Long-awaited FDI protection provision expected in Budget
Budget 2020-21 may have a provision that foreign investors in India have long sought, according to two government officials familiar with the matter: an investment protection law that safeguards investments from future changes in policy.
“A draft law for the protection of foreign investment is almost ready and being vetted. It also includes provisions of several BIPA (Bilateral Investment Promotion and Protection Agreement) and additional statutes. Some developed countries, interested in enhancing trade and commerce with India, want a robust dispute resolution mechanism and seek investment protection guarantees in unequivocal terms,” one of the two officials said who requested anonymity.
There have been several instances in recent years when foreign investors have made a significant investment, sometimes in a domain where the regulatory regime itself is evolving, only to see an adverse development on the policy front. For instance, Vodafone was subjected to a ₹20,000 crore retrospective tax during the UPA government. The dispute is still under arbitration, though the government has said it will not challenge it. Typically, such a process is called grandfathering with investments that came before a change in law being safe as long as they were in keeping with prevailing laws at that time.
Shagoofa Rashid Khan, partner & head - Funds, Investment, & Advisory, Cyril Amarchand Mangaldas said, “India is at an inflection point, and a move from developing country to the first-world club needs to be bridged through robust legislative and regulatory reforms. Hence, legislation to formalise our commitment to investment protection would lead to greater confidence in the investor community as it will insulate the investment from political change or judicial review and will lead to certainty from enforcement and dispute resolution outcomes.”
Public expenditure alone cannot boost the slowing economy, the second official explained. There is an urgent need to mobilise private investments, both domestic as well as overseas; India has potential to attract huge Foreign Direct Investment (FDI) in sectors such as infrastructure, health, education and financial services; and it is expected that a new FDI road map could be part of the February 1 budget speech, this person added.
India’s GDP grew at 4.5% in the second quarter of current financial year, the lowest since March 2013. According to the National Statistical Office’s (NSO) first advanced estimates, India’s GDP is expected to grow at 5% in 2019-20, the lowest since 2008-09.
The two officials pointed out that India has, over the years, progressively relaxed its FDI rules to make the country an attractive and investor-friendly destination. The most recent change was made on August 28, 2019, when the cabinet approved the proposal for a review of FDI on sectors like coal mining. Easing of local sourcing norms for FDI in single brand retail trading was announced in the last budget.
“There are several sectors with tremendous potential to attract FDI. However, decisions will taken in a calibrated manner,” the second official said, adding that banking could be one area where there may be changes. Currently, FDI up to 49% is allowed in private banks through automatic route and up to 74% with the government’s approval. FDI cap on PSBs are at 20%. FDI in insurance is capped at 49%.
According to a commerce ministry on August 28, 2019, India attracted $286 billion FDI from 2014-15 to 2018-19 as compared to $189 billion in the five-year period prior to that (2009-10 to 2013-14). FDI inflow in 2018-19 was about $62 billion, according to provisional figures compiled by the RBI compared to $60.97 billion in 2017-18. Vivek Gupta, partner and national head, M&A/ PE Tax, KPMG in India said: “At this stage, if there is one thing that India needs, it is infusion of investment capital into the economy. FDI caps of course play a vital role and maybe, some relaxations can occur in identified sectors, like in insurance.