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Sandeep Mehta
J Sagar Associates, Mumbai
sandeep.mehta@jsalaw.com

 

Introduction

The Covid-19 pandemic has been unprecedented on many counts pertaining to public health, national security and the global economy. It has had a colossal effect on various countries and India is no exception. Under phase 1 of reopening, that is post-Unlock 1.0,, the Government of India has taken several measures to revive India’s economy. The government has announced a special economic package of INR20tn (approx US$267bn) for an Atma Nirbhar Bharat, that is, a ‘self-reliant India’.[1] Under this package, with an intent to foster and protect home-grown businesses and make India the world’s leading manufacturing and supply hub, the government has further liberalised foreign investment policy across various sectors.

The Self-Reliant India Movement

Under the Self-Reliant India Movement, the government announced details of a special economic package in five stages. These stages provide relief to the stressed economy while simultaneously giving the required stimulus by introducing: measures for equity infusion in micro, small and medium enterprises (MSMEs); relief and credit support to small and medium businesses; measures to mitigate the burden of debt servicing such as a moratorium on payment of instalments and payment of interest on working capital facilities in respect of all term loans, easing of working capital financing, loans to commercial real estate projects, special liquidity facility for mutual funds; liquidity injection for power distribution companies to pay their dues to the transmission and generation companies; special liquidity scheme for non-banking financial corporations (NBFCs)/housing finance companies (HFCs)/micro finance institutions (MFIs), etc.

In addition, the government has announced various structural reforms across eight key sectors including coal, minerals, defence production, civil aviation, power distribution and atomic energy. The reforms are intended to benefit multiple sectors with the help of simplified policies to assist investors (including foreign investors), realise the potential of the sector, invite new participation and investment, generate employment opportunities and boost overall economic growth. The government has also stated that fast-track clearance will be given through an empowered group of secretaries and a project development cell constituted in each government ministry will coordinate with investors and government at federal and state level.[2]

Taking the initiatives to the masses, the Self-Reliant India Movement also provides relief to the agricultural sector and its associated industries. These measures are aimed at strengthening infrastructure, logistics, capacity building and governance and administrative reforms for agriculture, fisheries and food processing sectors, formalising micro food enterprises, funding agri-infrastructure projects, beekeeping, fishery, animal husbandry and herbal cultivation and amendments to essential commodities legislation to empower improved price realisation for farmers.[3]

Reforms and liberalisation of foreign investment policy for certain sectors

In India, foreign direct investments (FDI) can be undertaken under two routes: the automatic route and the approval route. Under the automatic route, FDI is allowed without government or the Reserve Bank of India (exchange control regulator) permission; whereas under the approval route, FDI is only permitted with the prior government permission.

The government has liberalised its investment policy in various sectors under its Self-Reliant India Movement, with an objective of boosting foreign investments in India.

Revised FDI limit in the defence sector

Until recently, under the Foreign Investment Policy, the sectoral cap for foreign investment in an Indian entity engaged in the defence sector was 100 per cent with investment beyond 49 per cent being subject to government approval, depending on wherever it was likely to result in access to modern technology or for other reasons to be recorded. However, under the economic stimulus package, the government proposes to raise foreign investment limits in an Indian defence sector entity from 49 to 74 per cent under the automatic route, with the objective to invite greater foreign investment.

Additionally, in keeping with the government’s ‘Make in India’ initiative, it is proposed to notify a list of weapons and platforms that would be banned from import with year-long timelines; promote the indigenisation of imported spares; and provide a separate budget allocation for domestic capital procurement. To this end, the Ministry of Defence has approved and notified 26 defence items which can only be procured from the local suppliers, irrespective of the purchase value, provided that these suppliers meet the minimum local content prescribed for each item and the prescribed standards for such items.[4]

These reforms widen the gates for private sector investment in Indian entities engaged in defence manufacturing and encourage global defence equipment manufacturers to set up production hubs in India. This will not only create employment opportunities but also help India realise its potential for defence equipment production including the export of defence equipment.

Product linked incentive scheme in the pharmaceutical sector

The government has also notified a production linked incentive scheme to give the required impetus to the pharmaceutical sector and promote domestic manufacturing of important drug intermediaries and bulk drugs. Under the production linked incentive scheme, investors will be allowed to submit proposals for the establishment of greenfield facilities for any of the 53 key drug intermediates and bulk drugs currently not manufactured in India on a large scale. This list includes ingredients used in the manufacture of commonly prescribed medicines such as paracetamol, metformin, aspirin, etc.^[5] Similarly, the government has announced a scheme for the promotion of ‘bulk drug parks’, set up to ensure drug security and reduce import dependence on active pharmaceutical ingredients (APIs) and there will be easy access to standard testing, infrastructure facilities and value addition.[6]

Under the Foreign Investment Policy, 100 per cent foreign investment is permissible in an Indian entity establishing greenfield pharmaceuticals manufacturing facilities and foreign investment in an Indian entity having facilities for manufacturing of pharmaceuticals products is permitted up to 74 per cent, under automatic route, and beyond 74 per cent under approval route. The scheme is intended to promote more foreign investment in the pharmaceutical industry and ensure greater research and accessibility of affordable medicines, building manufacturing capacities, introduction of new technologies and employment generation.

Reforms in civil aviation

Under the economic stimulus package, the government has announced reforms in the civil aviation, to pave the way for a Self-Reliant India. Under these reforms, restrictions on the use of Indian airspace will be eased so that civil flying becomes more efficient. Currently, only 60 per cent of India’s airspace is available for use of civil flying without obstruction. Opening up additional airspace is estimated to shorten travel time, saving fuel, and is annually expected to benefit the civil aviation sector to the value of INR10bn (approximately US$133m). Under the Foreign Investment Policy, foreign investment in an Indian entity engaged in air transport services (scheduled air transport services/domestic scheduled passenger airline and regional air transport services) is permitted up to 49 per cent through the automatic route and through the approval route beyond 49 per cent. Moreover, twelve airports have been identified for modernisation on a Public Private Partnership basis, under which 100 per cent foreign investment through automatic route is already permitted.

The government is also set on making India a hub for Airplane Maintenance, Repair and Overhaul (MRO) and aims to increase aircraft component repairs and maintenance to a great extent. To this effect, 100 per cent FDI through the automatic route is already permitted in an Indian entity engaged in aircraft maintenance and repair and the tax regime for the MRO ecosystem has also been rationalised to facilitate the world’s major engine manufacturers setting up their engine repair facilities in India.

Reforms in the coal and minerals sector

In the coal sector, the government has placed emphasis on the need to reduce the import of substitutable coal and on an increase self-reliance in coal production. The government launched an auction for commercial coal mining on 18 June 2020, wherein terms and conditions and the entry norms are liberalised.[7] New companies are allowed to participate in the bidding process and 100 per cent FDI through the automatic route is permitted in Indian entities engaged in coal and minerals mining in India, excluding atomic minerals. The government is also planning to boost growth in the mineral sector, by offering 500 mining blocks through an open and transparent auction process.

Other reforms

The government is set to announce a new Public Sector Enterprise Policy whereby certain public sectors will be opened up to private investment. This policy will provide a notified list of strategic sectors requiring presence of public sector enterprises in public interest. In such strategic sectors, at least one enterprise will remain in the public sector, but private sector investments will also be allowed. In other sectors, the public sector enterprises will be privatised. To minimise administrative costs and expenses, the number of enterprises in strategic sectors will ordinarily be only one to four and others will be privatised/merged/brought under holding companies.[8]

In addition to the reforms mentioned above, the government has announced reforms in various other sectors. These include reforms in the power distribution sector, space sector, atomic energy sector and the insurance sector, which are briefly discussed below.

With regards to the power distribution sector, the government proposes to introduce reforms in the tariff policy pertaining to consumer rights, reduction in cross subsidies, time bound grant of open access, elimination of regulatory assets and timely payment of Gencos (power generation companies).

For boosting private participation in space activities, the government has announced that it will provide a level playing field to private companies in satellites, launches and space-based services and will also liberalise geo-spatial data policy for providing remote sensing data to tech entrepreneurs.

In the atomic energy sector, the government has announced reforms to establish a research reactor under the public private partnership model for the production of medical isotopes and to use irradiation technology for food preservation.

Finally, in the insurance sector, according to the Foreign Investment Policy, Indian companies being intermediaries in the insurance sector are now eligible to receive 100 per cent FDI under the automatic route. This amendment does away with the requirement of any prior government or Reserve Bank approval.[9] Prior to this amendment, an FDI in Indian entity engaged in the insurance sector was capped at 49 per centunder the automatic route. With this, the flood gates for further foreign investment in insurance intermediaries have been fully opened, probably at the right time, given the impact of Covid-19 on India’s economy, especially on the business and the healthcare sector and the severe need for a stimulus to foreign investment activity.

In addition to the above reforms, the government has announced some more amendments in its existing Foreign Investment Policy. It has been clarified that Foreign Portfolio Investors (FPIs) investing in an Indian listed company breaching the prescribed limits (ie, ten per cent individual limit and 24 per cent aggregate limit) shall have the option of divesting their holdings in an Indian listed company within five trading days from the date of settlement of the trades causing the breach. If the FPI chooses not to divest, then the entire investment in the Indian listed company by such FPI and its investor group shall be considered as foreign investment and the FPI and its investor group shall not make further portfolio investment in the Indian listed company concerned.

In line with the amended Foreign Investment Policy, Indian companies undertaking single brand retail trading of products having ‘state-of- the-art’ and ‘cutting-edge’ technology and where local sourcing is not possible, the sourcing norms of 30 per cent will not apply for up to three years from the date of commencement of the business (ie, the opening of the first shop/store or start of online retail, whichever is earlier, by the Indian entity.)[10]Prior to the amendment, the three-year period, as stated above, would begin from the opening of the first shop/store.

Checks and balances: no entry without approval

India has significantly relaxed its foreign investment policies over the past few years. However, in contrast to its usual inclination, on 22 April 2020,[11] the government announced a tightening amendment to its extant Foreign Investment Policy, with an intent to curb the opportunistic takeovers/acquisitions of Indian companies.

As per the new amendment, an entity of a country sharing a land border with India, (namely, China, Nepal, Myanmar, Bhutan, Afghanistan, Bangladesh and Pakistan) or the beneficial owner of an investor into India who is situated in or is a citizen of any such country, can only invest in an entity in India with prior government approval.

In the event the transfer of ownership of any existing or future foreign investment in an entity in India, directly or indirectly, results in the beneficial ownership falling within the above restriction, such subsequent change in beneficial ownership shall also require prior government approval.

There is no doubt about the government’s urgency to immediately put checks and balances in place, considering that several sectors and industries are open to 100 per cent foreign investment under the current Foreign Investment Policy, without the need for any regulatory approval.

India, the world’s next manufacturing hub

In the wake of the Covid-19 outbreak, some countries are reconsidering having manufacturing and supply bases in one single country. Due to the global supply shock created by the pandemic and resulting lockdown in China, several countries are keen to relocate global supply chains and diversify production from one single country to other countries.

India being one of the world’s largest economies, with its young and abundant labour force, is competing to be a worthy alternative for global businesses intending to move some of their investments and manufacturing bases out of one single country. In order to provide a surge in investment and incentivise these companies to shift their production to India, the government is making changes to its industrial and sectoral policy, introducing long-impending labour, land and tax reforms and working towards fast track clearances and the streamlining of processes.

Government authorities at the state level are also working to introduce flexibility in the labour market and ease employment laws and related compliances. They are easing the process of seeking approvals, speeding up factory registrations and fast tracking investment clearances. The government has strengthened the ‘Ease of Doing Business’ by relaxing the timelines for corporate, employment, tax and securities laws compliances by the listed and unlisted companies and businesses in India and by decriminalising some compliance-related offences. The Self-Reliant India Movement provides special impetus to the MSMEs which the government has encouraged to promote upgrades in technology and seek foreign investment.

The Reserve Bank of India has also announced measures to smooth the flow of finance and uphold financial stability. These include a reduced repo rate; measures to improve the functioning of markets; measures to support export and imports; measures to ease financial stress; and measures to ease financial constraints faced by the government authorities at the state level.[12]

Conclusion

While the current pandemic has taken its toll on the economy and industries globally, the reforms under the Self-Reliant India Movement promise to be a silver lining for foreign investment for India’s post Covid-19 economy.

These government measures and reforms have a significant potential to boost several sectors and lead the way for India to become a major global investment hub. With the help of the Self-Reliant India Movement coupled with the ‘Make in India’ campaign, India will not go unnoticed by global investors. India has become a strong contender for such foreign investments and the proposed economic stimulus is a stronger promise to deliver the same.