Foreign Direct Investment – Legal Framework and Recent Trends in India

Securities and Exchange Board of India (SEBI)

The SEBI was set up as non-statutory body on April 12, 1988. After SEBI ordinance 1992, it was established as a statutory body on February 21, 1992. Subsequently, the ordinance was replaced by SEBI Act on April 4, 1992. In its earlier stage, SEBI was charged with twin responsibilities of regulation and development of Indian securities markets. At the later stage, SEBI acquired additional powers. Some of them are-

• Discovery and production of books of accounts and other documents
• Summoning and enforcing attendance of individuals and examining them on oath
• Inspection of books, registers and other documents of any person or company
• Suspend trading of security
• Restrain individuals from accessing securities market
• Suspend office-bearers of any stock exchange from holding their position
• Prohibiting unfair trade practices
• Regulating the work of stock brokers and other intermediaries
• Regulating work of venture capital fund

Composition of SEBI

• It comprises of one chairperson appointed by central government
• It comprises of one board member appointed by RBI
• Two board members who has or hold position under Union Ministry of Finance
• Five board members appointed by central government

Functions of SEBI

• It safeguards the interest of investors while educating them about security markets and intermediaries.
• Ensuring smooth functioning of securities market
• Regulating operations within securities market
• Registration and regulation of working of intermediaries
• Registration and regulation of working of collective investment schemes
• Promotion of self-regulatory organizations
• Inspection and inquiries of stock exchanges, stock brokers, mutual funds
• Fees and other charges

Foreign Investment Promotion Board

The foreign investment promotion board (FIPB) was a body responsible for processing FDI proposals and making recommendations for government approval. The board was previously constituted in the wake of economic liberalization drive of early 1990s. the board was reconstituted in 1996 with transfer of the FIPB to DIPP. The FIPB was transferred to the Department of Economic Affairs. The permanent members of board are –

• Chairman – secretary of department of economic affairs
• Secretary of department for promotion of industry and internal trade (DPIIT)
• Secretary of department of commerce (DOC)
• Secretary of ministry of overseas Indian affairs (MOIA)
• Secretary of economic relations, ministry of external affairs (MEA)
• Secretary of department of revenue, ministry of finance
• Secretary of ministry of small and medium micro enterprises

The board may co-opt other secretaries of government of India and official of financial institutions, banks and professional experts industry and commerce, if required.

On 5th June 2017, the government announced abolition of FIPB. With the abolition of board, the approval responsibilities were directed to individual ministries and government bodies.

Department for Promotion of Industry and Internal Trade (DPIIT)

The DPIIT was established in 1995 and reconstituted in the year 2000 with the merger of Department of Industrial Development. It was renamed from Department of Industrial Policy and Promotion (DIPP) to Department for Promotion of Industry and Internal Trade (DPIIT) in 2019.It was established to promote industrial development in the country. It covers 14 key sectors which includes – mobile manufacturing, drug intermediaries, pharmaceutical drug, special steel, telecom and networking products etc.

Reserve Bank of India

The Reserve Bank of India (RBI) was established on 1st April, 1935 under Reserve Bank of India Act, 1934. The RBI is a government owned body. It I governed by central bord of directors. The board is appointed by government in accordance with Reserve Bank of India Act. The board is appointed for a period of four years and is constituted of official directors and non-official directors.

Official directors include governor and four deputy governor while non-official directors are nominated by government and include ten directors from various fields and two government officials and other four directors, one each from four local board (regional). The RBI has offices at 33 locations. It has five training establishments. Main functions of RBI include –

• Formulation, implementation, and monitoring the monetary policy.
• Prescribes parameters of banking operations within which the country’s financial system functions.
• Manages Foreign Exchange Management Act, 1999
• Issues, exchanges and destroy currency notes as well as puts into circulation coins minted by government
• Regulation and supervision of non-banks, co-operative banks, non-banking financial companies
• Payment and settlement functions
• Consumer protection and promotion functions

Directorate General of Foreign Trade (DGFT)

DGFT is an organization established in 1991. It has headquartered in Delhi. Its main function involves regulation and promotion of foreign trade through regulation. It formulates and implements foreign trade policy with an objective of promoting India’s exports. Its functions include implementing foreign trade policy, trade promotion, transit of goods, proving importer-exporter codes etc.

Routes of FDI

• Automatic route – it allows investors to invest without seeking prior permission of government.
• Government route – approval form the government is required prior investment by investors.

India has become an investment hub in recent years. It has attained 39th position in global economy. some of the investment and development includes-

• Investments by companies such as amazon, Flipkart etc. into Indian e-commerce sector.
• Investment by foreign portfolio investors (FPIs) in the Indian equity markets.
• Investment by Foxconn of Rs. 12,894 crore to expand its Indian operations.
• Over past 9 years, Indian insurance sectors has attracted approximately Rs54,000 crore in FDI.
• The renewable energy sector has received a total FDI of US$6.14 Billion from April 2020 till September 2023.

Government Initiatives

Government has taken various initiatives to boost FDI inflows in India. Government has expanded many schemes as well as developed new schemes and strategies to make way for foreign investors to invest in country. Some of the initiatives are –

• Government permitted 100% FDI via automatic route for aircraft maintenance, repair and overhaul (MRO)
• Union cabinet approved the signing and ratification of Bilateral Investment Treaty between India and UAE to attract foreign investments, and create opportunities overseas, leading to job creation.
• Union cabinet approved an amendment to FDI policy concerning space sector, aligning with the vision of Atmanirbhar Bharat. The amendment liberalised the space sector, by allowing 100% FDI.
• The union cabinet approved the PLI scheme for white goods with a budget of US$752 Million.
• The government increased FDI in defence sector by liberalizing it to 74% through automatic route and 100% through government route.
• 100% FDI is allowed in civil aviation sector under automatic route.

Top sectors that have contributed to FDI inflows in India are – services sector, computer software and hardware, telecommunications, trading and automobile industry. Along with sectors, major countries that have contributed to India’s FDI inflows are – Mauritius (25%), Singapore (23.6%), Netherlands (7.4%), Japan (6.1%), United Kingdom (5%), U.S.A (9.6%).

Shift of Supply Chain from China to India

One of the major factor for increase in India’s FDI inflows is manufacturing migration from China. Countries like USA are shifting their supply chains from China to other countries. India is one of them. As per the report of BCG India is emerging as future export manufacturing powerhouse. Factors like wage inflation are driving manufacturing migration. For instance, US imports of mechanical machinery from China shrank by 28% from 2018-2022 but increased by 70% from India. India is very cost competitive; it has a strong manufacturing base that supplies everything from electric vehicle to chemicals and appliances for its domestic market.

Challenges

There are several challenges that impact India’s FDI. These are-

• Policy uncertainty – recurring changes in FDI policy and regulation leads to uncertainty among investors. Consistent FDI policy is essential for gaining trust of investors.
• Lack of infrastructure – insufficient infrastructure such as lack of transportation services, resources supplies, technology and connectivity reflect a negative image and limits FDI inflows.
• Concentration – FDI inflows are restricted to limited to urban areas. Less emphasis is given to rural areas.
• Corruption – corruption among various sectors in India is a common problem. To attract investors, there is a strong need to implement anti-corruption policies.

Conclusion

India’s FDI rate is rapidly increasing. Many initiatives have taken by government to attract foreign investors such as – liberalization, allowing 100% FDI through automatic route, technology driven reforms. The current global economy is also opening the doors for investors to invest in India. However, there are some challenges which have to removed with time as they are creating hurdles for FDI. These challenges include – frequent policy reforms, inadequate infrastructure, competition etc. Stable policy regulations can attract more investments in future. India only has to make right choices and choose a right path.