India touching the $500-billion mark in FDI inflows over the last two decades has not come as a big surprise and is consistent with the massive overhaul of the foreign investment regime that this period has witnessed. The Indian government has lived up to its consistent stance on continuously liberalising the foreign investment landscape in India—covering policy and implementation measures alike. However, what is a welcome surprise, is India’s 15% growth in its FDI inflows vis-à-vis the prior year, in the period of peak lockdowns across the world, i.e., between April and September 2020.

This is especially positive because FDI inflows peaked in August 2020 (doubling in number from those received throughout April–July 2020), demonstrating, amongst others, the long-term stable outlook of foreign investors towards India. With the upcoming Budget, all eyes are on the Indian government to further the streak of growing foreign investment inflows.

India can look at intuitive measures like limited-period tax holidays to long-term investors such as pensions and sovereigns, in critical sectors like healthcare, which are witnessing a lot of foreign interest and are the need of the hour. Similarly, the Indian government can look to implement certain sustainable tax relief measures for sectors affected by the pandemic and/or in need of a boost like education, infrastructure, real estate, renewable energy, biotech, hospitality, and information technology. Removal of the long-term capital gains tax on listed equities has been a long-standing ask of foreign investors and is likely to bolster foreign investments. Further, the anticipated norms on direct listing by Indian companies are also likely to make Indian companies more attractive to foreign investors. Specifically, in respect of sectoral limits, the current cap of 26% for digital media is a huge impediment to any foreign investment in this sector, and we hope to see some relaxations in this sector.

No discussion on Indian foreign direct investments is complete without talking about Press Note 3 of 2020. India placed severe constraints on foreign direct investments from countries sharing a land border with India, by introducing the requirement of government approvals for any FDI incoming from such jurisdictions. While the original intention may have been to regulate strategic investments from these countries, it has also had a ripple effect on non-strategic investments from these countries and FDI from foreign investors with some linkages to these restricted jurisdictions. Press Note 3 fails to clearly identify foreign investors that these restrictions are meant to apply to, given the absence of any specifications to identify beneficial owners and the applicable thresholds.

A significant portion of investors have paused deployment of funds into India, awaiting clarity from the government on the applicability of these restrictions, which is yet to come through. This has also affected foreign investments through investment vehicles, because of the lack of clarity. While a technical interpretation of the law makes it clear that these restrictions will not apply to investments through an investment vehicle, in the absence of any specific clarity to this effect, this has had an impact on the alternative investment industry.

Similarly, an issue affecting foreign investments in the alternative investment space on account of uncertainty on the government’s stance, is the participation of foreign nationals on the decision-making governance bodies of Indian funds. SEBI has paused processing of applications where the decision-making governance body of Indian funds has participation from non-residents. The governance rights afforded to foreign investors in this respect are a critical prerequisite to their investment, and has deterred many from making investments in Indian funds without such governance rights. This is also in contradiction to the government’s stand to make India an investment management hub, and any such limitations and delays will be a major impediment towards that goal.

No discussion on Indian foreign direct investments is complete without talking about Press Note 3 of 2020. India placed severe constraints on foreign direct investments from countries sharing a land border with India, by introducing the requirement of government approvals for any FDI incoming from such jurisdictions. While the original intention may have been to regulate strategic investments from these countries, it has also had a ripple effect on non-strategic investments from these countries and FDI from foreign investors with some linkages to these restricted jurisdictions. Press Note 3 fails to clearly identify foreign investors that these restrictions are meant to apply to, given the absence of any specifications to identify beneficial owners and the applicable thresholds.

A seemingly trivial measure that India should look to incorporate in its KYC regime across all streams of foreign investment is the explicit acceptance of digitally attested, notarised, and signed documents by all regulators. This is important not just in light of the extended and strict lockdowns in many foreign jurisdictions but is also an important measure towards “ease of doing business” for foreign investors in India in the long run.

India has come a long way, and the continued trust of global investors in the India story is testament that India will continue to grow as a market, an opportunity, and an economy. Certainty, clarity, consistency, and cuts on taxes are the cornerstones for any regime looking to attract foreign investments, and we hope the Indian government continues to introduce reforms to further these outcomes. Irrespective of the specific measures that the Indian government introduces or fails to, it has established a consistent track record for itself demonstrating the permanency of its outlook to welcome foreign investors.

Views are personal. Singh is a Partner at Khaitan & Co.; Agarwal is an Associate at Khaitan & Co.

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