FDI Rules in India: Recent Changes in the FDI Policy

Indian Government has been making regulations with regard to foreign policies in order to make the FDI process liberal and more streamlined

Foreign direct investment (FDI) in India has been one of the primary sources of money required for the economic and whole development of our country. India has been moving rapidly towards increasing its ability to attract more direct investment from across the globe and has encouraged private business to abroad to undertake the advantages of cheaper labour and the ever changing business environment in India.

Recently, on 17th April 2020, India made certain changes to the foreign direct investment (FDI) policy for the protection of domestic companies from what is now termed as "opportunistic takeovers and acquisitions of Indian companies due to the current COVID-19 pandemic". As per the Department for Promotion of Industry and Internal Trade, this is a necessity due to the current status of the world economy with increasing white collar crimes and unfair takeovers from foreign companies which deplete the local resources and leave it devoid of any platform for growth economically.  While the new FDI policy does not restrict markets, it does make sure that all the FDI shall now be under the scrutiny of the Ministry of Commerce and Industry. The changes brought about by the Government of India includes amendments aimed at increasing the inflow of FDI into the country as opposed to the outflow. Ill date several changes have occurred in our FDI policy to encourage such inflow. For example, in 2014, the government increased the foreign investment’s upper limit from 26% to 49% within the insurance sector along with the inauguration of the “Make in India” initiative in September 2014 within which the FDI policy for nearly 25 industries had been further liberalised. Subsequently, in April 2015, the FDI inflow in India had increased by a staggering 48% since the launch of the "Make in India" initiative, thereby making it a success.

Currently, the Government has again brought in certain necessary changes for the growth of FDI inflow into the country. In May 2020, government increased FDI in defence manufacturing under the automatic route from 49% to 74% while in April 2020, the government had further amended the existing consolidated FDI policy for restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations. This was again preceded by the Government permitting NRIs to acquire a 100 per cent stake in Air India, in March 2020.

Recent Changes in FDI Policy:

The Government of India has undertaken the project of ease of doing business lately, with the easing of several FDI norms in various sectors.

: In order to grow this sector further it was seen that there was a need for a consolidated effort on behalf of the National as well as the State governments for ensuring that the States attract more FDI inflows. Hence, for attracting more FDI, the State, with a sizeable manufacturing sector can attract more FDI inflows which implies that foreign investors shall prefer India over other nations due to a strong base for industrial set-ups. Recent Policy actions by the DPIIT include new changes to the FDI policy through which the following sectors have been affected positively:
  • In the Coal and Lignite Mining industry, 100% FDI under the automatic route has been granted for Indian entities engaged in coal and lignite mining. The same has also been provided to Indian entities engaged in the sale of coal, coal mining activities including associated processing infrastructure as long as it is in compliance with the provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957.
  • In the contract manufacturing sector, FDI in manufacturing had already been permitted to 100% under the automatic route, however the press note by DPIT, clarified that investments in Indian entities that are engaged in contract manufacturing will also be permitted under the 100% automatic route as long as it is undertaken through a legitimate contract under the law. This amendment is aimed at boosting the domestic manufacturing sector to a great extent.
Aviation Sector
  • The Government of India proposed the opening up of the aviation sector for FDI in consultation with all the members and stakeholders under the Union Budget 2019-20. In order to incorporate this plan along with the implementation of the strategic disinvestment of M/s Air India Limited, the Finance Ministry on July 27, 2020 notified changes under the FDI rules to permit non-resident Indians (NRIs) to acquire upto 100% stake in Air India alone.
  • Prior to this change, only Indian citizens were permitted to acquire a 100 % stake of Air India while investments by anyone else, including any foreign airline was allowed only till a limit of 49%.
  • This change in policy has been made to make the sector appear more attractive for foreign investors since with the change in FDI norms, the Government of India has advertised that a 100% share of Air India is up for sale now.
  • India has raised FDI cap for investment in insurance to 49%. Furthermore, there has been a further relaxation of foreign investment limit for insurance intermediaries with 100% FDI being permitted in this sector as well.
  • As per the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2020, notification, that took effect from April 27, 2020, these significant changes which have been introduced with this amendment has been done to increase the limit of the foreign equity investment cap to the insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors and all other such other entities, as may be notified by the IRDAI to 100%. The limit was increased from 49% to 100% as per this Amendment.
  • This amendment is expected to bring about a substantial amount of foreign direct investment into the country through the insurance industry. The regulation of the all the insurance intermediaries along with the majority shareholding by the IRDAI has a potential of providing a level playing field to all the players as well. 
  • In May 2020, GOI increased FDI in Defence manufacturing under the automatic route from 49% to 74%. India has also established two defence corridors for the encouragement of the production of defence equipments and platforms.
  • The Government of India has permitted for 26 per cent FDI in the digital sector as of December 2019. This sector has a specifically higher return ability in India since favourable demographics, substantial mobile and internet penetration, massive consumption along with technology uptake provides great market opportunity for a foreign investor.

Apart from these above mentioned changes, the Government of India has undertaken various restrictions with certain land bordering nations around India. These have been enumerated further below:
  • Recently as per the “Press Note 3” and the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020, India has revised its foreign direct investment policy by imposing stricter norms over foreign investments in companies in India from an investor who is based out of a country which shares its borders with India. As per the Press note, the changes had been implemented in order to curb opportunistic takeovers and the acquisition of Indian companies especially after having been severely affected due to COVID-19 pandemic.
  • Through this new rule, investors from China, Pakistan, Bangladesh, Nepal, Bhutan, and Myanmar are to face restriction and can only invest under the government route. The revised policy also includes within its ambit a beneficial owner of an investment situated in or who is a citizen of any of the aforementioned countries. The policy states that for all such categories of investors, the investment can only be made under the government route.
  • Moreover, if any transfer of ownership occurs, of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction and purview of the bordering countries, then such subsequent changes in beneficial ownership shall also require a government approval.
  • This move does not aim to restrict all foreign investment from the land bordering countries but only intends to regulate the future foreign investments or transfer of existing investments to beneficial owners located in bordering countries in India.
  • However, the announcement of the Press Note has also brought ongoing transactions to a halt since Indian companies receiving foreign investments have been forced to conduct regressive diligence exercises before the finalization of their transactions.
Under the present provisions, since any 'perceived' restriction of the government approval has been imposed on any form of investment by a land bordering nation's entity, the possibility of some delay in the ongoing transactions cannot be ruled out. This policy action has been used for the sole purpose of avoiding opportunistic takeovers of Indian companies with a limited coverage to the land-bordering countries around India. Under the present circumstances of the COVID-19 pandemic which has resulted in many Indian entities vulnerable, the Government's move is directly in line with public welfare and national security interests of the country.