Foreign Exchange Management Act (FEMA)

‘FDI’ means investment by non-resident entity/person resident outside India in the capital of an Indian company as per Foreign Exchange Management Act (FEMA) Regulations.

Investments can be made by non-residents in the equity shares/ fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route are considered by FIPB.
The Foreign Investment Promotion Board (FIPB) is a government body that offers a single window clearance for proposals on Foreign Direct Investment (FDI) in India that is not allowed access through the automatic route. The Minister of Finance, considers the recommendations of the FIPB on proposals for foreign investment up to Rs. 1200 crore. Proposals involving foreign investment of more than Rs. 1200 crore require the approval of the Cabinet Committee on Economic Affairs (CCEA). FIPB is mandated to play an important role in the administration and implementation of the Government’s FDI policy. It has a strong record of actively encouraging the flow of FDI into the country through speedy and transparent processing of applications. In case of ambiguity or a conflict of interpretation, the FIPB has always stepped in with an investor-friendly approach.

Despite slump, the fundamentals that make India attractive to investors remain intact. The high potential of the domestic market driven by an emerging middle class, cost competitiveness and a mammoth pool of talent continue to make India one of the most preferred destinations of FDI. The country’s domestic demand-driven growth model is playing a catalyst role in attracting foreign investments in the country. Although the ongoing global uncertainty stemming from recessionary concerns and sovereign debt crisis has, to some extent, prompted some discomfort among global investors to make long-term commitments, India’s inherent advantages and its proven resilience to counter macroeconomic challenges far outweigh these concerns.

As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI.

As per the FICCI FDI Survey 2010, the investors have given the following key messages to the Government for bringing improvement in the investment environment in India:
  • Rationalization of the tax structure
  • Simplification of procedures for flow of funds
  • Modernization of government systems and reduction in bureaucracy
  • Improvement in infrastructure facilities
  • Rationalization of labor laws
  • Liberalization of employment visa rules
There are serious thinkers who hold a more balanced opinion about FDI. Mr. Khaldun Malek of Malaysian Business has opined in AsiaViews that FDI is often regarded as a critical factor in the development of a healthy economy. However, as with many other general principles, there are many caveats to consider because FDI can manifest in many forms, but all of which must inevitably serve the interest of the investor. Investors invest for profits regardless of the social and economic ramifications of their investments. However, for governments, creating a healthy economy where benefits can be enjoyed equitably is fundamental. Creating investment opportunities may indeed stimulate investments from within and from abroad. It is critical that the government is aware of the ramifications of such incentives, especially to ensure that the fruits of such developments are not merely meant to line the pockets of investors but more properly to create and sustain the kinds of developments that can be enjoyed by all.

Shri Rajeev Srinivasan of Daily News and Analysis has more balanced views on FDI. He opines that FDI should not be attracted willy-nilly. The spectre of the East India Company and rapacious westerners still haunts us. While it is true that MNCs are often ruthless, Indians probably can compete successfully with them in a level playing field. There are sectors where investment has been minimal, and where there could be large opportunities. For instance, despite concerns that big retailers (such as Walmart, Tesco, Metro) might spell doom for small businessmen, there are extenuating factors. Small shopkeepers may actually benefit from being able to buy good quality products wholesale from the big stores. There is a simple economic reality that suggests that FDI is useful for India. The experience of China with FDI is instructive. Instead of MNCs dominating China, the reverse has happened: they were forced to transfer technology to China, and as a result, Chinese companies are now competing fiercely with the foreigners. The benefits of FDI include skill enhancements, technology inputs, job-creation, and spillover effects. It does caution that the market power of MNCs may result in their ability to extract large profits; left unsaid is the possibility that they may do predatory pricing to drive local competitors to ruin. Shri Rajeev Srinivasan concludes that the empirical data suggests that the positives outweigh the negatives. Judiciously pursued, FDI can indeed be useful.

The views of the thinkers like Mr. Khaldun Malek and Shri Rajeev Srinivasan are that the MNCs are more concerned with their profit maximization than the welfare of the people of the investee country. There is a news item in the newspapers on 13.07.2012 that a scientist and green activist Vandana Shiva has filed a Public Interest Litigation (PIL) in the High Court of Delhi that has alleged that Bharti Walmart was illegally carrying out multi-brand retail trade even though it was allowed to run only whole sale cash and carry trade (trading with firms having registration / licence certificates and not engage in retailing by selling to consumers directly). The Government and people of India has to keep their eyes and ears open so that the MNCs do not take recourse to any unfair activity which is against the letter and spirit of the relevant law, rules and regulations, so that the Indian small traders are not deprived of their source of livelihood and cause problems to lakhs of Indian people in organized and un-organized sector.

In the end we may say that FDI is very good for development of the nation, if it is allowed prudently into the country and the Government and people of India remain constantly vigilant about any unfair activities of the investors and zealously guard the national interest.
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Footnote: We, Corporate Professionals,  provide consultancy to resident company/ies accepting FDI and help them in their Compliance of FEMA guidelines.

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