Primarily, since 1991, India has sought to liberalise its economy and has continuously opened up most of its industrial and business sectors to foreign investment. In particular, the Indian government has sought to attract foreign investment into the country by undertaking steps towards enhancing the ease of doing business in India, as it has the effect of establishing long-term economic relationships with India.
Foreign investment in India is principally governed by the Foreign Exchange Management Act 1999 (FEMA) and the regulations framed thereunder, which consolidate the law relating to foreign exchange in India. To regulate foreign investment, the Reserve Bank of India (RBI) had published the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (TISPRO 2000) and thereafter the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO 2017) (as amended from time to time), under the FEMA was published on 7 November 2017. Additionally, in 2010, the Department for Promotion of Industry and Internal Trade (DPIIT) (earlier known as the Department of Industrial Policy and Promotion (DIPP)) had put in place a policy framework that consolidated the sectoral requirements and other conditions that must be complied with by foreign investors investing in Indian entities (FDI Policy). The FDI Policy used to be updated every year and amended from time to time and the consolidated FDI policy of 2017 is the last policy framework issued by the DPIIT (Consolidated FDI Policy).
On 15 October 2019, the central government notified, inter alia, certain amendments to the FEMA, pursuant to which, the central government, rather than the RBI, has been granted the power of specifying all permissible non-debt instruments capital account transactions and the RBI has been granted the power of specifying all debt instruments capital account transactions. The central government separately, on 16 October 2019, also notified the following instruments that shall be considered as ‘non-debt instruments’, inter alia, namely: (i) all investments in equity in incorporated entities (public, private, listed and unlisted); (ii) capital participation in limited liability partnerships (LLPs); (iii) all instruments of investment as recognised in the FDI Policy as notified from time to time; (iv) investment in units of Alternative Investment Funds (AIFs) and Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs); and (v) investment in units of mutual funds and Exchange-Traded Funds (ETFs) that invest more than 50 per cent in equity.
Pursuant to these amendments to the FEMA, the central government, on 17 October 2019, notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (Rules 2019) and the RBI notified the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (Regulations 2019) and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Reporting Regulations 2019), that have superseded the TISPRO 2017 (as amended from time to time) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. In the past year, the trend for liberalisation has continued, with relevant changes being made to the Indian foreign exchange laws in this regard, for example:
- Rules 2019, dated 17 October 2019: 100 per cent foreign investment (via automatic route up to 49 per cent and government route beyond 49 per cent) has been permitted in the single brand product retail trading for the products to be sold under same brand used internationally and to undertake retail trading through e-commerce for single brand trading entities operating through brick-and-mortar stores in India; and
- Rules 2019, dated 17 October 2019: the definition of an ‘investment vehicle’ has been amended to include mutual funds that invest more than 50 per cent in equity.
Further, Rules 2019 contain sectoral requirements that must be complied with by foreign investors for the purposes of investing in particular sectors in India and also by Indian companies that receive foreign investments in India. They also classify sectors that fall under the approval route and those that fall under the automatic route. Further, there are also certain limited sectors and industries in which foreign investment is prohibited. Except for those sectors and subject to conditions for foreign investment (performance conditions) or government approval in certain sectors; by and large, there are no preconditions for making foreign investment into other sectors in India.
Additionally, the Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations 2019 (FPI Regulations), read with Schedule II of Rules 2019, permits foreign portfolio investors (FPIs) to invest in equity instruments of an Indian company and specifies the form and manner in which such investment by FPIs in Indian entities can be categorised as foreign portfolio investment or foreign direct investment (FDI). As per the Rules 2019, the total holding by each FPI is required to be less than 10 per cent of the total paid-up equity capital on a fully diluted basis or less than 10 per cent of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (individual limit) and the total investment of all the FPIs put together in an Indian company (including any other direct or indirect foreign investments) is required to not exceed 24 per cent of the paid-up equity share capital on a fully diluted basis or the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company (aggregate limit). Further, as per the FPI Regulations, in the event that the investment by a FPI exceeds the individual limit of 10 per cent, such investment will qualify as FDI. Further, Regulations 2019, read with the FPI Regulations, also permit FPIs to invest in any debt securities, shares, debentures and warrants of listed companies or companies whose securities are likely to be listed on a stock exchange in India.
Therefore, foreign investment in India can broadly be classified into investments in debt instruments and investments in non-debt instruments.
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