Legal Shield in the Works for Foreign Investments

Legal Shield in the Works for Foreign Investments

Aimed at promoting & protecting investments; will spell out rights and obligations of investors

India is working on a framework that will provide legal backing for a stable and predictable foreign investment regime in the country as it looks to attract more capital to help create jobs and accelerate economic growth.The law that is in the works in the finance ministry is aimed at promoting and protecting foreign investments. It will spell out the rights and obligations of foreign investors and remove the grey areas that exist in the current system.

While Foreign Exchange Management Act (FEMA) deals with cross-border capital controls, a legal framework to guide foreign investment is still not in place. Bilateral Investment Promotion Agreements (BIPAs) have provisions but do not enjoy the force of law.“There is no law governing the foreign investment framework... this would provide the legal backing to these norms,” a senior government official involved in the process told ET.

Most developed countries already have such laws that seek to protect and promote investment. China, one of the biggest recipients of FDI, is working on a similar law to give additional comfort to foreign investors.The need for a clear legal framework became stark after several overseas investors dragged India into foreign arbitration proceedings and local legal disputes after running into issues such as tax claims. Subsequently, the draft text of the model investment treaty was revised in 2015 to explicitly exclude taxation measures or issuance of compulsory licences under intellectual property rights laws.

The model treaty also proposed fair and equitable treatment to investments on post-establishment basis through reciprocal provisions like national treatment, most-favoured nation treatment and mechanism for dispute resolution, which could find their way into the planned law.The legal framework that is being worked on will draw significantly from the model investment treaty framework, which seeks to promote bilateral investment flows.“Currently, foreign investments are regulated under Foreign Exchange Management Act as part of cross-border capital controls and partly under the Money Laundering Act to ensure inflow of clean money,” said Akash Gupt, partner and leader, regulatory, PwC. If a separate law is being contemplated, these two aspects may need to be consolidated, he said.

Outbound Investment

“It would be important to consider how the existing administrative machinery of RBI and Enforcement Directorate would dovetail into the new mechanism to avoid disruption for foreign investors,” said Akash Gupt of PwC.The government is also reviewing guidelines and processes to bring out a coherent and integrated Outward Direct Investment policy in line with the announcement in the Budget. The proposed framework will include the legal aspects related to outbound investments.The Narendra Modi-led NDA government is keen to attract foreign investments to spur job creation and economic growth and has taken steps to liberalise the FDI framework, including fungibility of all forms of overseas capital within sectoral caps. Fungibility refers to the interchangeability of goods or assets with other individual goods or assets of the same type.

The government abolished the Foreign Investment Promotion Board, which used to vet proposals, and relaxed caps on several sectors, including allowing 100% FDI automatically in single-brand retail trade and the construction sector, while opening the doors for FDI in Air India, the national carrier.India is among the top 12 global investment destinations and the second most attractive emerging market, according to AT Kearney’s Foreign Direct Investment Confidence Index.Overseas investments into India stood at Dollar 35.94 billion during April-December 2017, a growth of 0.27%, according to the Department of Industrial Policy and Promotion.

The Economic Times,New Delhi,18th May 2018

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