Foreign Direct Investment (FDI) In India A Year in Review

Foreign Direct Investment (FDI) In India A Year in Review

India's developing FDI policies combined protectionism and liberalism in 2020. As the global economy stabilizes and more international investors look toward India for opportunity, Indian businesses will need to adjust to the dynamic market trends while remaining in compliance with FDI regulations

2020 was an eventful year for foreign direct investment (FDI) policies around the world. The public health crisis caused by COVID-19 drove share prices downward across world markets and highlighted Chinese conglomerates as more threatening, opportunistic financial counterparties than ever before. While European nations responded to falling asset values brought about by COVID-19 mostly by bolstering their defenses against foreign business takeovers, India took a hybrid approach in adjusting to the current financial climate. In some respects, India has acknowledged the dangers of predatory overseas takeovers through regulatory reform. In other respects, India has relaxed its FDI policies in hopes of bringing additional foreign investment capital into the market. This article summarizes India's FDI policy developments during the year 2020.

INSTANCES OF GREATER FDI SCRUTINY

In October, India formally amended its foreign investment policy to require all acquisitions by any bordering countries to obtain prior government approval. Bordering countries of India include Pakistan, Bangladesh, Afghanistan, Nepal, Bhutan and, most notably, China. Chinese firms and investment funds are particularly active, ready-to-use market slumps to gain financial momentum. India remains uniquely vulnerable to traders due to its large economy and recent spike in startup businesses that have become undervalued and desperate for funding. As a result, Indian authorities now screen any future attempts of Chinese control over domestic businesses. The goal is to deter Chinese investors that are preying on cheap, distressed Indian assets.

INSTANCES OF RELAXED FDI SCRUTINY

Despite greater concerns about takeovers of Indian companies by companies from neighboring countries, Indian authorities concurrently determined that greater foreign investment access (other than China) is necessary for certain business verticals within the country.

The Indian defense manufacturing industry is the beneficiary of relaxed FDI regulations recently promulgated by the central government. In September 2020, the Indian government formally proposed to increase the permitted ownership by non-Indian investors in Indian defense manufacturing companies without prior approvals from 49% to 74% in certain cases. Currently, ownership by non-Indian investors in Indian defense manufacturing companies may not exceed 49% without prior Indian governmental approval. While the increase of the approval threshold to 74% is significant, the increase comes with caveats with respect to national security. For example, FDI in the India defense industry still requires prior security clearance by the Ministry of Home Affairs. Additionally, the government's formal proposal emphasized that permitted FDI in the India defense industry is now universally qualified by the fact that the government may impose limitations on proposed FDI on the "grounds of national security" and that the Indian government reserves the right to review any proposed FDI that may affect national security irrespective of the business sector. A target company's licensing status also plays a role in determining whether FDI will be approved. If an Indian defense company's operations do not require an industrial manufacturing license, the threshold below which governmental approval is not required remains capped at 49%.

In raising the cap on FDI in Indian defense companies without prior approval requirements, policymakers intend to encourage foreign original defense equipment manufacturers ("OEMs") to shift their manufacturing operations to India. Many multinational corporations ("MNCs") headquartered in the United States and Europe are hesitant to enter into partnerships with Indian defense companies due to the uncertainties surrounding prior governmental approval. MNCs generally are reluctant to share their sensitive defense technology and information without first having a majority stake in the joint venture. The threat of government rejection of a proposed investment or certain elements of a structure has a chilling effect on the decision of whether to engage in those investments at all. The raised investment cap should mitigate those concerns and bring greater global financial and technological support to the Indian defense industry and the larger Indian economy as a whole. Moreover, the more lenient investment rules may encourage global defense conglomerates to establish permanent manufacturing and research and development hubs in India. The proposed reform also allows smaller, private Indian companies to play a bigger role in Indian domestic defense equipment and materials production. While India purchases billions of dollars each year in defense technology, non-Indian contractors win nearly all of the major bids. Indian lawmakers hope that the wider access to foreign investment capital for local defense companies will reduce India's reliance on other countries for defense equipment and strengthen national "Make in India" efforts.

The Indian space industry is also a beneficiary of the ongoing trend of relaxed FDI regulation in India. In October, 2020, the Indian Space Research Organisation released a draft of its new Spacecom Policy 2020. The Policy governs the use of orbital slots, satellites and ground telecommunication stations with the goal of providing greater industry access to private companies. Representatives of the Department of Space in India confirmed that the Policy also aims to encourage FDI in Indian space businesses. Currently, all FDI proposals in India space companies are subject to national approval. While a foreign investor can technically invest up to 100% under the existing Indian space regulation, any such transaction requires approval by the government first. Space industry leaders have been formally requesting the Indian government to permit FDI through the "automatic route," as opposed to requiring regulatory approval, since June. With less stringent FDI approval rules, India could be poised to attract billions of dollars of fresh investment into the Indian space and satellite sectors. This could establish India as a significant player in the global space communication sector.

KEY TAKEAWAYS

India's developing FDI policies combined protectionism and liberalism in 2020. As the global economy stabilizes and more international investors look toward India for opportunity, Indian businesses will need to adjust to the dynamic market trends while remaining in compliance with FDI regulations. Additionally, foreign investors should be aware of the Indian government's ongoing attention to cross-border transactions that have been accelerated by the COVID-19 pandemic. For certain overseas companies and investors in particular, this rule changes represent a significant opportunity to participate in the newest phase of India's economy.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.