(For Private Circulation Only)

Dr. Shakuntala Misra National Rehabilitation University

Lucknow
FACULTY OF LAW

‘INVESTMENTS & SECURITIES LAWS’

For Students of B. Com., LL.B (Hons.) 8th Semester Only

TOPIC 03: ISSUES & PERSPECTIVES TO FOREIGN INVESTMENTS IN INDIA

Prepared By:

SHAIL SHAKYA
Assistant Professor (Law) & Faculty In-charge
Faculty of Law, DSMNRU

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

Topics

 An Uneven Beginning: Political Dialogue on Foreign Investments

 Legal Problems in Development of Foreign Investment

 Legislative Problems in Integration of Foreign Investments

 Operational Hindrance to Foreign Investments in India

 Evolutionary Perspectives to Foreign Investments in India

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

01. An Uneven Beginning: Political Dialogue on Foreign Investments

Foreign investment in India has been usually preferred over other methods of finance
because they are non-debt creating, non-volatile and their returns depend on the performance
of projects financed by the investors which also facilitates foreign trade, transfer of skills and
technologies.1 It is said that due to lack of understanding, foreign investment in India had
become a matter of political debate and dialogue long ago.2 Investment as a method of
finance has gained considerable acceptance and utility over a period of time. The primary
approach of government of India in relation to foreign investment was that ‘compared to
domestic investment, the contribution of foreign investment is bound to remain minor’. 3
Foreign investment was also seen as a new form of ‘western imperialism’ which was sought
to be responded with indigenous capabilities and therefore Swadeshi Jagaran Manch (SJM)
was created in 1991 soon after the announcement of liberalization policy for India. 4 Many
political thinkers had been gripped in long maintained protectionist policies and thought that
foreign investments in India; if allowed would drive them out of business. 5 Although
population of rural India was barely affected out of industrial policy reforms, political
discourse threw foreign investment to a trajectory of reforms.

Most of the political parties were concerned in uplifting the economic track of the
country by promoting domestic ventures over those that were being planned to be financed
from outside. The congress government at that time was aiming to gain access to new
technology, increase in exports and widen the base of production but it was also warned that
the foreign investments would not be promoted at the cost of self reliance. The government
was acting as promoter of domestic concerns and putting them to growth of scale by bringing
new technology, modes of operation and skills at their disposal which makes it clear that
government’s aim was not just to acquire funds from outside India but to bring technology
and skill was the primary concern. Sooner than later, unanimity regarding the importance of
foreign investment emerged in the minds of political parties and they got encouraged for
acquisition of world class technology. The topic remained a central political agenda during
elections of those periods and quite slowly, foreign investment became a kind of India. It
soon came to their acceptance that Indian economy would not progress without foreign
investments.6

Despite different perspectives on foreign investments, promotion of economy by

putting additions of any sort was deemed indispensable and therefore, foreign investments
came to the central agenda. Protection of domestic identity, sovereignty and economic
integrity were major challenges for the diplomats when they strove to liberalize the economy
for foreign investments. The announcement of industrial policies (1980 and 1982) and

1
Planning Commission of India, Report of the Steering Group on Foreign Direct Investment: Foreign
Investment in India, Government of India, 2002, p. 11
2
Kulwindar Singh, Foreign Direct Investment in India- A Critical Analysis, Centre for Civil Society, New
Delhi, 2005
3
Economic Survey, 1991-1992, Ministry of Finance & Company Affairs, Government of India, p. 23
4
Supra n. 63 at p. 4
5
Shashi Tharoor, India: From Midnight to the Millennium, Penguin Books-India, 1997 at p. 173
6
Bhartiya Janata Party, Election Manifesto, 1999

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

technology policy (1983) provided for a liberal attitude towards foreign investments in term
of changes in policy directions. The policies soon focused on de-licensing of some important
industrial rules and promotion of domestic exports and adoption of newer technologies
though foreign investments.

02. Legal Problems in Development of Foreign Investment

Promotion of foreign investment has also remained in testing arena of various legal
issues over a considerable period of time. Indian economy underwent a series of strategic
legal reforms to welcome foreign investments in India out of which introduction of dual entry
routes, automatic approval for technology agreements in high priority industries, permission
to NRIs and OCBs to invest upto 100% in high priority sectors, signing of Convention of
Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investors are
notable. 7 Legislations such as Foreign Exchange Regulation Act, 1973 etc. were attempted
with a view to establish a definite legal framework for smooth acquisition of foreign
investment to boost Indian economy. 8 Although legal mechanisms were under the stage of
development, foreign investments were resisted by various legal factors such as stringent
labor laws, centralized decision making autonomy, high rates of corporate taxes, political
instability and corruption.9 An analysis of the above identified factors reveals that continuous
and object-oriented adjustments to the issues that hinder flow of foreign investments should
be precisely addressed in order to gain clarity and certainty.

Apart from legal developments in India, foreign investments had become a topic of
deliberation and legal thought internationally. Putting the customary international law to
context, nations that were allowing foreign investments were getting succumbed to
responsibility of protecting tangible and intangible property of the foreign investors.10 It was
also held by the International Court of Justice that ‘a shareholder’s rights in a company that
was vehicle of a foreign investor could not be protected through diplomatic intervention of
the home state of the shareholder and that there are no international laws to protect the
interests of such foreign investors which put a stress to legislators in developing
comprehensive legal framework.11 Other initiatives such as inclusion of intellectual property
to the ambit of foreign investment and interpretations to the term ‘foreign investment’ were
continuously brought to the notice of policy makers in order to enable them for upholding
domestic objectives over concerns of foreign investment.12

Considering the various legal perspectives as outlined above, it was therefore needed that
labor laws be relaxed to provide accommodative environment to foreign investors,
reconsideration of sectoral caps and investment limits under the FDI policy framework,

7
Abhishek Vijaykumar Vyas, An Analytical Study of FDI in India, International Journal of Scientific &
Research Publications, Volume 5, Issue 10, October 2015 (ISSN: 2250-3153)
8
Dr. Harish Kumar, Foreign Direct Investment in India- A Critical Study, Inspira-Journal of Modern
Management & Entrepreneurship, Volume 08, No. 01, January, 2018 pp. 275-278
9
Ibid.
10
M. Sornarajah, The International Law on Foreign Investments, 2nd Edition, Cambridge University Press, 2004
11
Barcelona Traction Case, [1970] ICJ Rpts, 1
12
Ceskoslovenska Obchodni Banka v. Slovak Republic (1999) 14 ICSID Rev 251

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

removal of geographic disparities, development of self-sufficient debt market and
strengthening research and development work in aspects related to foreign investment in
India. A considerable thought was also being made to the fact that most FDI was being
pushed to India due to relaxed norms on mergers and acquisitions whereas the policy at
beginning was promotion of indigenous economy with acquisition of foreign capital,
technology and operational efficiency. The government has also invested its time in
developing models of single window clearance, legal assistance at times of need, easy
assessment of taxes, accountable repatriation of profits and sale proceeds and efficient
protection of intellectual property.

03. Legislative Problems in Integration of Foreign Investments

India’s foreign policy has also been gripped in considerable legislative debates for a
long period of time. There have been various instances in legislative discussions where
government’s decisions on sectoral limits, interpretations and definitions of key terms, role
and functions of Foreign Investment Promotion Board (FIPB) and conflicts between laws and
established legal framework were brought to insight and analysis by researchers and
academicians. The government has been heavily criticized for a protectionist approach to
domestic industries and for a centralized approach to making decisions on matters concerning
foreign investments.13 Although there have been various attempts to improvements in foreign
investment policy, general ideas in relation subjective and objective improvements have
remained under the scanner of economic development.14 FDI policies have been subjected to
allegations of callous drafting, FDI policy formulation being done in closed doors by the
government, overlaps and contradictions in FEMA framework and competence of regulators
in regulating the aspects concerning to foreign investments.15

There have been suggestions to bring FEMA framework and Policy directions in consonance
with each other so that foreign investors are not subjected to losses due to policy mismatch.
There is an urgent need for the sector-specific regulators to bring uniformity and certainty
and clarity to overlaps within a reasonable time so that situations of distress and confusion
could be avoided to the greatest extent possible. 16 There have been various examples where
problematic situations in relation to permissions, restrictions and limits in various sectors of
industrial activity, have arisen that need considerable attention by policy makers and
legislative authorities. 17 The government has also been criticized for adopting a differential
ideology in prescribing sectoral caps and investment limits in various sectors permitted for
foreign investments which are indicted to have been based on unintelligible criteria.
Historical facts have revealed that Indian government has tendency of diverting its focus and
money to sectors in disdain and trouble because of which immediate need of capital over-ride
other policy issues while formulating the FDI policies. There is also a possibility that the

13
Ajay Kr. Sharma, A Critique of the Indian FDI Law & Policy- Problems & Solutions, 2(1) NLUJ Law Review
30 (2013)
14
Deepshikha Sikarwar, Ambitious Reform: Plan to Scrap FDI Limits to Rein in Current Account Deficit,
Economic Times, 1 (Mumbai Edn., March 11, 2013) cited in supra n. 74 at p. 32
15
Supra n. 74
16
Manohar Lal Sharma v. Union of India, W.P. (C) No. 417 of 2012
17
Supra n. 74 at p. 52

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

researchers have misconceived ideas of categorization because the government’s policy have
not reflected hidden intentions in the policy dictations but research reveals that Indian
governments have always worked on object-oriented approach while putting foreign
investment limits and regulations at discussions.

It is clear from the discussion made above that a foreign investment policy is always laid
down with an intention to bring economy at scale, make progress in acquisition of world class
technology and operational expertise and to supplement domestic capital with foreign
contribution to enable domestic entities in fulfilling their working capital requirements in a
prudent manner. However, legislative intention should be to avoid ambiguities, remove
linked interpretations and defining rationale while prescribing investment limits unless the
same is not threatening to security or is not detrimental to sovereignty and integrity of India.
An increased academic research would be no doubt a significant contribution to policy
making and analysis.

04. Operational Hindrances to Foreign Investments in India

Apart from the above discussed limitations and hindrances to foreign investment in
India, there has been existence of other detriments to foreign investment. It is well accepted
that foreign investors always prefer countries with stable policy dictations 18 that should not
affect their business invariably, countries more appropriate in consideration of favorable
economic factors, availability of labor at less cost and well equipped and developed
infrastructure facilities.19 Suitability and transparency in tax regime alongwith clarity in tax
laws can have far reaching impacts on investments in any country. The taxation policies in
India have remained inherently complex despite the fact that government has taken various
steps to simplify and redesign it. India’s indirect tax regime is also very complex imposing
various kinds of taxes and calls for a number of compliances thereby increasing operational
burden on the companies equipped with foreign investments.20 However introduction of
legislations such as Goods & Services Tax (GST) and Insolvency & Bankruptcy Code have
marked the beginning of a new era in designing the regulatory framework for foreign
investments in India. 21

Corruption for long has been considered as an evidence of inequality and a negative factor of
governance in any country.22 Rampant corruption in any country causes significant effects to
the foreign investments notable among which are increase in cost of business operation,
situations of uncertainty, processing loss due to involvement of third parties, indeterminate
legal complications, retention of skilled labor and uneven competitive strategies from

18
Economic Times, September 19, 2017
19
Abhishek Vijaykumar Vyas, An Analytical Study of FDI in India, International Journal of Scientific &
Research Publications, Volume 5, Issue 10, October 2015 (ISSN: 2250-3153)
20
Ibid
21
Pratima Singh, Goods & Services Tax- How it will Impact Foreign Direct Investments Strategy in India,
International Journal of Pure & Applied Research, Vol. 2 Issue 1, 2017 at pp. 33-36
22
Munir Hasan, Mohammad Nayyer & Badar Alam, Corruption & FDI Inflows- Evidence from India & China,
Mediterranean Journal of Social Sciences, Volume 8 No 4 S1, July 2017 at p. 173

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

domestic counterparts.23 There is high possibility that the existing index of foreign
investment could be doubled if adequate measures for eradication of corruption could be
adapted and implemented.24 It has been described in various research studies that foreign
investors’ better familiarity with the host economy, political stability, and enhanced market
access etc act as components to boost foreign investments whereas corruption does the
contrary.25

It is therefore recommended that the duty of government machinery is not confined to lay
down broader policies of business operation in the host country but is also under an
obligation to ensure favorable business environment if it intends to supplement domestic
economy to accelerated growth level with foreign investments. Governments need to lay
special emphasis on aspects of operational concerns for foreign entities that act as hindrances
and impediments in providing a better expectation for the investors to pursue. The task of
removing rigidity in legal framework also casts burden on the governments to provide for
certainty in regulation of activities so that the entities from outside may find their assets and
money protected through domestic efforts.

05. Evolutionary Perspectives to Foreign Investments in India

It is time to look back to the trajectory of decisions that were taken primarily to
promote foreign investments in India and to look for factors that really help in boosting
foreign investments for a country. Countries over the world have created a long list of
incentives and awards in the past for the foreign investors exploring domestic markets which
was sought to be a deciding factor in foreign promotion and development. 26 It has been a long
possessed attitude of developing countries across Asia that has paved ways for attracting
foreign investment and protecting the indigenous economy from acquisition of outside
control. These economies have long considered that foreign investment is indispensable for
supporting domestic economy and to grow with mutual cooperation and coordination. 27
Although most of the countries including India have developed their comprehensive policies
on foreign investment through a series of discussions, there is ample scope for further
improvements and updation in the policy. Economies have considered attraction of foreign
investment as a matter of competitions with comparable jurisdictions and have concentrated
their energies in developing accommodative environment at all possible costs. 28

23
Siva Prasad Ravi, Does Corruption in a country affect Foreign Direct Investment?- A Study of Rising
Superpowers China & India, Open Journal of Social Sciences, 2013, 3, at pp. 99-104
24
Aye Mengistu Alemu, Effects of Corruption on FDI Inflow in Asian Countries, Seoul Journal of Economics,
201, Vol. 25, No. 4 at p. 390
25
Rahim M Qazi, Corruption & FDI in East Asia & South Asia- An Econometric Study, International Journal of
Economic & Financial Issues, Vol. 4, No. 2, 2014 at pp. 231-242
26
Josip Romic, Investment Incentive Policies Towards attracting Foreign Investments- The Croatian
Experience, available at
http://www.efos.unios.hr/repec/osi/journl/PDF/InterdisciplinaryManagementResearchVI/IMR6a34.pdf (10 FEB,
2019)
27
Dirk Willem te Velde, Policies Towards Foreign Foreign Direct Investment in Developing Economies-
Emerging Best Practices & Outstanding Issues, Overseas Development Institute, London, March 2001
28
Investment Policies that really Attract FDI, CUTS Briefing Paper No 3/2003, CUTS Centre for Competition,
Investment & Economic Regulation, New Delhi

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU

Foreign entry of firms in a domestic economy improves efficiency and competitive scale of
business by bringing considerable reduction in concentration of power in the hands of few
entities. 29 However, it is also true that countries tend to protect sectors that have attached
comparative disadvantages to their foreign counterparts which brings inequality in the
competitive field.30 Another considerable thought in the minds of government is regarding
addressing issue of balance of payments that tends to arise in series of monetary
transactions.31

The present outline of issues and perspectives to foreign investments in India has made a
categorical review of the existing guidance on matters of policy development and putting the
host country’s environment to greater degree of suitability for foreign investors. It should be
emphasized here that the legislative intent in approving the investment limits, distributing
investment opportunities across various identified sectors of industrial activity, making a
legitimate decision in regard to reforms to existing legal framework and introduction of new
policies in industrial regulation tend to dominate the way foreign investments will be made
and regulated in the domestic economy. It is indeed essential to mention here that the
ideology of developing countries stands on a different footing as compared to that of the
developed economies because of the fundamental difference in objectives to pursue foreign
investments. It is clear from the discussion made above that most of the economies have
invested considerable efforts in bringing their policy and intent in line with each other so that
new acquisition of technology, capital supplement etc. could be obtained for an accelerated
growth.

29
Kjetil Bjorvatn & Hans Jarle Kind, The Role of FDI in Economic Development, Nordic Journal of Political
Economy, Volume 28, 2002 at pp. 109-126
30
Graham E M & PR Krugman, Foreign Direct Investments in United States, Institute for International
Economics, Washington DC, 1995
31
Selma Kurtishi Kastrati, The Effects of Foreign Direct Investments for Host Economy, European Journal of
Interdisciplinary Studies, Vol. 5, Issue 1, 2013 at p. 29

© Shail Shakya, Assistant Professor (Law), Faculty of Law, DSMNRU