In 2020, foreign direct investment (FDI) and other policies changed and ushered in a new era for the treatment of non-resident Indian (NRI) investments and income. The Ministry of Commerce and Industry in Press Note 1 (2021 series), resolved confusion stemming from the 2020 policy. It clarified that where entities are owned and controlled by NRIs, that is 50% or more of the equity is owned, directly or indirectly by NRIs or a majority of the board is appointed by NRIs, downstream investment made by them but not intended for repatriation is regarded not as FDI but as domestic investment. This has increased the investment opportunities for NRIs. It also helps foreign investors wanting greater control and higher equity stakes and allow them to avoid the limits imposed by FDI caps, through the use of intermediate NRI-owned-and-controlled entities.
The opening up of the insurance sector, although limited, comes after years of reluctance to permit majority foreign participation and control. Press Note 2 (2021 series) increased FDI participation in insurance companies from 49% to 74% through the automatic route and for intermediaries or insurance intermediaries to 100% through the automatic route. This is subject to conditions such as obtaining approval from the Insurance Regulatory and Development Authority of India, complying with the Insurance Act, 1938 and the Indian Insurance Companies (Foreign Investment Rules), 2015 and ensuring that a majority of directors, key management personnel and at least one of the board chairperson, managing director and CEO are resident citizens. These changes will bring to the insurance sector the benefit of global best practices and reduce the cost of insurance products. They will also allow promoters in India to retain a degree of control over management and the board.
The end of 2021 saw multiple collaborations and acquisitions with companies leveraging strategic partnerships. Acko General Insurance and ZestMoney went to the market to raise much-needed capital. Companies that have been trying to penetrate the Indian market and to obtain funding may find FDI the way in. Following Press Note 2, Willis Tower Watson, one of the first movers, increased its holding in WTW India to 100%.
Press Note 3 issued by the Department for Promotion of Industry and Internal Trade permitted 100% FDI under the automatic route for oil and gas public sector undertakings where there is government approval in principle for disinvestment. This is in line with FDI policy in the private sector in exploration, infrastructure, marketing, pipelines, LNG regasification, and refining.
In September 2021, as part of a relief package for hard-hit telecom companies such as Vodafone Idea and Airtel who owe substantial sums to the government, FDI was increased from 49% to 100% through the automatic route. Provisions included a four-year debt moratorium and a review of the computation of licensing fees, which had been a matter of dispute. The increased FDI allowance should renew strategic and financial foreign investors’ investments in operators. It should aid operators’ cash flow and provide the Indian public access to advanced technology such as the 5G networks that the government has been working hard to introduce. On 12 January 2022, the board of Vodafone Idea approved the conversion of its statutory debts to equity of up to 35.8% to be issued to the government, thereby undoing the government’s divestment target achieved through the divestment of Air India.
From 2014 with the Make in India initiative, FDI norms have been relaxed in 25 sectors. FDI in infrastructure, IT, pharmaceuticals, ports and shipping, renewable energy, roads, railways, airlines, aerospace and the auto industry have been increased to 100% under the automatic route. Defence, once a sector closed to any private sector participation, was opened to 26% FDI in 2001 and then to 74% in 2020. FDI is still prohibited in a few sectors and from countries that share a land border with India, including China, Pakistan, Bangladesh and Nepal except with government clearance.
In 2021 it appeared that the sole objective of the changes to FDI policies was to bail out a flagging economy and to relieve the burden on sectors that had been particularly hard hit in the downturn.
Shonali Choudhry is a partner and Srijan Srivastava is an associate at L&L Partners.
Associates Anirudh Singh and Tanushri Agarwal also assisted with the article.
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