Foreign Investment in India - International Economics Institution, Business Environment Video Lecture | Business Environment - B Com

you
hi students welcome to future law school
in this lecture we will be providing you
an introduction to foreign investment
regime in India this topic will be
taught to you by mr. K the new teacher
hello good afternoon so today we'll be
talking about foreign investments into
India and giving a snapshot overview of
the entire prevailing regulatory regime
and framework within India the five
broad heads that we're going to discuss
today the first one being the overall
scheme of the exchange control
regulations in India followed by the
nuances and the key material principles
under the regulatory framework followed
by a structural functional analysis
which is basically for Investment
Promotion Board how does it regulate the
exchange control and the for investments
into and outside India followed by
Cabinet Committee on Economic Affairs
which also has a bit of regulation on
certain investments large ticket sized
investments in new India followed by
some kind of a structural representation
on the for investments within India now
let's discuss the first overall scheme
of the existing regulatory framework
what are the legal and policy
considerations surrounding the FDI
foreign direct investments in new media
how does the government train while
evaluating the proposals for see
cross-border mergers acquisitions or
other restructuring transactions
involving foreign entity and what are
the nuanced of potential challenges that
might arise during the course of such
transactions and which therefore must be
borne in mind by the lawyers let me give
you some perspective now if you open the
master circular if you start with the
conceptual understanding of the foreign
direct investment in India we know that
the certain sectors in which the FBI has
committed under the direct automatic
route while the others are either
prohibited and the third category is
when an FBI is permitted and the rule
what does it mean so let's take an
example of the aviation
up to a certain extent say 49%
investments into greenfield projects in
India
dealing with aviation sector not about
you know operating an airline or Airport
etcetera but aviation manufacturing of
plates etc is open under the automatic
sector that basically means that you
know if I am
on here I mean I slew in West into an
Indian entity which has 49% of my
shareholding into India without having
to go to any regulator for any prior
written approval over and above that if
I have to invest say up to 74 or 100
percent it's allowed under the approval
group this basically means that I have
to actually apply by way of plain paper
and a detailed application wherein the
services of the lawyer comes in handy to
the fiv which is for investment motion
board giving the details of my best
the summary the nature and size of
transaction the kind of clauses or the
understandings that I am entering into
and my broad business plan the budget
and the key concerns surrounding that
particular investment so now how does
the life cycle of a particular
transaction which is a simple plain
vanilla transaction of a could he look
like
so assuming you know I haven't 49%
partner with an Indian entity and
entering into a joint venture of sorts
say in any sector whatsoever defence
sector insurance sector banking sector
retail sector aviation sector most of
the sectors are being liberalized these
days to large extent and how does the
life cycle of it exactly look like and
why does the role of lawyers assume such
an important one the simple reason being
that you know if you look at our BIA
which is the regulator in this field for
exchange control in Freedy there will be
some of the other place node for a
notification or an EB BIR circular etc
which is being issued by the regulator
and having some modifications
substitution man-made addition etc of
the existing regulatory Jie
obviously this takes into account the
macro level policy monetary policy in
the fiscal policies of the country and
therefore the change is imminent and
also imperative now keeping in mind the
kind of changes modifications etcetera
that are being brought about in the
regulatory framework which is
characterized by Semih which is a
foreign exchange to act all these
amendments come to that under the
regulations also which are issued under
the fema thrown off as obviously becomes
very important but is lent significant
coming back to the question so if I am a
49% partner goes in on
most of make an investment or enter into
a JV with an Indian a partner what our
strategic alliance entity how do I go
about it obviously the principles of the
party sit across a table negotiate the
broad heads of terms but I read
something called a term sheet now what
does the term sheet contain terms it is
nothing but like a Memorandum of
Understanding or a letter of intent you
know some kind of broad understanding
which may or may not be legally binding
which sets out the summary of the
transaction contours the broad nuances
of the dynamic of the mechanics which
are surrounding the operations
maintenance management administration
etc of the joint venture where he could
now that everything can be found in any
way can be a general partnership it can
be an SP V which stands for a special
purpose vehicle it can also be a simple
Jaime entity like a private limited
company or nowadays we have limited
liability partnerships also under the
LLP act or it can assume the form of an
association of persons of a simple
consortium whatever the structure may be
involved you know because of taxation
commercial technical whatever the reason
says then he sit down and talk about the
management of that particular entity
which is formed as a result of the joint
venture the third are days you know
regarding the exit regarding the
dividend distribution regarding the turn
of capital so basically if I am bringing
X amount what is the internal rate of
return that I am getting out of my
investment so after a year obviously I
will nurture some aspiration that you
know my X amount will become x + 1 x + 2
etc so all those dividend distribution
the return of capital valuation
waterfall and other provisions have
built into the top sheet and finally
regarding the term in termination so is
it a project specific kind of an SP me
or joint venture which is created say
that you know key s someone is coming up
with a tender we both have to
participate in the tender and virtually
the synergies license you know these are
the tender so for that purpose
or is it an ongoing continual rolling
process that you actually want to make
up for April now obviously once the term
sheet has been signed sealed and
delivered will enter into further
negotiations and um due diligence is
analyzed the feasibility come
business plans come up with 10 all
budgets now with some structure and
functionally frameworks around in the
transaction and our alliance and use
that understanding and toward definitely
will believe we can call it a joint
venture agreement or a collaboration
agreement of cooperation agreement
nature is insignificant but the
essential core mechanics of a
relationship and Arrangements will be
reduced into black and white
by virtue and in terms of the joint
venture agreement now let's take a step
back what is a regulatory framework that
we're supposed to actually comply with
the primary institutional body
regulating the capital flows in an
outside India is the Reserve Bank of
India stated what are the capital flows
as opposed to current flows current is
something which is over recurring nature
cavity is something in a one-time
transaction which is actually affecting
a balance sheet assets a liability
situation in financial statements of
that particular entity that
institutional body is called the RBI of
the central bank of india which governs
these inside and outside cash of sorts
the government of india in Panvel has
constituted obviously you know one of
the key ministries of the Ministry of
Finance which houses the Department of
Revenue and Department of Economic
Affairs and the Department of Financial
Services so this is over departments you
know and the Department of Economic
Affairs looks into the proposals as in
when dealing with an STI going by the
structure the Department of Revenue also
post Central Board of Direct Taxes which
is the C V DD the EI which hosts the
capital markets division CMD you know as
we call it and the DFS with the
Department of Financial Services deals
with all these financial institutions
you know like banks insurance pension
funds and their respective regulators
now finance minister who heads the fi TB
he is the one who actually improves
every hour case-to-case pieces which are
there into the capital now how typically
happens is if I'm a foreign clear I'll
hire a Indian law firm and say okay fine
this is some live investment please get
me an if i PB approval before we
actually go ahead with a transaction
obviously the law firm collates and
compiles a relevant information which is
basically in the form of the summary of
the transaction the couple of term
sheets etc you know broad nuances of the
understanding that you have entered
when insecurity counterparty and come up
with some rationale for approval of the
particular transaction at hand and hands
it over to the FBI there's a systematic
procedure fiv B has its own regular
meetings in which it actually evaluates
and assesses the proposals on a case to
case basis and thereby accords its
approval or rejection thereon now the
other ministry obviously is the Minister
of Commerce which hosts the department
of industrial policy and promotion the
IPP is basically responsible for
promulgating issuing and setting forth
the MDI policy in India now the FDI
policy is basically contained in two
things one is their fem a-- this
coordination Management Act which is
regulated by the RBI and the MDI policy
the MDA consolidated the circular which
is typically issued on April 1 of each
year by the vit D now the classic
distinction between regulations and
policy as we are all aware you know the
policy is the framework or the
underpinning on which the regulation is
based and the regulation obviously is
not directive but has the force of law
and has a binding value also that is
going to in the finger 99% of the cases
both actually converts both had in
tandem in sync and in consonance with
each other
however if at all there is an
inconsistency or a conflict or some kind
of contravention between the
corresponding provisions under the fema
and MDI policy
Semih will prevail and section 6 of the
favor or thread is the idea to manage
the foreign exchange transactions in
consultation with the Ministry of
Finance moving on the Banking Regulation
Act which is BR Act and the Reserve Bank
of India act IV Act further provide and
set out that the RBI with supporting
Authority will regulate the capital
inflows and outflows in India the RBA is
the one which articulates the policy
with respect to capital accountants
actions through regulations that must be
been placed before the Parliament and
notifications that require publication
the official said through circulars and
press releases so basically they take
the form of a macro monetary policy and
the fiscal policies in India which then
get approved or disapproved by the
Parliament for in Europe I put the
houses then take the shape of the law in
which or in terms
which certain notifications and
circulars and press releases at issued
by RBI and then incorporated included
and accommodated within the same effect
which is missing in the exchange
controls network now as I stated that
you know number of press nodes
fortifications circulars etc is so
humongous the RBI actually comes out for
purposes of convenience on an annual
basis something called a master circuit
what is the master circular it's
basically a compendium or collation or a
compilation of all communications by the
Reserve Bank yeah one of their ideal
subjects living with capital for such as
FDI ECB straight that it's etc what does
it mean basically it means that you know
in cases of one of the regulations which
says transfer of security to a person
president outside India which is under
framer twenty there will be several
notifications which have combined and
together they consolidated to the master
circular similarly on external
commercial borrowings wherein they mean
residents actually borrow honored
indebtedness basis from foreign
financial institutions or companies or
eligible in the recognized lenders as we
call them then we consolidated to the
master circulars on EC is etcetera this
becomes very handy for the purposes of
interpretation reference and you know
our application of the law also RBI
regulation of various financial products
is legitimized by the multiple
authorizing legislations for example the
earlier regulates derivative trading on
currencies and exchange
interest rates under the past which have
dis to vote on it through the RBI
Amendment Act of 2006 this was a key
amendment by which are we I actually
came up with various legislation so
various and subordinate legislations
through which derivative trading on
countries was legitimized
now coming back to the FIP fi TV being a
part of the Minister of Finance is
chaired by the secretary of the immense
difference it has been specifically set
up and erected to expedite the approval
process for foreign investment purposes
it is also empowered to and as he
provided me the flexibility to examine
all the proposals in the totality free
of any predetermined parameters or
procedures it basically means that all
the investment structures / transactions
which fall not under the automatic route
but under the government / approval
route are supposed to be specifically
empowered and approved and permitted by
the fitt so basically it depends on the
strength and the viability and the
plausibility of the proposal that you
give to the FIP me then it gets approved
and therefore and this juncture the role
of the lawyers becomes very handy now
FIP we basically recommends with respect
to the proposals not covered under the
ambit of automatic ruled as I said but
which involved in investment up to three
thousand crores over and above these are
considered by the Cabinet Committee on
Economic Affairs so there's a threshold
there is a kind of a line which has been
drawn up to which the fiv be net
recommend and they can move and then
approves if it's beyond the threshold
say 3000 crores in this case it will be
has to be also through by the Cabinet
Committee on Economic Affairs in
addition to approving the concessions
that are beyond the threshold of three
tacos Cee Cee which is the Cabinet
Committee on Economic Affairs also
reviews the economic trains on a
continuing basis indirectly and also the
problems the challenges the prospects
with a view to a warning a more
consistent integrated and consolidated
you can only quality frame
see if it comes out with the blueprint
it comes out will go right there by
cetera which takes into account all the
situations recommendations received from
the industry players and accommodates
the viable ones puts it before the
cabinet committee whatever sees it not
becomes the letter of the law now let's
move on to the diagrammatic
representation so basically for
investments bifurcated and try located
and multi for gated into various paths
for direct investments foreign portfolio
investments for adventure capital
investments other investments and
investments on an on the battle basis
and we brought lots of vacations self
explanatory in which the investment can
happen we are focusing for the reson
timing on the first leg which is the FBI
as we discussed
FDI can be bifurcated broadly into
automatic and government route and
basically talks about investments from
persons outside India in doing here
moving on kind of regulators that we
have RBI semi NFIB be RBA regulates all
he inflows and outflows and basically it
is a Yale divided into various kinds of
investments and basically depends on the
vehicle from which investment is routed
through or the method of investment for
example the investment can be in plain
equity investment can mean convertible
debentures investment can be in hybrid
securities investment can be through
debt securities etc that also changes
the regulation correspondingly with
which this particular action is for we
can regulated and played by I think this
flowchart is very important because it
deals with the exact we in wisdom voice
promulgated and assumes the force of the
law and then implemented and also
applied by the players like civility
which is basically the one by the iti
then DEA the FS di BB the way they
actually promulgate and issue the laws
regulations the rules whatever we call
it having the binding force and then
those are enforced among the industry
players in that particular space through
specific regulators like semi seventies
care of listed entities on the stock
exchange so we are a public listed
company that has to combine by obviously
the are their rules while making for
investment and also the semi framework
when doing activities on a daily basis
so therefore the moral of the story is
the scope the nature the size the method
the matter the manner of investment of
the transaction at hand has to comply
with the letter of the law which in
essence when it deals with foreign
investments is regulated by the Reserve
Bank of India and depending on the
nature of entity by the seve or the
companies or the Ministry of Corporate
Affairs etc so the whole promulgated or
myriad of laws over in a particular
transaction and this is very vital for
the lawyers to know this law and
obviously to ensure that it's applied
consistently and in spirit thank you so
much
I hope you learn something new from
today's lecture if you still have any
doubts or queries about this lecture
please contact us on doubts at fusion
law school comm hi viewers to know more
about us please visit fusion law school
comm or you can also visit us on
Facebook Twitter or Google glass links
are provided here to stay updated
subscribe to our YouTube channel by
clicking on the subscribe button if you
like this video please like share and
comment down below