The Modi government’s intention to revitalize the Indian economy positively affected the business environment post 2014 general elections. According to the UN Conference on Trade and Development (UNCTAD) World Investment Report 2015, India acquired ninth slot in the top 10 countries attracting highest foreign direct investment (FDI) in 2014, compared to 15th in 2013. The World Bank has improved India’s ranking by 12 places in its 2016 Study of Ease of Doing Business. The International Monetary Fund has branded India as the brightest spot in the global economy, while the World Bank projects the country’s growth at 7.5% or better for the financial year 2016-17.
The Modi government, in its brief tenure so far, has introduced several measures and is looking to remove hurdles and simplify laws to further attract foreign investment. Some key reforms introduced by the government recently are summarized below.
(1) The government recently increased foreign investment limits, as well as relaxing FDI-linked conditions in various key sectors such as insurance and pension, railway infrastructure, construction and development, defence, single brand retail trading, plantation sector, and manufacture of medical devices.
(2) The government recently clarified that non-repatriable investments made by non-resident Indians (NRIs) will be treated as domestic investments, and will not be subject to FDI caps.
(3) FDI has now been permitted through the automatic approval route in limited liability partnerships (LLPs) operating in sectors where 100% FDI is allowed under the automatic route without conditions (which was previously only under the government approval route). The government has brought LLPs on a par with companies with a view to promoting FDI, considering that the LLP as an entity is easier to operate.
(4) The cabinet committee on economic affairs (CCEA) has raised the threshold for FDI, requiring its approval to ₹50 billion (US$746 million) from the earlier limit of ₹30 billion. This change was made to expedite the approval process.
(5) The Reserve Bank of India (RBI) has recently relaxed approval requirements for the establishment of branch, liaison and project offices by foreign entities, which can now be given by authorized dealer category-I banks, as against the earlier requirement of approval from the RBI, provided the business falls under sectors where 100% FDI is allowed.
(6) On 4 March 2016, the Ministry of Corporate Affairs (MCA) increased the thresholds for small target exemptions. Transactions involving target enterprises with value of assets not more than ₹3.5 billion in India, or turnover of not more than ₹10 billion, are now exempt from having to seek prior approval from the Competition Commission of India. The thresholds now exempt many transactions from lengthy approval requirements under the Competition Act 2002, and to facilitate the ease of doing business.
(7) Parliament also passed the Arbitration and Conciliation (Amendment) Act in December 2015. Various changes have been made to the arbitration laws, with a view to making arbitration quicker, reducing interference by courts and to make India a more attractive destination for foreign investors.
(8) The Real Estate (Regulation and Development) Act 2016 (RERA) came into force on 1 May 2016, with 69 of 92 sections notified. RERA is designed to provide uniform regulation, protect consumer interests, help speedy adjudication of disputes, improve accountability of developers and boost transparency. It should help to make the Indian real estate sector more attractive for foreign and domestic investment.
(9) The RBI has vide a circular dated 30 November, 2015 and embarked upon a comprehensive review of extant guidelines with respect to external commercial borrowings (ECB). The overarching principle of the new framework has been to liberalize and encourage long-term ECBs denominated in foreign currency with fewer restrictions on end uses, as well as ECBs denominated in Indian rupees.
(10) The government has launched several other initiatives, such as Make in India, Smart Cities, Start-up India, and Digital India, with a view to facilitate investment, foster innovation and build best-in-class facilities.
With a more favourable global economic outlook, sustained improvement in India’s macro-economic factors, prudent fiscal policy and continued policy reform, India will continue to evolve into a more attractive and stable investment destination.
RABINDRA JHUNJHUNWALA is a partner at Khaitan & Co’s Mumbai office and STUTI GALIYA is a principal associate, also at the firm’s Mumbai office. The views of the authors are personal, and should not be considered as views of Khaitan & Co.
Khaitan & Co
Mumbai office: One Indiabulls Centre, 13th Floor,
Tower 1, Mumbai 400 013, India.
Tel: +91 22 6636 5000; Fax: +91 22 6636 5050