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Foreign Investment & Regulation

FOREIGN DIRECT INVESTMENT

A Foreign direct investment (FDI) is an investment made by a firm or individual of one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign- based companies.

Foreign Direct Investments are commonly made in open economies i.e the countries that have skilled workforce and growth prospects. They not only ensure the inflow of money in the economies but also provides them with nascent skills and upgraded technology.

TYPES OF FOREIGN DIRECT INVESTMENTS 

Basically, there are two types of FDI. They are as follows:

  • HORIZONTAL FDI: In this case, a business expands its domestic operations to a foreign country. It conducts the same activities but in a foreign country. For example, McDonald’s opening restaurants in Japan would be considered horizontal FDI.

HORIZONTAL :     MANUFACTURER TO MANUFACTURER

  • VERTICAL FDI : In this case, a  business expands into a foreign country by moving to a different level of the supply chain. In other words, a firm conducts different activities abroad but these activities are still related to the main business. For example : McDonald’s could purchase a large-scale farm in Canada to produce meat for their restaurants.

VERTICAL : MANUFACTURER TO RAW MATERIAL SUPPLIER
                 MANUFACTURER TO DISTRIBUTOR

Apart from these two,  other types of FDI are as follows:

  • CONGLOMERATE FDI : In conglomerate FDI, the business acquires an unrelated business in a foreign country. This is uncommon, as it requires overcoming two barriers to entry: entering a foreign country and entering a new industry or market.
  • PLATFORM FDI: Here, a business expands into another country but the output from the business is then exported to a third country.

BENEFITS OF FOREIGN DIRECT INVESTMENT

Foreign direct investment offers advantages to both the investor and the foreign host country. These incentives encourage both parties to engage in and allow FDI.

 Benefits for business are as follows:

  • Market diversification
  • Tax incentives
  • Lower labour costs
  • Subsidies

Benefits for the host country:

  • Economic Stimulation
  • Development ofHuman capital
  • Increase in employment
  • Access to management expertise, skills, and technology

For businesses, most of these benefits are based on cost-cutting and lowering risk. For host countries, the benefits are mainly economic.

FDI IN INDIA

The Government of India established the New Economic Policy [NEP] in 1991. This policy focussed mainly on three heads which were: Liberalisation , Privatisation and Globalisation [ commonly known as the LPG model].

Among these three the flow of foreign investments was directly related to the policy of liberalisation. In general , Liberalisation refers to relaxation in rules and regulations for the entry and exit of goods. The basic motive of the Indian Government behind this policy was to make their way to the international market and take a step forward towards globalisation.

Foreign Direct Investment (FDI) has steadily increased in India as result of this economic liberalisation in India. Foreign companies generally invest in India due to the availability of cheap labour and changing business environment in India . To ensure more and more FDI inflow, the Government of India makes amends to FDI policy from time to time. Intrinsically, FDI plays a complementary role in overall capital formation and in filling the gap between domestic savings and investment. At the macro-level, FDI is a non-debt-creating source of additional external finances. At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors and regions of the host economy. The service sector receives the highest FDI inflow followed by the computer software and then the hardware sector [ Acc. to fiscal year 2020].

According to the World Investment Report 2020 , India was the 9th largest recipient of FDI in 2019. Furthermore , on the part of the  Government of India, certain amendments have been made in the FDI policy to increase FDI inflow. In 2014, the government increased foreign investment upper limit from 26% to 49% in insurance  sector. It also launched Make in India initiative in September 2014 under which FDI policy for 25 sectors was liberalised further.  In April 2015, FDI inflow in India increased by 48% since the launch of “Make in India” initiative. In May 2020, government increased FDI in defence manufacturing under the automatic route from 49% to 74%. In April 2020, government amended existing consolidated FDI policy for restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations . In March 2020, government permitted Non Resident Indians (NRIs) to acquire up to 100% stake in Air India. Due to all these amendments, the flow of FDI in India has undoubtedly increased in the past few years to a very good extent.

Routes of Foreign Investment are as follows:

There are two routes by which India gets FDI. 

  1. Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.
  2. Government route: Here, Prior approval by the government is needed . The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single window clearance of FDI application under Approval Route.

MAJOR INSTITUTIONS THAT OVERLOOK FDI IN INDIA

  • Foreign Investment Promotion Board [FIPB]

The Foreign Investment Promotion Board (FIPB) was a national agency under the Government of India that offered a single-window clearance for FDI  applications which did not come under the automatic route. It was abolished by the Indian government in May 2017 . It was stated that  India’s  opening up  of many sectors for foreign companies to start a business in India had reduced the utility of FIPB.  Therefore, FIPB was abolished.

The FIPB performed the following functions before it was abolished:

  1. Quickly approve FDI proposals.
  2. Review FDI policies and help set up transparent guidelines to encourage FDI in different sectors.
  3. To examine the implementation of the various proposals.
  4. To communicate with the government and industry to increase the inflow of FDI into the country.
  5. To identify other sectors that need FDI.

After the abolishment of FIPB,  individual departments of the government have the authority to look into the matters of FDI.

  • Department of Industry Policy & Promotion [DIPP]

Department of Industry Policy & Promotion is responsible for formulation and implementation of various promotional and developmental measures for the growth of the industrial sector. It is responsible for overall industrial policy. It monitors the industrial growth and production and forecasts the need for technological development in various industrial sectors in particular. This Department is also responsible for facilitating and increasing the FDI inflow in the country. Moreover ,it  encourages acquisition of technological capability in various sectors of the industry through liberal foreign technology collaboration regime. It plays an active role in investment promotion through dissemination of information on investment climate and opportunities in India. The Department is also responsible for Intellectual Property Rights relating to Patents, Designs, Trade Marks etc.

  • Secretariat for Industrial Assistance (SIA)  

The Government of India established the Secretariat for Industrial Assistance (SIA) in the Ministry of Commerce and Industry’s Department of Industrial Policy and Promotion to provide a single-window service for entrepreneurial assistance, investor facilitation, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and state governments) and other related services. It also notifies all government policy decisions relating to investment and technology, and collects and publishes monthly production data for industry groups.

SERVICES PROVIDED BY HELLO COUNSEL

Hello Counsel provides assistance to foreign companies for routing entry strategies for investment in India and assisting them through Government regulations and procedures for setting up their operations in India. Our lawyers have in depth knowledge of international markets and the Foreign Investment Management Act (FEMA), 1999 and have comprehensive experience in cross border transactions.

We assist our clients in obtaining necessary approvals from the concerned authorities such as Foreign Investment Promotion Board (FIPB), Director General of Foreign Trade (DGFT), Department of Industrial Policy & Promotion (DIPP), Secretariat for Industrial Assistance (SIA), Reserve Bank of India (RBI), etc. We also assist our clients in Industrial licensing, Government contracts, transfer of technology and licensing and repatriation. We have advise and assist our clients on routing Foreign Direct Investment (FDI) in the fields of telecommunication, construction, single brand retailing, power, hotel, tourism, etc. We have significant experience in dealing with mergers & acquisitions, private equity, joint venture agreements, international securities and capital markets transactions. We assist companies in raising capital by way of FCCB’s, ADR/GDR, etc.

We also advise foreign companies to determine the most appropriate vehicles for their desired investment in India, ranging from establishing a Liaison Office, Branch Office, Project Office, Joint Venture, Wholly Owned Subsidiary, Holding Companies and Acquisition of an existing company. We assist companies in obtaining approvals from Reserve Bank of India (RBI) for establishing branch, liaison, project and site office. We also advise on various provisions and procedures relating to imports and exports.

We conduct due diligence and feasibility analysis of probable collaborations in India. We draft various agreements such as joint venture agreement, shareholders agreements, share purchase agreements, memorandum and articles of association of companies for our clients.

Courts & Fora

  • Director General of Foreign Trade (DGFT)
  • Department of Industrial Policy & Promotion (DIPP)
  • Foreign Investment Promotion Board [FIPB]
  • Reserve Bank of India (RBI)
  • Secretariat for Industrial Assistance (SIA)

Legislations Governing Foreign Investment

  • Companies Act, 1956- Section 391 [Scheme of amalgamation between two Companies]
  • Constitution Of India,1950– Articles 73, 136 & 226, 253, 265 & Schedule VII List I Entries 10 & 14.
  • Contract Act, 1872
  • Finance Act, 1994
  • Foreign Exchange Regulation Act, 1973- Sections 19 28, 29 & 31
  • Foreign Exchange Management Act, 1999.
  • Income Tax Act, 1961- Sections 90, 4, 5, 116(a) & 119
  • Land Acquisition Act, 1894.

International Law Treaties

  • Indo Mauritius Double Taxation Avoidance Convention, 1983.

Citations Of Judgments: Foreign Investment

Union of India v. ABN Amro Bank [Bench Strength  2], Crl. A. No. 975/2007 Judgment Dated: 12/07/2013, Bench: K.S. Radhakrishnan, J. & Dipak Misra, J., Supreme Court Of India- 2013(13) SCR 820: 2013(16) SCC 490: 2013(10) JT 124: 2013(9) SCALE 407: 2013(6) SLT 619: 2013(179) CompCas 437- Foreign Exchange Regulation Act, 1973- Sections 19 & 29- Foreign investment- Automatic RBI approval for 51% foreign equity share- Non-fulfillment of required condition- Respondent No.2 a company registered in India sought approval from RBI for 51% foreign equity share for as consultancy company of trading activity- However, subseqently company engaged itself for trading of gold coin in India- Directorate of Enforcement has taken action against the company under Section 19 and 29 of FERA- In appeal by the company Tribunal set aside the order passed Directorate which was affirmed by High Court holding no question of law arise for consideration- Challenged- Held, automatic Permission Route was found open by the Notifications dated 13.1.1998 and 20.1.1998 subject to certain conditions and parameters with the filling of declaration in Form FC [RBI] regarding engagement of export activity- Relaxation was given to invest 51% equity for two categories namely all industries mentioned in Annexure III to the Statement of Industrial Policy 1991 or to a trading company primarily engaged in export and was registered with Ministry of Commerce as an Export/Trading/Star Trading House- In absence of such declaration automatic approval was not available- Legislative intent was to grant approval for those companies which were incorporated in India- Companies which do not fulfill the conditions mentioned in those Notifications are required to obtain prior permission from FIBP for foreign equity investment- Whether company was set up newly or not, it was required that it was engaged primarily for export activities- The company has put a tick mark in the form which would indicate that it sought to avail of the automatic route for service sector only as indicated in Annexure III and item code indicated “893”, which deals with “Business and Management Consultancy Activities”- The company cannot go back from the information already furnished by it in the application, form which are declared as `true and correct’- RBI granted general permission only for dealing with the activities mentioned in NIC Code 893 and not for any trading activities leading to import or export- The High Court has committed an error in holding that no questions of law arose for its consideration under Section 54 of FERA and has completely misread and misinterpreted the Industrial Policy- Accordingly appeal is allowed- Industrial Policy 1991- Part III & Press Note No.11 dated 20.8.1991 and No.23 dated 31.12.1991- Companies Act, 1956- Section 81.-HELD: We have examined in detail the historical background of the Industrial Policy dated July 24, 1991, Press Note No.11 dated 20.8.1991 dealing with the changes in procedures for foreign investment approvals, Press Note No.23 dated 31.12.1991 dealing with the procedure for foreign investment in trading companies and also Appendix III of Press Note No.10 dealing with Industries for 51% foreign equity approvals, Press Note No.14 dealing with the revised consolidated list for automatic approval for foreign equity upto 50%/51%/74% etc. so as to understand the scope of Section 19(1), (d) and Section 29(1)(b) read with Notification dated 13.1.1998 and 20.1.1998 (Para 54)- The Automatic Permission Route was found open by the Notifications dated 13.1.1998 and 20.1.1998 and those notifications have laid down certain conditions and parameters for automatic approval which were to be complied with by the issuer company along with the filling of declaration in Form FC [RBI]. Notification had given relaxation to the provisions of Section 19 and Section 29(i)(b) to invest not exceeding 51% to two categories namely all industries mentioned in Annexure III to the Statement of Industrial Policy 1991 or to a trading company primarily engaged in export and is registered as an Export/Trading/Star Trading House with the Ministry of Commerce, Government of India. To claim the benefit of the above-mentioned notifications, it was essential that a true declaration in Form FC [RBI] was required to be filed and benefit of the general permission through automatic route could be obtained only for the activity specified in Form FC [RBI] and there was no automatic approval for any activity not specified in the above-mentioned form. Reading Section 19(1)(a), (b) and 29(1)(b) read with the notifications and the Press Notes show that the intention of the Legislature was to permit company incorporated in India which is engaged or proposing to engage in an activity specified in Annexure III or an Indian Company which is a trading company, primarily engaged in export and is registered as an export/trading/star trading house with the Ministry of Commerce, Government of India to issue equity shares, subject to the conditions mentioned in paragraph 3 of the Notification dated 13.1.1998. The first proviso to Notification states that a company existing on the date of the notification, which was not engaged in Annexure III activity would be eligible to issue shares if it had embarked upon expansion programme, predominantly in Annexure III activities, subject to the condition that foreign equity raised by issue of equity shares to the foreign investors was utilized for such expansion. The first proviso goes along with clause (a) of the Notification. The second proviso states that in the case of a newly set-up “trading company”, primarily engaged in export, issue of shares shall be subject to the conditions that registration as an export/trading/star trading house was obtained before the dividend is declared to the foreign investors. These provisos go along with clause (b) of the Notification. The Notification, it is clear, was intended to give relaxation to the provisions of Section 19(1)(a), (b) and 29(b) of the Act to the investments not exceeding 51% of the aforesaid two categories, namely, (1) Industries in Annexure III to the statement of Industrial Policy, 1991 or (2) a trading company primarily engaged in export and was registered as an export/trading/star trading house with the Ministry of Commerce, Government of India. Companies which do not fulfill the conditions of the Notification dated 13.01.1998 and 20.01.1998 and all other companies which do not fulfill the conditions mentioned in those Notifications are required to obtain prior permission from FIBP for foreign equity investment (Para 55)- We cannot read the notifications dated 13.01.1998 and 20.01.1998 in isolation, but have to be read along with Section 19(1)(a),(d), Section 29(1)(b), the Industrial Policy of July 1991 especially para 39B(iv), Press Notes dated 20.08.1991, 13.12.1991, 31.12.1991 with specific reference to the trading companies primarily engaged in export activities whether new or existing. We have extensively dealt with the same in the earlier part of this judgment and hence not repeated. Para 39B(iv) of the Policy read with paras 5 and 6 of the Press Note dated 31.12.1991 which indicate that a newly setup trading company primarily engaged in the export will have to file application in prescribed form for approval of foreign equity upto 51% equity (Para 56)- Newly set-up trading company primarily engaged in export has therefore also to satisfy the conditions laid down in clause (b) of paragraph 1 of the Notification dated 13.01.1998 and the contention that a trading company is primarily engaged in export be determined only when it remits dividend cannot be accepted. The expression “further” used in the second proviso makes it more explicit. “Further” as means “additional” meaning thereby a newly set up trading company is not a third category as such but it goes along with second category i.e. “a trading company primarily engaged in export”. To get the benefit of the general permission in the automatic route a trading company should be primarily engaged in export, even if it is a newly set up company. A newly set up company also could demonstrate the same by specifying the same in Form FC[RBI] that it is a trading company, whether new or old, and is at least intended to be engaged primarily in export. A reference to the Form FC (RBI) duly submitted by the 2nd respondent is useful (Para 57)- FC[RBI] form specifically directs the applicants to “carefully tick” the “appropriate” box. In the box dealing with the application for approval for foreign investment not to exceed 51% for “service sector in Annexure III”, the company has put a tick mark which would indicate that it sought to avail of the automatic route for service sector only as indicated in Annexure III. Noticeably no tick mark was put in the next box referring to “not exceeding 51% of the trading companies engaged in exports. Para VII deals with the “existing activities” which the 2nd respondent indicated as “not applicable” and no supplementary sheet was also attached explaining as to whether it was a newly set up trading company proposing to engage in export activities. Para VIII referring to Item Code ITC (HS) the company has indicated “893”, which as per the Code deals with “Business and Management Consultancy Activities”. The company stated in the application as “Business Management Consultancy for Trading, Marketing and Selling of Goods and Services”. Even there also, there is no indication whatsoever that the company was set up for trading, but only indicated “consultancy for trading”. Further Para IX (iii) called for the description of the products for export trading wherein the company has stated as “not applicable”. Resultantly, it is clear that the purpose for which the company had sought for foreign collaboration was not for trading in gold coins either for export or domestic purpose, but for the activities mentioned in the NIC Code 893 (Para 58)- We are of the view that the company cannot go back from the information already furnished by it in the application, form which are declared as `true and correct’. Based on that application RBI vide its communication dated 29.6.1998 granted registration No.FC98NDR1005. Registration, in our view, pertains only to NIC code `893′. No permission was obtained by the second respondent company from the RBI for 51% foreign equity induction, for trading, by way of export. RBI, on the other hand, granted general permission only for dealing with the activities mentioned in NIC Code 893 and not for any trading activities leading to import or export (Para 59)- The High Court, in our view, has committed an error in holding that no questions of law arose for its consideration under Section 54 of FERA and has completely misread and misinterpreted the Industrial Policy, Press Notes and Section 19(1)(a) and (b), Section 29(1)(a) and (b) etc. and issues raised in appeals, which are clearly questions of law which fell within the ambit of Section 56 of FERA and the High Court committed a serious error in rejecting the same holding no questions of law arose for its consideration (Para 60).

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