 crore up to 20 August 2026. The relaxation was notified in March 2026. It permits a foreign entity carrying non controlling beneficial ownership of up to 10 per cent from a land bordering country to invest through the automatic route. Press Note 3 of 2020 had required prior government approval for any such investment, however small that land border shareholding was. What is now tested is whether a shareholding threshold can separate incidental Chinese exposure inside a global fund from Chinese strategic control of an Indian asset.

    What is Press Note 3 of 2020?

    1. The restriction: Imposed in April 2020, it made government approval mandatory for investment from any country sharing a land border with India.
    2. Stated purpose: It was aimed at preventing opportunistic takeovers of Indian firms during the Covid-19 pandemic, and stayed in force amid heightened national security concerns after the Galwan clash later that year.
    3. Country neutral drafting: The framework named no country, and China is the largest source of investment among India’s land neighbours.
    4. Uneven bite: Entities of Bangladesh and Pakistan can invest only through the government route. Flows from Nepal, Myanmar, Bhutan and Afghanistan are very small as a share of India’s total foreign investment.

    What conditions does the relaxed route carry?

    1. Indian control retained: The majority shareholding and control of the investee entity must rest at all times with resident Indian citizens, or with resident Indian entities that are themselves owned and controlled by resident Indian citizens.
    2. Threshold is a ceiling, not a waiver: A land border holding above 10 per cent still routes the investment through government approval, so the automatic route covers only diluted exposure.
    3. Time bound clearance for named goods: A 60 day deadline was approved for clearing proposals from land bordering countries, including China, in capital goods, electronic capital goods, electronic components, polysilicon, and ingot wafer for solar cells.

    Where has the relaxed route drawn money from?

    1. Sectors: The proposals span information technology, artificial intelligence, information and communication, manufacturing, pharmaceuticals, data centres and transport services.
    2. Jurisdictions: They were reported by investors and entities based in Mauritius, the United States, the Republic of Korea, Japan, Singapore, Luxembourg and the Cayman Islands, among others.
    3. Stated gain: The government’s own assessment is that the reform gives investors greater certainty, cuts transaction time and strengthens ease of doing business in India.

    Where has the Centre gone further than the ownership threshold?

    1. A strategic sector joint venture: In July 2026 the Centre cleared a joint venture between Dixon Technologies (India) Limited and Vivo Mobile India Limited for manufacturing electronic devices and smartphones, one of the first major approvals to Chinese investment in a strategic sector.
    2. Entry into power tenders: The Finance Ministry in July allowed four Chinese power equipment manufacturers with factories in India to bid for government tenders on critical power projects.
    3. A procurement exemption: TBEA Energy, Nanjing Electric India, New Northeast Electric India and Taikai Electric (India) were exempted from the public procurement rule requiring entities from land bordering countries to register with the relevant Indian authority before bidding.
    4. What is at stake in that equipment: The four firms make transformers, wires, high voltage switchgear and gas insulated switchgear used in transmission lines. New Northeast Electric India lists at least 11 transmission line projects across India.

    Challenges to the revised land border investment framework

    1. Beneficial ownership is hard to trace through layers: A 10 per cent test presumes the ultimate holder is visible, which layered holding structures defeat. Eg. Several of the reported proposals came through Mauritius and the Cayman Islands. The ultimate holder is not on the local register in either jurisdiction. Fix. Require a declaration of the ultimate beneficial owner at every layer, verified against the significant beneficial ownership register maintained under the Companies Act, 2013.
    2. A shareholding cap does not bound influence: Control travels through contracts as much as through equity. Eg. A minority holder with board nomination rights or a sole technology licence can direct a joint venture without owning a majority. Fix. Test control by board composition and contractual veto rights, not by shareholding percentage alone.
    3. Screening capacity is spread thin: No single body owns the security review of an inbound proposal. Eg. Screening runs across the Department for Promotion of Industry and Internal Trade, the Ministry of Home Affairs and the administrative ministry, each with its own timeline. Fix. Constitute a standing inbound investment security review committee with a statutory disposal deadline.
    4. Technology dependence persists in the sectors being opened: Approval eases entry without changing who owns the process knowledge. Eg. India imports most of its polysilicon and ingot wafer requirement for solar cells. Fix. Tie approval in those goods to a phased technology transfer and a rising domestic sourcing commitment.
    5. The government route stays slow for everyone else: Only the notified goods got a deadline, so other proposals still face open ended review. Eg. Land border proposals outside the notified list have historically taken well over a year to clear. Fix. Extend the 60 day discipline to every proposal on the government route, with reasons recorded for any extension.

    Conclusion

    The relaxed framework has been operative since March 2026 and has produced 29 reported proposals in five months. Press Note 3 itself stays on the books for any land border holding above the threshold, so the restriction has been narrowed rather than withdrawn. The next milestone is disposal of proposals under the 60 day window for the notified goods, and whether the Dixon and Vivo clearance becomes a template for a wider, sector by sector opening.

    Foreign Direct Investment in India

    1. About: Foreign direct investment is cross border investment that establishes a lasting interest in an enterprise abroad, in the definition used by the Organisation for Economic Cooperation and Development.
    2. Routes: Most sectors permit 100 per cent foreign investment through the automatic route, and the remainder require prior government approval.
    3. Cumulative scale: India’s cumulative inflows crossed about $1.14 trillion between April 2000 and December 2025, with nearly 70 per cent of that arriving in the last decade.
    4. Recent flows: Gross inflows reached a three year high of $81 billion in 2024-25, led by services and manufacturing.

    Laws and Rules Governing Foreign Investment

    1. Foreign Exchange Management Act, 1999: The parent statute governing cross border transactions and capital account flows into and out of India.
    2. Foreign Exchange Management (Non-debt Instruments) Rules, 2019: Notified by the Finance Ministry, these fix sectoral caps, entry routes and pricing guidelines for equity investment.
    3. Consolidated FDI Policy Circular: A single compiled statement of sectoral policy, which Press Notes amend between editions.
    4. Competition Act, 2002: Acquisitions above notified thresholds need Competition Commission of India clearance.

    Challenges in Attracting Foreign Direct Investment

    1. Policy unpredictability: Rules that change mid cycle force investors to restructure entities already built. Eg. Repeated shifts in e-commerce foreign investment norms forced marketplace operators to redraw their seller structures. Fix. Publish a standstill period between the notification of a sectoral rule change and its taking effect.
    2. Land acquisition: Site control is the binding constraint on greenfield manufacturing. Eg. POSCO abandoned its Odisha steel project after a decade of unresolved land disputes. Fix. Build titled, pre cleared land banks held by state industrial corporations and offered on long lease.
    3. Geographic concentration: Inflows cluster in services and a few urban states. Eg. A handful of states absorb the bulk of equity inflows reported each year. Fix. Offer differential incentives for greenfield investment in aspirational districts.
    4. Intellectual property enforcement: Weak enforcement raises the risk premium on technology intensive investment. Eg. India remains on the United States Priority Watch List on intellectual property enforcement. Fix. Create dedicated commercial intellectual property benches with fixed disposal timelines.
    5. Clearance friction across governments: A central approval does not deliver the state permissions a project actually needs. Eg. The National Single Window System still does not carry every state level clearance. Fix. Make full state onboarding to the single window a condition for central infrastructure co-funding.

    Back2Basics: Department for Promotion of Industry and Internal Trade

    1. Parent ministry: It sits under the Ministry of Commerce and Industry. It was the Department of Industrial Policy and Promotion until internal trade was added in 2019.
    2. Policy mandate: It frames and administers the Consolidated FDI Policy and issues the Press Notes that amend it.
    3. Programmes run: It runs Startup India and Make in India, and maintains the National Single Window System.

    “[2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

    (a) It is the investment through capital instruments essentially in a listed company.

    (b) It is a largely non-debt creating capital flow.

    (c) It is the investment which involves debt-servicing.

    (d) It is the investment made by foreign institutional investors in the Government securities.