India – Galloping Towards an Open FDI Regime

By Cyril Shroff, Cyril Amarchand Mangaldas

Cyril Shroff assesses India’s recent reforms to its FDI regime highlighting key legislative developments and what this means for the future of corporate activity within the country. 


Foreign investment laws in India have changed dramatically since the start of liberalisation in 1990. Today, almost 90 per cent of sectors are now fully open for foreign direct investment (FDI), such that foreign investments do not require any prior governmental approval. Looking at the turmoil in the global market, India remains a promising destination for foreign investors. In 2016, India replaced China as the top destination for FDI by capital investment, and has surpassed even the USA. Despite a 5 per cent reduction in global FDI inflows, FDI in India grew 36 per cent in the first half of 2016–2017 over the first half of 2015–2016. Within India, the states of Gujarat and Maharashtra remain strong performers in terms of attracting investment. As per a report on global investment trends by the United Nations Conference on Trade and Development, India ranks third in the list of multinational enterprises’ top prospective host economies for 2016–2018. As per the International Monetary Fund forecasts, India is poised to be one of the fastest-growing major economies in 2017.

One could say that the reforms to the FDI regime in India have undergone three versions of economic liberalisation, from a protectionist regime to becoming a progressive economy, especially in the past three years. In this article, we explore these developments.

Version 1: Protectionist Regime

Prior to liberalisation, the government adopted an extremely cautious approach towards FDI with the objective of encouraging self-reliance, sheltering domestic industries, permitting import of only select technologies and promoting export. This protectionist approach is evidenced by the conservative investment ceiling of 40 per cent which was prescribed for foreign-held equity prior to 1991.

Economic liberalisation commenced in India in 1991 as a response to a crisis involving steep fall in foreign exchange reserves, a sharp downgrade of India’s credit rating, reduced foreign lending coupled with high inflation, large fiscal and current account deficits and a growing burden of domestic and foreign debt.

Since the onset of economic liberalisation, consistent efforts have been made by successive governments to ease the regulatory environment in respect of foreign investment and make the domestic market more investor-friendly. The government took important measures to encourage FDI such as introducing the dual route for FDI (the automatic route governed by the Reserve Bank of India (RBI) and the approval route governed by the Foreign Investment Promotion Board (FIPB)), permitting non-resident Indians and overseas corporate bodies to make up to 100 per cent investment in high priority sectors and removing all restrictions for FDI in low technology areas, easing regulations for import of technology and increasing foreign equity participation limit to 51 per cent for existing companies and liberalising the use of foreign brand names.

Giving further impetus to these measures was the enactment of FEMA in 1999, aided by several subsequent Press Notes issued by the Department of Industrial Policy and Promotion (DIPP), which significantly transformed the landscape of FDI in India.

Version 2: A Guarded Gate

Despite the gradual and progressive liberalisation of the framework governing FDI following the economic reforms, India’s approach towards FDI remained relatively conservative, and sectors open to foreign investments remained highly regulated. For instance, while 100 per cent FDI was permitted in the brownfield pharmaceuticals sector and 74 per cent FDI was permitted in brownfield projects in the civil aviation sector, FDI in these sectors was still subject to prior approval from the FIPB. Procedural delays in obtaining approvals from the government posed a further challenge at the stage of implementation leading to increase in costs and impacting the competitive advantage of the Indian market, thereby making an otherwise reasonably liberal policy, less competitive and economically unviable. 

An additional hurdle to inflow of FDI in India was the lack of decision-making authority with the state governments. In respect of most key infrastructure areas, the central government remained in control, unlike other countries wherein regional governments played an active role in pushing reforms and encouraging “local” FDI.

Compounding this problem was the requirement to obtain multiple approvals from various government agencies when setting up companies and facilities in India. The complexity and delay in obtaining such approvals made it difficult for foreign investors to take timely decisions.

Version 3: Globalising India

In an effort to make India a more attractive foreign investment destination, the government has made sweeping changes to the FDI framework (under the Consolidated FDI Policy (FDI Policy)), ever since Prime Minister Modi was elected to helm the nation in May 2014. One of Modi’s agendas was to move India up the ranks in World Bank’s Ease of Doing Business Index.

In the past year, with a view to attract greater influx of FDI into India, the government has reviewed the FDI policy and subsequently liberalised many sectors including defence, railways, civil aviation, broadcasting and pharmaceuticals. These changes were also brought about with the aim to provide an impetus to employment and job creation and incentivising industrialisation.

The changes brought about by the government over the last couple years, can be clubbed into three categories: increase in sectoral caps; sectors brought under the automatic route; and liberalisation of sectoral conditions, whereby many of the sectors which had been liberalised earlier but were still regulated through sector specific conditions, which have now been relaxed or in some cases done away with. Prime Minister Modi has been aggressive on making India a manufacturing hub, and with his “Make in India” and “Skill India” campaigns, India is set to emerge as a key destination for manufacturing units, aided by a wider government policy of incentives, infrastructure and programmes.

To tackle the issues on complicated regulatory hurdles faced by investors, the central government has taken certain initiatives such as an Investor Facilitation Cell giving primary support for all investment queries; dedicated desks established to strengthen economic ties with certain countries; and E-Biz, a single-window online portal where investors can avail themselves of certain core services needed for necessary approvals, clearances, licences, etc. The government has also simplified the operation of business in India with the use of online applications, e-portals, reduction in the mandatory documents required for import and export, etc.

Supplementing the changing course of economic liberalisation has been the “transformation” of the federal structure in India, with states flexing their muscles on the global and national stage, directly reaching out to foreign investors to come to their state and passing local reforms to make it easier to do business there. While earlier states played a passive role, they have realised the importance of foreign investment. With states such as Gujarat, Andhra Pradesh, Maharashtra and Karnataka leading the way, many have made policy changes to attract more investment, including relaxing a multitude of labour laws, and are conducting investment summits and road shows to create more visibility to the global economy to encourage state-oriented private investment to implement their own course of development.

Economic growth is commensurate to the development of infrastructure sector and India has systematically introduced the private-public-partnership (PPP) model for the delivery of high-priority public utility and infrastructure. Additionally, the recent Federal Budget confirms that PPP will be encouraged in all infrastructure projects with special emphasis on railways and airports.

Legislative Reforms

Along with the easing of policies and regulations governing foreign investment, the government also saw the need to reform certain key legislations. The enactment of the Companies Act, 2013, is one of the most important recent legal reforms in India, aimed at bringing Indian company law in line with global standards. While it promotes corporate culture and corporate social responsibility, the government has also taken a conscious decision to be less intrusive and give power to the board and shareholders to take decisions in the best interest of all stakeholders in the Company. India has in place statutes dealing with registration and protection of intellectual property rights. The entire intellectual property regime in India is compliant with the Agreement on Trade-Related Aspects of Intellectual Property Rights and provides more than the minimum criteria prescribed thereunder.  Shram Suvidha, an online portal for reporting various labour laws and consolidating information on labour inspection and enforcement, has reduced the difficulty in compliance with multiple of labour laws.  Land acquisition is a contentious issue, and with the intent to improve conditions for manufacturers, the government has enacted the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, to make acquisition and repurposing of land easier for businesses. India’s new Bankruptcy and Insolvency Code, 2016 (Code), adopts a unified framework consolidating insolvency legislations applicable to companies, limited liability partnerships, partnership firms, and individuals.  The Code proposes a paradigm shift from an existing recovery regime to a new time-bound revival regime by introducing time limits to the recovery of debts and bringing in institutional infrastructure for insolvency and bankruptcy and greater role for the creditors in the insolvency and bankruptcy process. Passage of the much-awaited reform of the Goods and Services Tax (GST) in August 2016 is hailed as a victory across partisan lines, and one of the most fundamental reforms since the Constitution. The one nation, one tax regime will subsume various taxes currently levied by the central and state governments. GST would make doing business tax neutral, irrespective of the choice of place of doing business in India. The government is working tirelessly to roll out GST by 1 July 2017. 

Availability of funds is rather difficult as credit is difficult and expensive. India’s answer is the use of Masala Bonds: rupee-denominated bonds issued overseas to offshore investors, including retail investors. The RBI has issued guidelines allowing Indian companies, non-banking finance companies and infrastructure investment trusts and real estate investment trusts to issue rupee-denominated bond overseas. The important Arbitration and Conciliation Act, 1996, has been substantially amended by the Arbitration and Conciliation (Amendment) Act, 2015, keeping in mind the objective of providing a speedy and cost-effective dispute resolution mechanism and is a step forward in making India a more dispute resolution-friendly nation.

In the 2017 Federal Budget, India’s finance minister Arun Jaitley announced the abolition of the FIPB by 2017–2018. This will help make foreign investment simpler and faster. The government has made substantive reforms in the FDI policy over the last two years and more than 90 per cent of the total FDI inflows are now made through the automatic route. Hence, it can be said that FDI in India has reached a stage where the FIPB can be phased out. The government also announced that it is considering further liberalisation of the FDI Policy which indicates that foreign investment in sectors which currently require prior approval of the government will be simplified.

The Way Forward

Liberalisation has gained momentum in the recent years, particularly after the election of the Modi government, evidenced by concrete steps taken to open new sectors to foreign investors, increase in the sectoral limit of existing sectors and simplification of the FDI policy.

Investors coming into India now can expect a conducive environment with numerous opportunities and tangible growth. Taking a cue from the changes over the last couple of years and the recent announcements, one can expect to see India moving towards an open and liberal FDI policy, in comparison to the protectionism rising in the West. Suffice to say, with an investor-friendly FDI regime and a strong economy coupled with a robust growth trajectory, there has been no better a time to invest in India.

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