Government needs to revisit FDI regulations

Reported by: |Updated: May 28, 2019

Changes are perceived in regulations governing foreign direct investment so that Indian corporate can easily adopt this route:

Sameer Mittal, Managing partner, Sameer Mittal & Associates LLP

Foreign investment plays a very crucial role in promotion of investment in key segments, development of technology and infrastructure, creation of job opportunities and in the overall development of the economy. The current government has been doing its bit for attracting foreign investment in India through various initiatives like Make in India, Startup India, Standup India, Goods and Services Tax, Insolvency and Bankruptcy Law, land reforms, ease in licensing requirements and opening up various sectors for foreign direct investments, including single brand retail, aviation sector, power exchange, pharmaceuticals, construction, etc.

India has received foreign direct investment worth $239 billion in the last 5 years. In fact, Commerce and Industry minister Suresh Prabhu had also announced that the government has set a target of attracting $100 billion in foreign direct investments over the next 2 years.

Though the figures seem to be very pleasing, there has been a slight decline in the foreign investment inflow in the recent years. It is to be noted that the increase in FDI inflows in the past years was basically the result of acquisition of existing business and not the setting up of new ones. Therefore, the industry is expecting new measures for the increase in foreign investment inflows in greenfield areas. Few of the industry expectations are listed below:

eCommerce:

The government on 26 December 2018 notified changes in eCommerce FDI policy with regard to deep discounts, various complex structures of group entities, warehousing agreements and other services agreements adopted by the market place entities to source goods in bulk from the manufacturers at cheap rates or exercise control over the inventory directly or indirectly and selling them on the online platforms in names of small vendors. Though the measures were expected to create a level playing field for the players, it was not welcomed by the industry, which is still expecting some softening in the regulations.

Data localization of financial transactions:

The Government in April 2018 issued a rule for payments system providers to store all of the transaction related information involving Indian customers, exclusively on the servers located within the country within 6 months. Currently, most of the multinational players like American Express, VISA etc are maintaining the data in their servers in other countries. Therefore having this data stored in India would lead to high costs for corporates and will have very serious ramifications on the foreign investments and digital trade between countries.

Data protection norms in draft eCommerce policy:

The draft eCommerce policy released by the Department for Promotion of Industry and International Trade provides that the data collected by eCommerce houses like Amazon, Flipkart etc in India belongs to the citizens of India and if the same is stored on an overseas server then such data should not be made available to other business entities or foreign governments. However, it is not considered a very welcome move by the industry as it believes that the data should belong to the company. The government needs to address the concern soon, in the light of the criticism being faced from international markets as well as the major local players.

Reduce restrictions in multi-brand retail:

The plethora of conditions imposed on FDI in multi-brand retail needs to be relaxed in order to attract investment in the segment. Currently, only 51% of FDI is allowed in multi-brand retail, that to0 under the approval route. Further, there is a minimum investment requirement of $100 million wherein at least 50% of the FDI brought in has to be invested in backend infrastructure and 30% of the value of goods procured have to be procured from India. The government should reduce the restrictions on the multi brand retail to allow greater flow of capital in the Company.

Education:

The UGC regulations governing higher education require that all deemed-to-be universities shall be registered as a not-for-profit society/trust/company. Since FDI is not permitted in trust and society structures, the only option left is ‘not for profit company’. However, this is not viable for foreign investments as the profits cannot be repatriated and needs to be invested for the promotion of company’s ‘not for profit’ objective. Of late, we have seen companies resorting to different structures for repatriation of their investments. Therefore, regulating authorities could possibly look to amend the current mandatory requirement as far as the ‘not for profit’ model is concerned in order to attract increased FDI inflow into the country.

Allow 100% FDI in insurance broking:

The FDI policy allows 49% foreign investment in the insurance sector, which includes insurance intermediaries. According to the Economic Survey, life insurance penetration was 2.72% and general insurance penetration was 0.77%. The sector offers huge scope. Since insurance broking is like any other financial or commodity broking services, 100% FDI should be allowed in this business.

Tackling of delays in insolvency cases:

Starting a business and closure of a business are two arms which make the ease of doing business work. As per a recent report released by CRISIL and ASSOCHAM, more than one-third of the 1143 cases under the corporate insolvency resolution process were pending as on 31 March 2019. Though the government has appointed 14 additional judicial members and has been taking measures to strengthen the infrastructure and utilities, a lot needs to be done so that the process of winding up of bankrupt companies can be made quicker and the locked-up assets and intellectual property rights can be deployed elsewhere. Delays act as a deterrent to foreign investments in the distressed assets.

Revisiting dispute resolution process though Bilateral Investment Treaty (BIT):

BIT refers to agreements between the 2 countries for the reciprocal promotion of investment. In 2014, the government had cancelled its BITs arrangements with 58 countries and wanted its counterparts to sign the modified BIT which asked the foreign investors to first exhaust legal remedies available in India and thereafter resort to International Arbitration Tribunals. However, considering the dismal pace of settlement of disputes in India, most of the countries stayed out of the agreement. This has also acted as deterrent in attracting new investors.

Wooing the Foreign Portfolio Investment (FPI):

FPI includes investment groups of Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs), subaccounts etc registered with Securities and Exchange Board of India. The importance of FPI investment in the Indian capital markets cannot be undermined. It has been mooted time and again to link FPI investments and foreign direct investments. Few of the measures that are seeking the nod of government are listed below:

  • FPI investment in unlisted company: Allowing FPIs to invest in the unlisted companies would create a larger capital base for the companies and startups, which are largely unlisted and cannot tap capital from FPIs. Currently FPIs can invest in listed entities or entities that plan to get listed. Though last year the government had allowed FPIs to invest in unlisted debt securities of companies, investments in capital needs to be liberalized.
  • Bringing on par the sectoral caps under the FDI policy and FPI Investment: Under the current regime, FPIs are allowed to invest only up to 24% stake in the listed entities and any increase in the stake up to the sectoral cap requires the approval of the board of directors. Therefore, bringing the investment limit on par with the sectoral cap provided under the FDI policy will enable easier access to foreign funds for the corporates.
  • Usage of FPI funds for FDI: Currently the money brought in for foreign portfolio investment cannot be used for making foreign direct investment and every time the FDI investment is made, the funds are required to be brought in from outside. The industry has been requesting the government for a while that since the investor is the same person the inter se usage of funds should be allowed.

The government is therefore required to have a clear cut and thought out process for creating a congenial environment for foreign investment in India.

  • Sameer Mittal is managing partner, Sameer Mittal & Associates LLP


Close Bitnami banner
Bitnami