Introduction

  • Foreign Direct Investment is commonly made in open economies that have a skilled workforce and prospect growth. Apart from bringing money, the FDI also has skills, technology, and knowledge that help in boosting the economy of the country. This is considered an important source of funds for the companies and establishing ownership or controlling interest in a forest company.
  • Foreign Direct Investment (FDI) is governed by the Foreign Exchange Management Act, 1999, guidelines and other notifications from time to time in this regard are issued by the Reserve Bank of India. The Department of Promotion of Industrial and Internal Trade (DPIIT) under the purview of the Ministry of Commerce and Industry is the concerned department for the formulation and implementation of policy regarding Food Direct Investment. The basic function of the DPIIT is to maintain and manage the data of inflow FDI into India in accordance with the remittances found by the Reserve Bank of India (RBI). In recent times, the Government has relaxed the liberal policy i.e. 100% is allowed under the automated criteria in most sectors. The Department works for the liberalization and rationalization of the policy.

Key Highlights

  • In the year 2019, the Ministry of Finance in a notification informed Foreign Exchange Management regarding the Non-Debt Instruments Rules, 2019. The Non-Debt Instrument rules, 2019 replaces the existing Transfer of issue of Security by a Person Resident outside India regulations, 2017 under Foreign Exchange Management.
  • The motive behind this rule is to simplify the provisions in terms of FDI. These rules clearly mentioned the provisions with respect to investors and different types of transactions. For instance, Overseas Citizens of India (OCI) and Non-Resident Indians (NRI) and their provisions are now covered under the ambit of separate chapters.
  • The Central Government has power over non-debt instruments such as the power to govern capital account transactions involving non-debt instruments. It also allows the Central Government to notify the rules and implementing the same.
  • The RBI has the power to govern capital account transactions involving debts instrument only. Previously, the RBI alone has the power to govern every account transaction.
  • The power is now with the Ministry of Finance for notifying the change in FDI Rules. The Central Government will formulate the rules and the same will be governed by the RBI. Now, the Central Government becomes the governing authority for non-debt transactions such as investment in the equity of incorporated entities, acquisition and dealing, trust contributions whereas, RBI is the governing authority of debt transactions like making an investment in Government bonds, corporate bonds, and borrowings by Indian firms via loans.
  • According to Non-debt Instruments Rules, 2019, many definitions are explained such as Foreign Direct Investment can be defined as an investment made by the equity instruments of a person resident outside India in an unlisted Indian Company or ten percent or more paid-up capital on a fully diluted basis of Indian listed company.
  • Under this rule, Foreign Investment shall denote any investment made by the person resident outside India on a repatriable basis for an Indian company or capital of an LLP.
  • Equity Instrument is defined as equity shares, convertible debentures, and preference shares. Therefore, after reading the above article, FDI shall be called an investment that is made by the capital instruments of the person who is residing outside India in an unlisted Indian Company.
  • On the other hand, Foreign Portfolio Investment refers to any investment made by a person residing outside India by equity instruments where the investment is the percentage of the post-issue paid up share capital of a listed Indian company.

Conclusion

In the recent notification, the framework for FDI in India is largely simplified. The Non-debt Instrument rules clearly distinguish between debt and non-debt instruments and separate the concerned authority responsible for each kind of instruments such as RBI and Central Government. This will ease the initial process for investors.

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