(Article) Foreign Direct Investment in India: Policy Platform for FDI

Union Commerce and Industry Minister Anand Sharma on March 31, 2010 released the final document of FDI Policy Framework that would now comprise the single document on FDI policy and mark the inception of a whole new chapter on FDI policy.

Mr. Sharma said the current exercise had been initiated with the aim of integration of all prior regulations on FDI, contained in Foreign Exchange Management Act (FEMA), RBI circulars, and various Press Notes into one consolidated document, so as to reflect the current regulatory framework. Having a single policy platform would also ease the regulatory burden for Government. The intention of this exercise is not to make changes in the extant guidelines, but to deal with them comprehensively.

Limit in LLP firms

The government said it was considering allowing FDI in limited liability partnership (LLP) firms and also to clearly define whether shares and bonds issued to overseas investors could be treated as foreign direct investment.

The government may also do away with Schedule IV of the FEMA that deals with sale and purchase of shares and debentures by NRIs and overseas corporate bodies on non-repatriable basis, Mr. Sharma said.

“There are many issues related with FDI policies that are currently under discussion in the government,” he said after releasing a compendium. LLP, the fast emerging form of business structure, is a hybrid of companies and partnership firms, which allows unlimited number of partners in an entity but their liability is restricted to the extent of the stake held by them.

FDI Inflows Touch US $ 1.72 Billion During February 2010

The Minister said that such consolidation would ensure all information on FDI policy is available at one place, which is expected to lead to: simplification of the policy; greater clarity of understanding of foreign investment rules among foreign investors and sectoral regulators, as also predictability of policy. “Having a single policy platform would also ease the regulatory burden for Government. Updation of this document will be carried out after every 6 months. This consolidated Press Note will be superseded by a Press Note to be issued on September 30, 2010, ensure that the framework document on FDI policy is kept updated”, Shri Sharma said.

Earlier, the draft document was released on 24 December, 2009 and was open for comments until the 31st of January, 2010. The response to the draft document has been excellent. Comments from 60 stakeholder organizations (including various Government Departments, Reserve Bank of India, Law Firms, consultancy firms, Chambers of Commerce and private companies) have been received. All comments, received until date, have been considered, before preparation of the final document. Even after receiving the responses, we held another round of discussions on the document with a number of consultancy firms that had offered comments on the draft, as also with the Reserve Bank of India and the Department of Economic Affairs.

There are a number of issues related to FDI policy that are currently under discussion in the Government, such as foreign investment in Limited Liability Partnerships (LLPs), policy on issuance of partly paid shares/warrants, rescinding Schedule IV of FEMA, clarifications on issues related to Press Notes 2, 3 & 4 of 2009 and on Press Note 2 of 2005, as also certain definitional issues etc. When a decision on these is taken, the Government decision would be announced and thereafter incorporated into the Consolidated Press Note subsequently.

Foreign Direct Investment into India is a capital account transaction under the Foreign Exchange Management Act (FEMA), 1999. The Government of India and the Reserve Bank of India (RBI) regulate such transactions. The Government comes up with new regulations or amends/changes the existing ones, keeping in view the requirements that may exist at a particular point in time. Various aspects of FDI policy are, accordingly, pronounced/ notified through Press Notes issued by DIPP, RBI circulars, Acts and changes in regulations. DIPP itself has issued about 177 Press Notes since 1991, covering various aspects of FDI policy, including cross border investment, policy liberalisation, policy rationalization and foreign technology collaborations, Industrial Policy etc.

As far as FDI policy is concerned, it had been felt, through interaction with various investors, counterpart government organizations and other stakeholders, that there is a need for further simplification and consolidation of the FDI policy framework, so as to make it more comprehensible to all investors and stakeholders. The Prime Minister, in his remarks at the World Economic Forum in December, 2008, had also announced that, “Our policy will be guided by the desire to make India even more attractive for Foreign Direct Investment. We are particularly keen to rationalize and simplify procedures so as to create an investor friendly environment”. The present exercise was a step in the above direction.

FDI Inflows

FDI equity inflows for the month of February, 2010 have been US $ 1.72 billion, which represents an increase of 15%, in US $ terms, over the inflows received in February 2009 (which were of the order of US $ 1.49 billion). FDI equity inflows for current the financial year (i.e. April, 2009 to February, 2010) have been around US $ 24.68 billion. These are comparable to the FDI equity inflows for the comparable period of the previous year, which were around US $ 25.39 billion.

FDI inflows for almost all months in the current financial year, from June onwards (excepting September, 2009 and January, 2010) have shown an increasing trend over the FDI inflows of the same months in the previous financial year (2008-09). The pace of inflows, therefore, is stable.

Accordingly, it is likely that the total inflows in the current financial year (2009-10) are comparable to the total inflows received during the last financial year (2008-09). This is despite the fact that the UNCTAD World Investment Report, 2009, had noted a fall of global FDI inflows, from a historic high of 1.979 billion in 2007 to 1.697 billion in 2008, a decline of 14%. UNCTAD had subsequently predicted a fall in global FDI investment flows by 30%, from US $ 1.7 trillion in 2008 to US $ 1.2 trillion in 2009.

It is relevant to note that the Organisation for Economic Cooperation and Development (OECD), in its latest report on investment, released in March, 2010, has noted a significant stagnation in the global investment activity. It has noted that: The average monthly Merger&Acquisition (M&A) activity in the past 12 months was just under US $ 50 billion. The last time monthly M&A activity fell below US$50 billion was in April 2006. Year on- year, global M&A activity is now at its lowest level since the beginning of the global economic crisis, at around 35% of the levels reached two years ago (March, 2007 through February, 2008).

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