In 2020-21, India attracted its highest-ever foreign direct investment (FDI) of USD81.97 billion, despite the disruption caused by the covid-19 pandemic. Indeed, according to a report released by the United Nations Conference on Trade and Development, India was the world’s seventh-largest recipient of FDI in 2021-22.
India’s FDI legal regime is critical to attracting foreign investors. The Department of Promotion of Industrial and Internal Trade (DPIIT) is the nodal authority under the Foreign Exchange and Management Act, 1999 (FEMA), for formulating FDI policy. The DPIIT has over the years issued press notes which, with the Consolidated FDI Policy of 2020, make up the FDI policy.
Under the policy, FDI is prohibited in sectors such as the lottery business, gambling and betting, the manufacture of cigars, tobacco and tobacco substitutes, atomic energy and railway operations. Other than the aforementioned sectors, FDI is permitted either through the automatic route or the government approval route, where approval from the government is required for FDI in certain sectors. In addition, sectoral caps prescribe the amount of FDI permitted in particular sectors. Recently, the government liberalised FDI in insurance companies, allowing investment up to 74% under the automatic route; in telecom services up to 100% under the automatic route and in defence up to 74% under the automatic route.
The Ministry of Finance introduced the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (rules), in October 2019, regulating foreign investment in India through, among other vehicles, equity instruments, capital participation in limited liability partnerships, investment in alternative investment funds, real estate investment trusts and infrastructure investment trusts and the acquisition of immovable property. Under the rules, a person residing outside India can subscribe to, purchase or sell equity instruments of an Indian company, subject to entry routes, sectoral caps and other conditions in the rules and the policy. The rules also govern downstream investment, that is where an investment is made by an Indian entity which has total foreign investment in it. Any investment by foreign-owned or controlled companies must be in accordance with the applicable pricing guidelines and other conditions prescribed in the rules.
As well as being the preferred destination for foreign investment globally, India is now an emerging manufacturing hub. The country ranks number 63 in the Ease of Doing Business Index, according to the World Bank. Japan is the fifth largest foreign investor in India, key sectors being automobiles, food processing, chemical companies, renewable energy, textiles and electronic systems design and manufacturing. To facilitate such investments by Japanese companies, the government has introduced several schemes and incentives. These include a Japan Plus Desk, fast tracking investment proposals from Japan; Japan Industrial Townships, which are 12 allocated industrial townships for Japanese companies to set up manufacturing, and the Japan-India Start-up Hub, an online platform to support collaborations between Indian and Japanese stakeholders such as start-ups, investors and incubators. The government has also eased the burdens of regulatory compliance by introducing a national single window system as well as a regulatory compliance portal, allowing easy access to the information needed to set up businesses in various sectors.
Covid-19 caused concerns to Japanese investors regarding areas such as the interstate movement of workers, newly proposed labour law amendments, the payment of debts by large public service undertakings and companies and access by companies to facilities in aiding the reopening of industrial establishments, which the government urgently addressed. However, strong India-Japan economic relations were confirmed by the India-Japan Industrial Competitiveness Partnership in force from 2019, between the Japan Ministry of Economics, Trade and Industry, and the DPIIT. This aimed to identify and reduce Japan investment hurdles in specific industrial sectors, particularly under covid-19.
Moving forward, both countries intend to marry their core strengths by linking Japan’s robust financial strength and access to global markets with India’s strong IT expertise. This has great potential to benefit both countries.
Samiron Borkataky is a partner and Aatman Shukla is an associate at Kochhar & Co.
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