In 2020-2021, India attracted its highest foreign direct investment (FDI) of $81.97 billion, despite the disruption caused by the covid-19 pandemic. Indeed, according to a report published 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 key 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 of 1999 (FEMA), responsible for formulating FDI policy. The DPIIT has issued press releases over the years which, together with the 2020 Consolidated FDI Policy, constitute the FDI Policy.
Under this policy, FDI is prohibited in sectors such as lotteries, gambling and betting, manufacture of cigars, tobacco and tobacco substitutes, atomic energy and railway operations. Apart from the aforementioned sectors, FDI is permitted either through the automatic route or through the government approval route, where government approval is required for FDI in certain sectors. In addition, sector caps prescribe the amount of FDI allowed in particular sectors. Recently, the government liberalized 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 defense up to 74% under the automatic route.
In October 2019, the Ministry of Finance introduced the Foreign Exchange (Non-Debt Instruments) Management Rules (Rules), 2019, regulating foreign investment in India through, among others, equity instruments, equity investments in limited liability companies, investments in investment funds, real estate investment funds and infrastructure investment funds and the acquisition of real estate. Under the rules, a person residing outside India can subscribe, buy or sell equity instruments of an Indian company, subject to entry routes, sector caps and other conditions in the rules. and politics. The rules also govern downstream investment, i.e. when an investment is made by an Indian entity that has total foreign investment there. Any investment by foreign-owned or foreign-controlled companies must comply with applicable pricing guidelines and other conditions prescribed in the rules.
Besides being the preferred destination for foreign investment in the world, India is now an emerging manufacturing hub. The country ranks 63rd on the ease of doing business index, according to the World Bank. Japan is the fifth largest foreign investor in India, with key sectors being automotive, food processing, chemical companies, renewable energy, textiles, and electronic systems design and manufacturing. To facilitate these investments by Japanese companies, the government has put in place several programs and incentives. These include a Japan Plus Desk, which expedites investment proposals from Japan; Japan Industrial Townships, which are 12 industrial townships allocated to 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. ups, investors and incubators. The government has also eased the burden of regulatory compliance by introducing a national one-stop-shop system as well as a regulatory compliance portal, providing easy access to information needed to start businesses in various sectors.
Covid-19 has raised concerns among Japanese investors over areas such as interstate movement of workers, new proposed labor law amendments, payment of debts of large corporations and utility companies, and access from businesses to aid facilities for the reopening of industrial establishments, which the government has urgently addressed. However, strong economic relations between India and Japan have been confirmed by the India-Japan Partnership for Industrial Competitiveness effective from 2019, between the Japanese Ministry of Economy, Trade and Industry and the DPIIT. This aimed to identify and reduce barriers to investment in Japan in specific industrial sectors, particularly in the context of covid-19.
Going forward, the two countries intend to marry their core strengths by combining Japan’s strong 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 a partner at Kochhar & Co.
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