The Hindu Editorial Analysis- 15th June 2024 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

• The 91st Amendment, expiring in 2026, ensures equitable representation based on the 1971 Census data, safeguarding states with advancements in human development.
• The government's hesitation to renew this amendment might result in a demographic shift favoring Hindi-speaking states, potentially marginalizing southern states.
• Modifications in the Finance Commission’s terms, which now favor states with larger populations over performance-based criteria, have intensified regional disparities.

Why in News?

Impact of FEMA Amendment on Foreign Investments:

• Amendments to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019, necessitate prior government approval for foreign investments from neighboring countries, creating challenges for Indian companies, especially start-ups.
• This introduces uncertainty and regulatory hurdles, potentially deterring foreign investment and hindering India's economic growth goals.

Importance of Foreign Investments for Economic Goals:

• Foreign investments are crucial for India to achieve its target of a $5 trillion economy by the financial year 2025-26.
• Removing barriers for foreign investments is essential to attract these investments.

Amendment Conundrum:

• The amendment via press note number 3 of 2020 has significantly impacted Indian companies, particularly start-ups and smaller enterprises.
• It requires prior government approval for investments from entities in countries sharing land borders with India, or where the beneficial owner is from these countries.
• Intended to prevent opportunistic takeovers during the COVID-19 pandemic, it has caused uncertainty due to the vague term 'beneficial owner'.

Ambiguity and Regulatory Scrutiny:

• Initially, a lenient interpretation of beneficial ownership was adopted based on other laws, but the Reserve Bank of India (RBI) has since enforced a stricter stance.
• This stricter interpretation has created issues for Foreign Owned or Controlled Companies (FOCCs) regarding downstream investments.
• The lack of clear guidance has caused investors and law firms to exercise increased caution.

Challenges with Government Approval:

• The approval process is time-consuming and has a high rejection rate.
• Unofficial reports indicate proposals worth ₹50,000 crore from neighboring countries are pending, withdrawn, or rejected.
• Compliance burdens fall on Indian companies, with severe penalties for non-compliance, including fines up to three times the investment amount.

Impact on Start-ups:

• Start-ups, which often receive investments exceeding their revenue or assets, could face insolvency due to hefty fines.
• Non-compliance could lead to prolonged legal battles, worsening India’s court case backlog.

Issues and Potential Solutions:

• Defining Beneficial Owners:

  • A comprehensive definition of ‘beneficial owners’ is needed, including ownership thresholds and control tests.
  • Ownership thresholds could range from 10% to 25%, varying by sector sensitivity, with higher scrutiny for sectors like telecom and defense.

• Control-Conferring Rights:

  • The definition should include control-conferring rights beyond ownership thresholds, capturing entities with significant influence.
  • Rights related to operational control should be included, while investor value protection rights should be excluded.

• Consultation Mechanism:

  • A consultation mechanism similar to Indian competition law could help resolve ambiguities regarding control-conferring rights.
  • This would involve time-bound consultations with regulatory authorities to determine if specific clauses confer control.

Conclusion:

• The article highlights challenges posed by the FEMA rule amendments for foreign investments in Indian companies.
• It underscores the need for clear definitions and streamlined approval processes to facilitate foreign investments while protecting national interests.
• Addressing these issues through precise regulations and consultation mechanisms can balance attracting foreign investments and ensuring national security and economic stability.

PYQ: Examine critically the recent changes in the rules governing foreign funding of NGOs under the Foreign Contribution (Regulation) Act (FCRA), 1976. (200 words/12.5m) (UPSC CSE (M) GS-2 2015)