FDI in M&A- 2020 Trends in India

Varun Hariharan

25 Sep, 2020

Foreign Direct Investment is understood as any form of direct and indirect investment from a foreign entity or a non-resident Indian. This investment can be in the form of purchase or acquisition of shares in an Indian company or an Indian entity. However, the foreign direct investment can also come in the form of a foreign company investing in an Indian company or acquiring minority or a majority stake in the Indian entity. FDI in M&A sector is one of the key requirements for the Gross Domestic Product (GDP) to improve.

Overview of FDI in M&A sector

Since 1991, this sector would not have been active due to strict policies and enforcement under the Monopolistic and Trade Practices Act (MRTP Act), 1969. However, the Indian government paved the way to the development of the finance bill in 1991, which brought about major reforms for the FDI sector. Due to this, gates were open to foreign companies to invest in the Indian M&A space. These revolutions brought about major developments in India.

Not only did technical advancements occur in India, but it also paved the way of creating more amount of employment opportunities amongst individuals in India. These policy reforms also improved the way in which the country operated.

In the millennium, there was a steady growth of FDI in M&A sector; however, this was not about to improve as there were a lot of regulatory problems in these areas. Some of the problems included the lack of liberal policies brought out in India. Apart from this, there were several restrictions.

Restrictions on FDI in M&A sector before 2010

There were many restrictions in 2000 which did not allow a lot of inflow of FDI in M&A sector. The following are the reasons which caused less FDI inflow in the M&A sector:

Routes for FDI in M&A- In India, the DPIIT previously known as the DIPP has brought out different routes for FDI in M&A sector.

These routes are considered as the following:

• Automatic Route- Under the automatic route, there is no form of approval required from any government authority. Hence a company planning to invest through this route does not require any form of approval. A company that is planning to invest through the automatic route does not require approval. A company planning to invest through this route would not require any approval under the automatic route.
• Government Route- Under the government route, prior approval would be required from the government for investing in India. Any foreign company wanting to invest through this route would require prior approval from the respective government authority. There were problems only due to the investment through the government route.

Government Control- The ruling party in India before 2010 has stringent policies. No form of liberation was given for FDI in M&A sector during this time. Due to this, there was a lack of development and regulation in this sector.

Situations which increased the amount of FDI in M&A Sector

As per a report by the UNCTAD, India has climbed in rank when it comes to ease of doing business in the world. In 2010, India was ranked at 132 place out of all countries for ease of doing business in the world. India’s position for ease of doing business has drastically improved since then. As of 2018, India ranked at 77^th position for ease of doing business. In 2019, India climbed to 63^rd position in the world. Not only this has improved, but it has also drastically affected the GDP in India as of 2019.

In 2019, India surpassed the United Kingdom for having one of the largest GDP in the world. However, the global pandemic caused by the Covid-19 has disrupted the GDP and growth of FDI in India.

The following reasons have increased the amount of FDI in M&A sector:

• Increased Factors such as Ease of Doing Business in the Country- The present government under the leadership of Mr Narendra Modi has brought out several initiatives such as ease of doing business in the country. This will not only affect businesses in India but also cause some benefits for international businesses that want to invest some portion of FDI in M&A activities.
• Change of Political Parties- BJP government has brought out different initiatives which have eased access to foreign investment in India. This has directly improved the amount of foreign investment in India. The Indian government brings out different Initiatives, and one such initiative is by reducing the corporate tax rate^[1] in 2019.
• ‘Make in India’ Scheme- FDI in M&A is predominately affected by the domestic landscape which is offered in India. For example, the present government, through the ‘Make in India’ initiative has promoted domestic production in India. These initiatives would attract more foreign investors to invest in the country. This would directly affect the amount of FDI in M&A sector. For example, the government of India has brought out various initiatives for manufacturing toys in India and exporting them outside India. Such initiatives would improve the amount of FDI in M&A sector. Previously all countries were heavily dependent on the Chinese economy for the production of toys. This initiative would improve the amount of domestic M&A.

Present Standing of FDI in M&A

As per a report produced by the World Bank, India ranks in 9^th place for attracting a significant amount of FDI in the world. This is a remarkable achievement for the country and as per the DPIIT; this progress is tending to improve, considering the amount of foreign direct investment in the country. The above measures taken by the present government has improved the ease of doing business in the country, which has directly affected the amount of FDI in the country.

The major reasons for such ranking would be predominately based on the following:

• Changes in Initiatives brought out by the government. There are different initiatives such as Start-up India which contributes to the economic progress of the country. Many unicorns are evolving in India, making it the global start-up capital. Companies such as PayTM and OYO have started small but become progressive companies. They are able to raise seed funding from Chinese as well as Japanese Investors. This has considerably affected the FDI in M&A sector.
• As per the reports of the Government, the amount of FDI in the M&A sector would be increasing. However, the current amendment brought out by the Indian government amending the route for FDI or foreign investment would create devastating effects to deals and M&A activities which have been negotiated earlier. Now companies which are present in countries that share land borders in India would have to seek approval under the Government route, which was previously regulated under the automatic route. This will take a considerable amount of time for the parties.
• As per statistics provided by the DPIIT, the amount of foreign investment would only increase in the coming years. This would especially be for FDI in M&A sector. Most amount of foreign investment is received from countries that have secure bilateral ties with India. However, the government plans to improve the level playing field in which business activities are regulated. Apart from this, the government is going to create international standards for conducting business dealings with foreign companies.
• One of the main factors that improve the FDI inflow in the country is the Ease of doing businesses. Foreign companies and investments coming outside India want to adapt according to changing circumstances. A foreign company would definitely want to invest in a country, which provides more initiatives for the company to develop. This will directly and indirectly improve the amount of FDI in India. For example, if a foreign company wants to invest in a particular M&A transaction, they must have legal advice or management advice. If the foreign company is present in the UK, they may require local counsel or an Indian counsel. They can seek advice from a representative in India or a foreign law firm that has an office in the country. However, the present regulations do not allow foreign law firms to practice law in the country.
• Reducing the amount of sector norms would definitely help improve the status for ease of doing business in the country. For example, for a particular sector, the investment amount is only 50%. FDI in M&A for these sectors would only be applicable when a foreign company invests only 50% funds in the transaction. The funds are invested through the purchase or transfer of a capital asset.
• FDI in M&A sector is growing. The DPIIT has given clearance to sectors such as gaming, visual graphics, video technology and the insurance sector.
• However, even though there are different routes for FDI: Automatic and approval, still there are prohibited sectors where FDI would not be allowed. For example, ITC is one of the largest producers of tobacco in the country. Even though this country has international presence, still FDI in M&A in producing tobacco and cigar based products is not allowed. Apart from these products there are also different services where FDI is not permitted. There will be no scope of development of FDI in these sectors for M&A activity as the amount of FDI is not allowed.

What initiatives have been brought by the Government of India to boost FDI in M&A?

Foreign companies such as Google have invested USD 10 Billion for the development of technology and AI in India. Similarly, tech giants such as Amazon have provided assurance to the government of India for setting up technology hubs and increasing the amount of technology in India. Apple has shifted its production hubs from China to India.

Amidst the effects taken by the Chinese Government to tackle the Covid-19 and the political scenario throughout the world, India has taken global stance in being a leader of production. To improve the amount of FDI in M&A, the government has come out with different schemes.

Some of these initiatives which have improved the amount of FDI in M&A sector are:

• Liberisation of FDI- When it comes to FDI in the retail sector, the government has taken extra precaution at regulating this sector. FDI in M&A activity is allowed in the retail sector. However, the government has liberalised the investment limit of FDI in the SBRT sector, Coal Sector, Digital Sector and the Insurance Sector. Insurance Companies are allowed more than 74% FDI under the automatic route.
• Single Brand Retail Trading (SBRT)- SBRT also known as Single Brand Retail Trading comes under the e-commerce and retail sector. FDI in this sector is allowed under the automatic route. Apart from this, 100% FDI is allowed through this route. Previously FDI in M&A activities and other transactions in this sector required some form of government approval. Moreover only 49% investment was permitted in this route.
• Manufacturing and Contract Manufacturing- There was a confusion between the terms manufacturing and contract manufacturing. It was well known that in the manufacturing sector 100% FDI was allowed. The confusion was for the amount of FDI allowed when it comes to contract manufacturing. However, clarity has been provided in this area that under contract manufacturing 100% FDI in M&A sector is allowed. This would be as long as there is principal contract between the parties.
• Digital Media- The government has given clearance and permission for FDI in the digital media sector. Only 26% FDI was permitted under this sector.
• Technology Transfer and Resources- FDI in M&A would improve the technology transfer between two or more companies. This will directly improve the way in which the company performs its operations on a day to day basis. Transfer of technology and R & D are one of the major benefits of FDI in M&A sector.
• Aatmanirbhar Bharat Abhiyaan Scheme- Through this scheme, the government of India has improved the initiatives of both domestic companies as well as international companies. International companies will benefit the services offered by MSMEs and other small business through this scheme. There will also be some form of transfer of technology.

Conclusion