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Inbound Investment means any investment made by a foreign investor in the capital instruments of Indian Companies. The trend of inbound investment rose after the LPG reform in 1991. As the economies opened up for doing business at an international level, there was a transfer of technology, development of industries, innovation, increase in employment opportunities. The country which channeled more inbound investment witnessed economic growth and development. In this way, Inbound Investment started to play a major role in the economic growth and development of the country and became a key source for foreign non-debt investments. In this blog, we will discuss FEMA Inbound Regulations.
With the LPG Reform in 1991, the Government of India also introduced various reforms in the domestic laws of the country. It framed laws to attract inbound investments. Since, then the FEMA inbound regulations have been consistently eased to attract more investment. Any inbound investment in India is subject to the FEMA Act & Regulations, Companies Act, etc. In this article, we will be dealing with the FEMA Inbound Regulations relating to inbound investments.
Majorly, the Inbound Investment in India is made under the FDI Policy announced by the Government of India and is governed by the FEMA, 1999[1] as amended from time to time. FEMA Regulations prescribe the mode of investments i.e. the procedure for the receipt of funds, issue of equity or preference shares or convertible debentures and reporting of the investments to the RBI. Inbound investment can take place either directly or through joint ventures in all sectors except those which have been specifically prohibited.
The Reserve Bank of India is the primary authority responsible for inbound investments under FEMA Inbound Regulations. As per Regulation 16 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2017 there are two routes provided for making inbound investments:
1) Automatic Route
2) Government Approval Route.
Under the Automatic Route, no approval from RBI is required. However, under the government approval route, specific compliances are required to be made for getting the approval. On the basis of the routes, the investment is categorized into four:
As per Regulation 15 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2017 and unless otherwise specifically provided in the Act or the rules or regulations framed, the following activities are strictly prohibited from receiving inbound investments:
The FEMA Inbound regulations provide for the formulation of FDI Policies. The FDI Policy, 2020, prescribes the following criteria for making an inbound investment:
As per the FDI Policy, any Indian Company, Partnership firm or proprietary concern is eligible to receive inbound investment subject to the following conditions:
From the above, it is clear that the policies for inbound investments (under FEMA Inbound Regulations) have been liberalized by the Indian Government. Almost all sectors welcome inbound investment except those explicitly prohibited. Such liberal policies have made India one of the most attractive economies to invest in. After the 2020 amendment, India has also witnessed a rise in inbound investment despite the global pandemic and lockdown situation. Having a liberal law might facilitate huge investments however, such laws must also ensure safety. Investment from the wrong hands may compromise the safety of the nation. It is important to maintain proper checks and balances while making laws welcoming foreign investors.
Also Read: FEMA and Taxation issues in Inbound Investments
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