{"id":14845,"date":"2019-03-19T15:25:12","date_gmt":"2019-03-19T09:55:12","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=14845"},"modified":"2019-05-28T14:38:20","modified_gmt":"2019-05-28T09:08:20","slug":"unregulated-financial-services","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/unregulated-financial-services\/","title":{"rendered":"FDI and Unregulated Financial Services in India"},"content":{"rendered":"<p>Foreign Direct Investment (FDI) is an investment whereby a firm or individual of one country makes an investment in a business located in another country. This investment is usually made to control the ownership of the business in which the investment is being made. <a href=\"https:\/\/en.wikipedia.org\/wiki\/Foreign_direct_investment\" https:=\"\" en.wikipedia.org=\"\" wiki=\"\" foreign_direct_investment=\"\">Foreign Direct Investment<\/a> serves as a non-debt resource for economic development for the country in which investment is being made. There is also the generation of employment and advancement of technology with increased investment in the country.<\/p>\n\n\n\n<p>In India, FDI is controlled under the Foreign\nExchange and Management Act (FEMA), 1999. The FDI policy of India is quite\nliberal. In recent years, many initiatives have been taken by the government to\nrelax FDI norms in various sectors including defense, telecom, oil refineries,\npower exchanges, and many others. <\/p>\n\n\n\n<p>There has been a constant inflow of foreign capital\nin the Indian financial markets due to the favorable foreign policies and\nvigorous business environment. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong><a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>Market<\/a> size of\nFDI in 2018<\/strong><\/h2>\n\n\n\n<p>There was a total FDI investment of US$ 33.49\nbillion in India between April-December 2018, as reported by the Department for\nPromotion of Industry and Internal Trade (DPI). This reflects the government&rsquo;s constant\nefforts at making relaxation in FDI policies so that setting up a business in\nIndia becomes relatively easier. <\/p>\n\n\n\n<p>In 2018, the service sector attracted the highest\nFDI inflow amounting to US$6.59 billion, between April-December 2018. This was\nfollowed by computer hardware and software industry- US$ 5 billion andthe telecom\nindustry &ndash; US$ 4.39 billion.<\/p>\n\n\n\n<p>The county making the highest contribution was\nSingapore- US$ 12.98 billion followed by Mauritius- US$ 6.02 billion,\nNetherlands &ndash; US$ 6.02 billion, Unites States of America &ndash; US$ 2.34 billion and\nJapan &ndash; US$2.21 billion.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Developments\nmade in FDI in 2018<\/strong><\/h2>\n\n\n\n<p>As per a trade review released by The Commonwealth,\nIndia received the highest greenfield FDI inflows in 2018.<\/p>\n\n\n\n<p>Following are the major FDI announcements made in\n2018:<\/p>\n\n\n\n<ul><li>An investment of\nUS$ 612 million in Maharashtra was announced by Ikea in February 2018 for\nsetting up multi-format stores and experience centers.<\/li><li>77percent of\nFlipkart&rsquo;s stake was acquired by Walmart for US$ 16 billion in May 2018.<\/li><li>The Department\nof Telecommunication approved Idea&rsquo;s 100 percent FDI in June 2018.<\/li><li>Warburg Pincus\nbought 20 percent stake in Bharti Airtel&rsquo;s DTH wing for US$ 350 million in\nAugust 2018.<\/li><li>An investment of\nUS$ 2 million was announced by VMware (US-based leading software enterprise) in\nOctober 2018.<\/li><li>An investment of\nUS$ 6 billion by the year 2022 is being planned by International Finance\nCorporation- World Bank group&rsquo;s investment arm. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>FDI Policy for\nUnregulated Financial Services<\/strong><\/h2>\n\n\n\n<p>Unregulated Financial Services is one of the two categories\nof &ldquo;Other financial services&rdquo;, the other one being the regulated financial\nservices.<\/p>\n\n\n\n<p>Unregulated financial services are those services\nthat do not come under the purview of any financial sector regulator or are\npartly under a financial regulator or where there is doubt pertaining to the\nfinancial regulator under which they fall. <\/p>\n\n\n\n<p>In 2016, two major relaxations in FDI were given. <\/p>\n\n\n\n<ul><li>First, 100\npercent FDI under the automatic route was opened for all regulated financial\nservices. <\/li><li>Second, the\nminimum capitalization norms were removed. <\/li><\/ul>\n\n\n\n<p>As per the FDI policy of 2016, 100 percent\ninvestment is permitted in the unregulated financial services with prior\ngovernment approval. However, the foreign direct investment in the unregulated\nfinancial services shall be subject to certain conditions. This would also\ninclude the minimum capitalization norms, which shall be as per the decision of\nthe government. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Minimum Capital\nRequirements for Unregulated Financial Services<\/strong><strong><\/strong><\/h2>\n\n\n\n<p>As per the press release of 16 April 2018, the\nminimum capital requirements for FDI in non-fund-based activities in lieu of\n&ldquo;other financial service&rdquo;, which covers the unregulated financial services, has\nbeen prescribed by the Ministry of Finance. <\/p>\n\n\n\n<p>In this recent press release, the following issues\nhave come to surface:<\/p>\n\n\n\n<ul><li>The definition\nof the &ldquo;unregulated financial services&rdquo; has been widened and there is scope for\ninclusion of those entities that have been exempted from registration under the\nrelevant laws. <\/li><\/ul>\n\n\n\n<p>For instance, investment managers with assets less\nthan INR 100 crores and that do not accept public funds, do not require to get\nregistered per se and only the alternative investment funds (AIF) require\nregistration with SEBI. With the new press release, even the IMs could come\nunder the purview of the &ldquo;unregulated financial services&rdquo; and hence, be\nrequired to comply with the minimum capitalization norms. <\/p>\n\n\n\n<ul><li>Another grey\narea is the actual amount of minimum capital that would be required to be introduced. There is no explanation to minimum capitalization\nrequirements under the automatic route. Prior to 2016, there was relaxation in minimum\ncapitalization requirements. The foreign capital requirement was in proportion\nto the total ownership of the foreign entity in the Indian business. Proportionate\ncapitalization has been missed out in the press release. <\/li><li>There is no\nexplicit provision regarding the cap on the infusion of funds. This could\nresult in over-capitalization of the organizations that are a part of the\nunregulated financial services.<\/li><li>LLPs have been a\npopular organizational set-up option since it has the advantages of tax\nefficacy and limited liability. Investment in an LLP can be problematic since\nFDI in Indian LLP is permitted for only those sectors that fall under the\npurview of the automatic route. Hence, no FDI can be made in LLPs that come\nunder the unregulated financial services sector.<\/li><li>There is also\ndoubt in regards as to whether the provisions mentioned in the press release\nwill be applied prospectively or retrospectively.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<p>It is apparent that the latest press release on FDI\nhas bought along with-it certain doubts which needto clarify urgently by the\ngovernment. Till the time, the foreign investors should make a mindful\ninvestment in any of the sectors, after making all the assessments on minimum\ncapital requirements. Nevertheless, India still continues to be a favorable\ndestination for foreign investment due to the growing nature of its economy and\nsteady democratic political environment. <\/p>\n\n\n\n<p>For any other queries on foreign direct investment, overseas direct investment, routes of foreign investment, investment caps of various sectors or any <a href=\"https:\/\/enterslice.com\/foreign-exchange-regulations-india\" target=\"_blank\" rel=\"noopener noreferrer\">FEMA <\/a>provisions, contact us at <a href=\"https:\/\/enterslice.com\">www.enterslice.com<\/a>. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Foreign Direct Investment (FDI) is an investment whereby a firm or individual of one country makes an investment in a business located in another country. This investment is usually made to control the ownership of the business in which the investment is being made. Foreign Direct Investment serves as a non-debt resource for economic development [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":14849,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[11,1315],"tags":[2487],"acf":{"service_id":"112"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>FDI and Unregulated Financial Services in India | Enterslice<\/title>\n<meta name=\"description\" content=\"However, the foreign direct investment in the unregulated financial services shall be subject to certain conditions. 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