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A Look at the Impact of FDI After a Year

    15 June , 2021         Fdiindia

A Look at the Impact of FDI After a Year

The Indian government amended its FDI policy in April 2020, requiring prior approval for any investments made by organizations established in a "country that has a land border with India" or whose "beneficial owner of an investment in India is located in or is a citizen of such a country." Seven countries share borders with India. But investments from Pakistan and Bangladesh are already regulated under Indian law.

As the pandemic arrived, the amendment didn't specify the sectors for which it is included, nor did they mention the amendment liability period. One of the essential factors of this amendment is "beneficial ownership." Even if a single share of an investment firm is beneficially owned by an investor from one of the restricted bordering countries, prior government authorization may be required. However, the laws and regulations governing these revisions were not clear, causing uncertainty on multiple levels.

In June 2020, an OECD report was issued, which classify the process into two major categories:

  1. changes that broadened the scope of pandemic-related screening systems (health-related industry sectors and associated supply chains) or significantly enhanced controls in these areas
  2. efforts to create or improve FDI screening processes across the board to prevent acquisitions in any industry where assets experienced temporary financial stress and value distortions due to the pandemic's extraordinary economic conditions.

Many countries who are now seeing relaxation in covid have even eased the strictness. In response to the coronavirus, Australia implemented a zero-dollar monetary screening threshold in March 2020. But from Jan 1, 2021, this rule has been nullified. Despite the COVID-19 pandemic, India reported a 13 percent increase in FDI inflows in 2020, primarily by investments in the digital industry. China was among the highest investor this year.

Now, it's time for the government to look upon the amendments made under FDI. It should be currently regulated following the performance of the previous year performance. Also, the government should throw some clarity on the terms like "beneficial ownership." The process is currently a lot of time-consuming. Reforms should be made to modify it so that the flow becomes more smooth.

To ease the early determination of an approval requirement and decrease administrative costs, the government should consider establishing a pre-filing consultation procedure akin to the Competition Commission of India. It may also explore expediting the evaluation of FDI applications in most sectors, except for essential infrastructure, banking, healthcare, and telecommunications, defined as national priorities.