Foreign Investment In India

Foreign investment in India is a major force driving the engine of the nation’s economic growth with many international companies finding the destination attractive because of various factors like tax benefits and relatively cheap labour. A developing nation like India needs non- debt financial resource that can provide significant periodic infusion of funds in the business sector. The country also profits from job creation and introduction of modern techniques and best management practices which enrich the domestic business environment.

Let’s take a look at some of the statistics related to Foreign Direct Investment (FDI) in India before knowing about the major changes announced by the government regrading the FDI policy for various sectors.

FDI Equity Inflow

The Department of Industrial Policy and Promotion (DIPP), released some figures according to which a total of US$ 44.86 billion was invested in the country through the FDI route during 2017-18. The highest FDI equity inflow was directed towards the services sector with an amount of US$ 6.71 billion, which was followed by telecommunication which saw an infusion of US$ 6.21 billion. The computer software and hardware sector was at the third position with an inflow of US$ 6.15 billion. Recently, the total FDI equity inflow for the month of April,2018 touched US$ 5.34 billion.

FDI Policy Modifications In Major Sectors

The investment figures are showing a constant increase every fiscal year since 1991 when foreign investment in India was allowed for the very first time. Earlier this year, to continue reaping the rewards of this beneficial policy the central government announced some more liberalizing changes to a number of sectors. The notable features of the announcement are given below :

1. Single Brand Retail Trading (SBRT)

One of the major amendments affects the growing retail industry of the country as 100% FDI (as compared to 49% earlier) has been allowed in SBRT through the automatic route, meaning that no prior government approval is required for the investment. Another key change introduced in this sector is that the entity looking to enter the market through this route must do its incremental sourcing of goods for the first 5 years from India and follow the mandatory sourcing requirement of 30% of its purchases locally, afterwards.

2. Real Estate Broking Services

The current FDI policy does not allow any overseas investment in the real estate business but the notification issued mentions that real estate broking service does not come under the purview of real estate business and therefore 100% FDI under automatic route has been approved for such services. Some ambiguity still remains though as no clear definition has been provided for the term “real estate business”, with the statement only mentioning that development of townships, housing projects, built-up infrastructure does not fall under this category.

3. Civil Aviation

A foreign airline could have invested up to 49% of the paid capital in an Indian company running scheduled and non-scheduled air transport services after the prior approval of the government but Air India was kept out of this scheme. The restriction has been removed and 49% FDI has been permitted in the national carrier subject to fulfillment of conditions that the amount of investment does not exceed 49% and the substantial ownership and effective control of the airlines lies in the hands of an Indian national. This amendment has been notified with the aim of improving the condition of the airlines that has been a loss making enterprise for some time now.

4. Power Exchanges

The existing policy permitted upto 49% FDI through automatic route in power exchanges that were registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. A restriction was placed on Foreign Institutional Investors (FII) or Foreign Portfolio Investors (FPI), who could invest only through the secondary market. This condition has been removed and now FIIs/FPIs can invest in the sector through primary markets also.

5. Pharmaceuticals

According to the earlier FDI policy, the definition of a medical device for foreign investment purposes was subject to amendment in the Drug and Cosmetics Act but the new version has dropped the reference to the Act and states that the definition as contained in the policy is complete in itself and it will be revised.

Other Approval Requirements Notified In The Policy

1. Issuance Of Shares Against Non-Cash Considerations

Equity shares can now be issued against non- cash considerations such as pre-incorporation expenses, import of machinery etc. under automatic route for sectors that enjoy FDI through automatic route.

2. Investing Companies

If an Indian company investing in the capital of other Indian company is regulated by any financial sector regulator, then foreign investment upto 100% under automatic route shall be allowed and if it is not the case then investment up to 100% will be allowed under Government approval route.

Conclusion

These liberalizing changes to the policy governing foreign investment in India will only help in improving the ease of doing business in the country and in the formation of more conducive environment for development.