Open Access Research Article
“ANALYSIS OF CRITICAL ISSUES IN FOREIGN INVESTMENTS IN INDIA” (By-Shail Shakya)
Published Paper
Article Details
“ANALYSIS OF CRITICAL ISSUES IN FOREIGN INVESTMENTS
IN INDIA”
Authored By-Shail Shakya[1]
Abstract
Submitted for Publication in:
International
Journal for Legal Research and Analysis, ISSN: 2582-6433
1.] A Brief Background:
Regulation of foreign investments and
issue/ transfer of securities to a person resident outside India; is such a
complex phenomenon that legislative clashes or overlapping is something could
be well expected considering the nature and scope of the subject. There are
many minute details which have been unintentionally left over to the concern
and disposal of understanding of those interested in framework of foreign
investments. While issues may correspond to international measures for domestic
protection of shareholders, issues relating to repatriation of profits and sale
proceeds out of India, settlement of disputes through international commercial
arbitration and the like, discussion here is limited to the context and
background of discussions made so far. There could not be umbrella solutions
for all major problems in foreign investments, but it should be kept in mind
that serious discussions motivated to economic development should be convened
timely in order to solve issues of prime importance.[2]
Many specific issues have been already discussed and this part is dedicated to
discuss the general issues in foreign investments when inspected from a ‘look
through’ approach instead of ‘look at’ approach.
It has been occasionally observed
that exchange control laws created by FEMA, 1999 and various pertinent
Regulations & Rules under it should be in consonance with the FDI Policy,
or there is a risk of the policy coming in conflict with the law and getting
overridden consequentially.[3]
It is said that the lag between FEMA
laws and the FDI Policy which often exists, was usually ignored, and possibly
the sectoral policy delineated in FDI Policy has been followed by legal
practitioners.[4] There
have been numerous cases in India where the concepts of residence and visit to
India have been debated in order to remove ambiguity and store clarity to the
assessment and regulation.[5]
There are many others instances where definitions under FEMA and other
regulatory laws have created problems of interpretation & application
despite efforts to avoid the same.[6]
Most of the debates outside
legislative framework are concentrated on binding character of bye-laws,
executive orders that are generally framed for execution of FDI Policy.[7] It
is well settled that foreign investments are being monitored through FEMA and
the relevant rules framed thereunder, but considerable doubt still exists in
relation to binding character of press notes issued by various sectoral
regulators. There is a need of reform to consolidate the regulatory environment
which causes uncertainty in the minds and approach of foreign to such a high
extent that India lands to criticism of ‘unpreferred
destination’ for foreign investments owing to complex environment and lack
of clarity. Intelligible criteria behind prescribing sector specific caps and
investment limits have also been criticized to be based on exploitative
approaches that affect the choice selection by foreign investors quite
considerably. It should however be noted that continuous research and
deliberation could only solve such problems.
2.] Factors Influencing Foreign Investments in India
Apart from the conventional
legislative problems for a considerable period of time, necessary attention is
also sought by some prime determinants of foreign investment policy in India.
Certain factors such as trade openness, exchange rate policies have acted as
essential determinants to FDI policy of India for which the research concluded
that better coherence and integration of such concepts would cause appreciation
of the economic conditions of India by investor resident outside.[8]
Others have considered size of the market, political stability, macro-economic environment,
access to basic inputs and regulatory frameworks to be the prime factors
behind a successful FDI policy of
India.[9]
Contributing factors such as labor costs, infrastructure facilities and
export-import conditionalities of the country have also been considered as a
major determinant of FDI in India.[10]
Impact of government policies on key issues could not be sidelined for the fact
that they operate as indicators for entities which are planning to pursue
investments in India and India’s evolving jurisprudence among the south Asian
countries has done significantly well to attract foreign investment for
domestic economy.[11]
Indian government’s stand on
liberalizing the foreign investment domain is on a continuous rise particularly
after introduction of ‘Make in India’ scheme that has caused liberalized
formerly closed sectors for foreign intervention.[12]
Introduction of stringent monitoring system, planned permissions for
remittances, control over activities in domestic economy and interlinked
sectoral regulation has paved new avenues of positivity among foreign investors
as far as India as a preferred destination is concerned.[13]
India’s diplomatic negotiations with considerable investment potential have
also contributed significantly in attracting foreign investments to sectors in
need.
There is however disagreement on the
ways critical issues in foreign investment are pursued by the legislatures and
policy makers. It could be observed that aspects which do not require political
dialogue are subject to political scrutiny in India and the underlying area of
concerned gets overridden. This is the reason that despite several efforts,
multi-layered regulatory setup of India has always blocked inflow of FDI. It is
important to note here that being a diverse country with multiple
opportunities; each issue needs to be tackled in the light of applicable
conditions. One such dimension is central policy making without any involvement
of states of India. DIPP has left processing of FDI proposals to the concern of
independent sectoral regulators, but that alone could not serve the purpose for
the reason that state based conditions holds an everlasting impact on
utilization of foreign investment and the opinions/ suggestions of states
should also be incorporated in central policy making in India.
Another impediment to FDI and a very
important determinant in foreign investments is ‘measures to prevent losses out
of currency mismatch’ which has been the core of discussion among Indian
regulators when questions of external commercial borrowings (debt route) have
come to analysis. There have been suggestions by authors where scrapping the
current system of control on foreign currency exposure is maintained and it has
been said that a better system would be to pursue the challenges on a case to
case basis.[14] Some
considerable updates have already been incorporated in the system such as
allowing firms to undertake rupee-denominated ECB, increase in caps of FII
investment in rupee-denominated bonds etc. along-with strict prudential norms
for banks while lending to unhedged securities by Indian companies.[15]
It has also been suggested that information system (particularly for unlisted
companies) should be paid more attention and a consolidated framework to avoid
risks of currency exposure should be implemented in order to gain stability and
better control.[16] It is
also said that in order to boost domestic economy to higher scales, the
governments need to identify measures in monitory policies to maintain stable
exchange rates.[17]
3.] Exposure to Systemic Risks:
A greater participation by foreign
investors in a developing economy such as that of India also involves exposure
of Indian markets to systemic risks and other risks that may arise out of
contagion. It is observed that due to volatility of investment markets, a high
dependence on foreign investments would put the domestic markets at the risk of
accumulated failure. Such failures may arise out of uncontrolled exchange of
detrimental information without having any substance. It is therefore important
that the developing economies focus more on supplementing their domestic
economy by acquisition of capital, skill and technology from outside and also
to focus through strategic measures on ownership and interference of such investors
in entities owned domestically. Integration of market economies and regulatory
setup further aggravates the risk which if remains uncontrolled or unmonitored
would be a significant exposure to uncounted risk of demolition or failure.
It has been observed in experiences
that foreign owned entities also resort to exploitative and exclusionary
practices in order to establish their firm presence in domestic markets. It
cause huge blow to the domestic market and may also cause their ultimate
dismissal from competition. While the objective of promoting foreign investment
should be do grow economically, measures to combat instances of misuse of
economic power, concentration among foreign entities and exclusive dealing
should be addressed nationally as trade and exploitation can’t go together.
Adopting specific measures in managing competition holds importance not just to
provide incentives and rewards to domestic entities but to keep a check on
activities pursued by foreign investors and their conglomerates in domestic
economy. There must be strict & time-bound redressal of disputes if any, as
competitive concerns come together with trade objectives.
FDI is not an unmixed blessing as a
number of adverse effects on host countries are identified with it.[18]
It is a misnomer that FDI invariably provides capital to Indian enterprises.
FDI as it is being measured now can be categorized into three major types.
First, in a liberalized policy environment, RFDI which is associated with
capital and the expected attributes of technology, management skills, etc.,
would have little interest to finance domestic entrepreneurs or to transfer
advanced technologies to them unless they are bound in some subordinate
relationship. It will indeed be naïve to expect RFDI, especially the market
seeking type, to facilitate the emergence of local competitors. Far from that,
it will be inclined to not only displace existing entrepreneurs but also to
inhibit the emergence of newer ones. In the process, national champions, lead
firms and start-ups nurtured though various types of incentives by developing
countries like India could end up as constituents of global corporations. The
investors can also be differentiated according to their motives: natural
resource seeking, efficiency seeking, market seeking and strategic asset
seeking. The remaining two types of investors can bring in capital but would
more often than not have very little to contribute in terms of technology.
Foreign financial investors, the second main type of FDI, would play the financing
role. But, the downside risks are large capital outflows and loss of control
over domestic enterprises when RFDI investors provide the exit route to them.
The third main form of FDI, i.e. inflows on account of domestic entrepreneurs
could be return of flight capital and/or disguised portfolio
investment/borrowings.[19]
4.] Policy Innovations in India:
India however has moved to advanced
stages of policy formulation to attract and retain foreign investment in
various sectors of economic activity. There have been measures implemented not
only to liberalize the sectors for enhanced acquisition of technology and
know-how but has also opened up domestic promotion of foreign investors. Key
initiatives in the recent past have been aimed at attaining accelerated rates
of growth with intensive homework on policy requirements and system of
regulation. Several key steps as have been discussed above remain in continuous
elaboration and discussion by government agencies to ensure that a threat and
risk free environment is created for collaborated commercial activity in India.
The conventional wisdom that FDI is a
key factor in sustained economic growth may provide an incomplete picture. Also
the arguments put forth by the environmentalists against the very concept of
privatization of the atmospheric commons (you can’t sell what you don’t own)
that allows the market and corporate actors (many of whom are the world’s
biggest polluters) to determine the pace and development of the ‘carbon
market’; cannot be overlooked. Investing abroad inevitably carries increased
political and economic risks, particularly when an investment involves large
sunk costs or a long-term commitment of capital. Overall policy trends during
the crisis in India have so far been mostly favorable to FDI, both nationally
and internationally. However, in some countries a more restrictive FDI approach
has emerged. There is also growing evidence of ‘covert’ protectionism.[20]
Apart from various positive aspects
that might have been mingled with a comprehensive foreign investment policy of
countries such as India, there are certain attached disadvantages that are
observed domestically. For example, some of the products produced in cottage
and village industries and also under small scale industries of India have been
alleged to have disappeared from the market due to the onslaught of the
products coming from FDIs.[21]
Foreign direct investments contribute to pollution problem in the country. The
developed countries have shifted some of their pollution-borne industries to
the developing countries. The major victim is automobile industries. Most of
these are shifted to developing countries and thus they have escaped pollution.[22]
Similarly, Foreign Direct Investments are one of the reasons for exchange
crisis at times.
During the year 2000, the Southeast
Asian countries experienced currency crisis because of the presence of FDl.
With inflation contributed by them, exports have dwindled resulting in heavy
fall in the value of domestic currency. As a result of this, the FDIs started
withdrawing their capital leading to an exchange crisis. Thus, too much
dependence on FDls will create exchange crisis.[23]
And above all, in all the countries where the FDls have made an inroad, there
has been a cultural shock experienced by the local people, adopting a different
culture alien to the country. The domestic culture either disappears or suffers
a setback. This is felt in the family structure, social setup and erosion in
the value system of the people. Importance given to human relations, hither to
suffers a setback with the hi-fi style of living.[24]
5.] Observations & Concluding Remarks:
There shall always be a difference of
opinion in relation to utility and problems of FDI among the developing and
developed nations and therefore there could not be a unanimous opinion
regarding appropriateness of foreign investments for a select country. American
experience reflects that European entities are aiming to focus investments in
Mexico to establish a production base to meet supply requirements of US
markets. Asian experience has largely remained to focusing on supplementing the
domestic capital by establishing joint ventures so that better acquisition of
technology could be done. European experience is based on creating new trade gateways
across emerging economies and doing businesses with them.[25]
In summary, this paper has
concentrated on developing deep understanding on various facets involved in
foreign investments and allied activities done in a domestic economy. It is
imperative for the learner to understand that investments for any country, is
not just an abstract concept but is political ideology which has many
objectives to pursue. It should be kept in mind that political dialogue and
deliberation across countries has been based on their respective objectives and
therefore a universal consensus for laws relating to investments and securities
was impossible to realize. In a developing economy such as India, the problems
are not just related to operational mechanisms but to various other segments
and the issues are so intermingled with each other that, policy formulation for
one issue would cause significant impact on several others thereby putting the
entire framework to analysis and criticism.
Article Information
“ANALYSIS OF CRITICAL ISSUES IN FOREIGN INVESTMENTS IN INDIA” (By-Shail Shakya)
Authors: Shail Shakya
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/08/22
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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