The year 2019 saw a steady flow of the foreign direct investment (FDI) into India, despite comparatively slower growth in the global and Indian economy. FDI inflows until September 2019 stood at $26 billion indicating a 15% growth over the previous year.
As India aims for a $5 trillion economy, the Government is optimistic of continuing to attract foreign investment. The Government's liberalised norms along with a significant jump in the ease of doing business ranking is expected to further boost foreign investment in India which should, in turn, give the much-needed impetus to the economy.
The Government had earlier held a series of meetings with various stakeholders to further relax the FDI norms in areas like AVGC (animation, visual effects, gaming and comics), and insurance. Additionally, important clarifications were also issued by the RBI on the foreign investment framework.
Increase overseas investment limit in insurance to 74%
In the Union Budget for fiscal year 2020, the finance minister had indicated that the government would examine suggestions for opening up FDI in the insurance sector in consultation with all stakeholders. Subsequently, the FDI limit in insurance intermediaries was increased from 49% to 100%. It is expected that the government could raise overseas investment limit in Indian insurance companies to 74% under the approval route from the existing 49%.
The increase in FDI limit could pave the way for foreign players who are expected to bring in new technologies, new products and ensure better market penetration. This will also ensure that long-term funds stay invested in India.
Ease restrictions on FDI by joint ventures or wholly-owned subsidiaries of Indian parties
The existing legal framework under the Foreign Exchange Management Act (FEMA) does not permit FDI by an overseas joint venture (JV) or a wholly-owned subsidiary (WOS) of an Indian party without prior RBI approval because this is perceived as round-tripping irrespective of the source of the FDI.
Round tripping has never been defined in the exchange control regulations. This concept was brought into law in May 2019 when the RBI updated its frequently asked questions (FAQs) on overseas direct investment (ODI) to provide that no Indian company, partnership firm or LLP can acquire a stake in an offshore company that in turn has an existing FDI in an Indian entity irrespective of the level of FDI.
In addition, foreign WOS or JVs of Indian companies have been barred from setting up subsidiaries in India. If an Indian party proposes to make such an investment, it will have to approach the RBI for prior approval, which would be considered on a case-to-case basis.
While the RBI aims to restrict round-tripping as well as overseas structures which were primarily set up to hold Indian assets, taking advantage of beneficial tax regimes while offshoring Indian wealth - the wording of the FAQ appears to be quite expansive and impacts genuine structures.
For instance, an Indian party acquiring even a nominal stake, say one equity share in an overseas company under the automatic overseas direct investment (ODI) route will have to ensure that the foreign company does not hold a stake or makes no investment in another Indian entity, even if it belongs to a different business group. The fact that local money is not brought back to India is not considered in the FAQs.
The Government should introduce norms to carve out bonafide investments. This would help the Indian parties which have made outbound investments to attract FDI in India for their group entities.
Liberalisation of FDI norms
The department for promotion of industry and internal trade (DPIIT) issued a press note on 18 September 2019 (Press Note 4), to introduce relaxation in FDI norms in several sectors like single-brand retail trading, contract manufacturing, coal mining, and digital media. The Government allowed 100% FDI in coal mining and contract manufacturing eased sourcing norms for single-brand retailers and approved 26% foreign investment in digital media.
There is much optimism around these policy changes, as it is expected to attract FDI investments in the manufacturing and retail sector.
Consequential amendments to Foreign Exchange Management (Non-debt Instruments) Rules, 2019
The Government had notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules) to introduce certain changes in the FEMA framework such as vest the central government with power over non-debt instruments, vest the RBI with power over debt instruments, clearly define debt and non-debt instruments, amongst others.
The NDI Rules along with the NDI Amendment Rules have helped to provide a distinction between debt and non-debt instruments and demarcate responsibility between the government or RBI for each type of instrument. This is expected to simplify the framework for foreign investment in India and also ease the approval process.
Enhanced scope of special non-resident rupee account
The RBI recently enhanced the scope of non-interest bearing special non-resident rupee account (SNRR Account) by permitting persons residing outside India to open such accounts to facilitate rupee-denominated external commercial borrowings (ECB), trade credit and trade invoicing. SNRR Account can now be opened and operated for business interest in India including Indian Rupee (INR) transactions such as ECBs in INR, trade credits, trade invoicing, amongst others.
Further, restriction on the tenure of SNRR account, which currently is seven years, has also been removed. This move is aimed at popularising cross-border transactions in INR and fulfil the demand to allow a mechanism to receive trade payments for import of goods and payments to Indian customers.
The proposed liberalisation of the insurance sector, ease of restrictions on FDI by JVs/WOS of Indian parties and other measures taken for liberalising FDI are expected to spur investments and raise investor sentiment. The government is also expected to announce in this year, two new policies - new industrial policy and national e-commerce policy and introduce labour reforms. With these policies and initiatives, the government hopes to continue India's FDI growth story in 2020.(Rajesh Gandhi is Partner, Deloitte India, Utkarsh Trivedi is Director and Vinita Abhyankar is Manager with Deloitte Haskins and Sells LLP.)