Introduction:
In the last week of March 2020, the Indian Government imposed a nationwide lockdown to contain the COVID-19 virus from spreading. Not only India but many other nations have imposed lockdown which resulted in shut down of businesses and industries and affected the everyday lives of many people around the world. Since the country was shut down for almost two and a half months, the economic activities have been significantly disrupted which lead to the fall down of the economy rate of the country and losses in many businesses and industries. The scope of this article is to know how the coronavirus pandemic will affect foreign investment in India.
Meaning of Foreign Investment
Foreign investment is defined as an investment that involves transactions of capital flows from one country to a different country, which in turn grants the foreign investors widespread ownership of shares in domestic companies and their possessions.[1] Foreign investors play a vital role in the management of the company as part of their investment and foreign investment helps to boost the economy of the country. For example, Amazon has invested in India’s start-up companies like BankBazaar, Westland, and HouseJoy by seeing that the Indian markets have a massive scope in developing.
According to the United Nations Conference on Trade and Development (UNCTAD), India’s economy might be the strongest in the Southern part of Asia because Indian markets are competent to bring in investments even in the COVID-19 crisis. Amitabh Kant, the CEO of NITI Aayog has said that India attracted foreign investments of 22 Billion in United States Dollar in the course of COVID-19.[2]
Legal Perspective
India took a step towards the development of the country by supporting the legislation of Foreign Direct Investment in the 1970s, intending to ease up the trade and economy of the country while encouraging investments into the country. The Foreign Exchange Regulation Act (FERA) of 1973 was passed to reach the goal and was applied to all the citizens of the country. The objective was to legalize foreign payments that deal with foreign exchange. The Reserve Bank of India acted as a statutory governing body for regulating and controlling activities like export and import of currency notes and bullion. The foreign investments into the country were low because FERA 1973 has imposed restrictions on foreign companies. Therefore the Foreign Exchange Management Act (FEMA) 1999 was passed to remove the constraints which controlled foreign exchange and reduced restrictions on foreign companies.
International Perspective
According to UNCTAD, the pandemic’s effect on the economy will be uneven, with the repercussions caused by downward demand shocks and production stoppages and supply chain disruptions and especially, in those economies which are dependent on raw material supply from countries like China, Japan, and the Republic of Korea. The Countries which took serious healthcare measures to stop the spread of the virus are more prone to face a fall in the economy. Multinational Companies will slow down their investment outflows in the home country as well as in foreign countries. Any new investments which were going to take place shall be on a halt.
Greenfield investment projects that are already on-going will also be affected by this. However, the new investment ventures have an extended gestation time and a lifespan for decades. So, there are fewer chances for the instant effect on present investments and investment ventures under construction. There will be a delay in the announcement of any new projects. In the same way, mergers and acquisitions possibly will see a stoppage for some time. Similar to Greenfield projects, mergers and acquisitions are generally long-term obligations to foreign country markets. However, data for February shows a significant drop in the achievement rate of cross-border mergers and acquisitions, to lower than 10 billion dollars from the usual monthly values of 40-50 billion dollars.[3]
The efficiency of markets is affected due to downward demand shocks. Currently, the demand shock is graver in China; for example, Toyota reported a 70% decline in sales in China in February. But then again the effect is by now visible in important markets outside China also, specifically in consumer-facing industries such as travel and tourism, retail and wholesale and other consumer sectors.”[4]
Current Scenario in India
Currently, India changed its policy on Foreign Direct Investment to protect domestic corporations and enterprises from unprincipled takeovers of the companies amid the pandemic from countries that share a border with India under the Foreign Exchange Management Act (FEMA) law.
Current law
The current law states that an entity which is not resident to India can invest in India, in accordance with the FDI Policy apart from those sectors or undertakings which are being forbidden. However, the citizens of Bangladesh and Pakistan or entities situated in Bangladesh and Pakistan can invest only under the Government route while Pakistan can invest in sectors or undertakings other than defence, space, atomic energy, and sectors or undertakings that are forbidden from foreign investment. [5]
Revised law
A change was made to the current law. The revised law states in the first clause that an entity which is not resident to India can invest in India, in accordance with the FDI Policy apart from those sectors or undertakings which are being forbidden. However, where the beneficial owner of investment into India is situated in a country that shares a land border with India and is a citizen of that country or an entity of a country that shares a land border with India can invest only under the Government route. Furthermore, the citizen or an entity of Pakistan can invest in sectors or undertakings other than defence, space, atomic energy, and sectors or undertakings that are forbidden from foreign investment.
The second clause states that approval of Government is required if there is any change in transfer of ownership directly or indirectly, of any existing or future FDI in a corporation in India that might result in beneficial ownership under the purview of the first clause.[6]
Even in these tough times, India continues to attract foreign investments because of various factors like India’s liberal FDI policy, divided schemes, structural reforms, geopolitical scenario and India’s large market.
India has one of the most liberal Foreign Direct Investment policies in the world, where foreign investments of up to 100% are acceptable under the automatic route in most of the segments of the economy. Foreign investments are restricted in only a few sectors or undertakings of the economy. There are fewer sectors, for example, the agricultural sector where foreign investments are limited to a set of events.
The Indian Government recently announced the Atma Nirbhar Bharat scheme which means ‘self-reliant India mission’. This is an initiative towards Make in India Programme. Therefore, when manufacturing is done in India, there are high chances of foreign investments in the country. The Atma Nirbhar Bharat scheme can bring in a lot of foreign investments into the country. The honourable Finance Minister, Nirmala Sitharaman revealed several Foreign Direct Investment-related reforms under this scheme. One of the most important declarations by the ministry tells the liberal intent of the government by increasing the foreign direct investments up to 74%.
Case Law
Ericsson India (P.) Ltd v. Reliance Infratel Ltd [7]
This case is with regards to contempt jurisdiction of the Court. The Supreme Court gave the judgement that the chairman of the Companies namely Reliance Communications, Reliance Telecommunications and Reliance Infratel Ltd. should pay Rs. 550 Crores to Ericsson with interest. The chairman of the three defaulting companies failed to comply with the judgement given by the Supreme Court within a given period therefore, the contempt plea arose. This judgement gives assurance to the investing companies of the world that it is safe to invest in India and if any legal problem arises Indian Courts are there to look into the matter immediately. Earlier, the companies would restrict themselves from investing in India because if a legal problem arises then it would be a difficult path due to the Indian legal system which is time-consuming in solving a problem. This was a great step taken by the Supreme Court in attracting foreign investors into the country more and more.
Conclusion
The outbreak of COVID-19 caused several problems to everyone all over the world. The countries took drastic health care measures to stop the spread of the virus which disrupted the economy very badly. Few countries are able to cope up with negative effects on the economy however, only time will tell us the actual impact of the COVID-19 on foreign investments. Countries must take precautionary measures from the predictions to be on a safer side. The Government of India has tried its level best to save the economy by making changes to foreign direct investment policy and bringing out different schemes for poor people and businesses.
References:
[1] Chen, J. (2019). Foreign Investment, Investopedia. https://www.investopedia.com/terms/f/foreign-investment.asp
[2]India attracts USD 22 billion FDI during COVID-19: Amitabh Kant https://economictimes.indiatimes.com/news/economy/indicators/india-attracts-usd-22-billion-fdi-during-covid-19-amitabh-kant/articleshow/77436279.cms?from=mdr
[3] Impact of the coronavirus outbreak on global FDI (p. 2). (2020) https://unctad.org/en/PublicationsLibrary/diae_gitm34_coronavirus_8march2020.pdf
[4] Ibid
[5] Government of India Ministry of Commerce & Industry Department for Promotion of Industry and Internal Trade FDI Policy Section. Press Note No. 3(2020 Series) (2020).
[6] Ibid
[7] 2018 (145) CLA 345
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