[Shashank is a student at West Bengal National University of Juridical Sciences.]
The Government of India published Press Note-3 of 2020 as a policy move aimed at regulating foreign direct investment (FDI) in Indian enterprises. The stated aims of the initiative encompassed the protection of Indian enterprises' interests and the assurance of national security. The primary objective of Press Note-3 was to analyse and restrict foreign investments in crucial sectors of the Indian economy, with a specific focus on the aftermath of geopolitical tensions. Although the policy's aims were evident and comprehensible, its broader ramifications and repercussions have generated substantial apprehension. Nevertheless, with the passage of time, it has become increasingly evident that this approach may have outstayed its acceptance.
What is Press Note-3?
Press Note-3 of 2020, released by the Department for Promotion of Industry and Internal Trade of the Government of India on 17 April 2020, constituted a substantial departure from India's established FDI policy. This policy was formally announced with the principal objective of regulating and intensifying scrutiny on foreign investments originating from countries that share a land border with India. The specific focus was on nations such as China, Pakistan, and India's other immediate neighbours. The overarching purpose was to safeguard India's national interests, particularly within the context of escalating geopolitical tensions prevalent at the time.
A prominent feature of Press Note-3 was the introduction of a mandatory requirement for government approval regarding FDI originating from bordering countries. This was a significant deviation from India's previous approach to FDI, which had been comparatively more lenient. The policy imposed a heightened level of scrutiny that was notably absent in the previous FDI regulations.
According to Para 3.1.1.(a) of the Press Note-3, non-resident entities can invest in India, following the FDI Policy, except in prohibited sectors. However, if an entity is from a country sharing a land border with India or if the beneficial owner of an investment is from such a country, they can only invest through the government route. Additionally, citizens of Pakistan or entities incorporated in Pakistan can invest under the government route but only in sectors other than defence, space, and atomic energy, and those sectors are prohibited from foreign investment.
The rationale for this policy shift was multifaceted. India aimed to fortify critical sectors and essential infrastructure against undue foreign influence and control, a response primarily driven by concerns over national security and the backdrop of intensifying geopolitical tensions. This strategic shift was spurred by mounting apprehensions about data security and privacy due to China's involvement in several Indian technology companies.
Press Note-3 exerted its most profound impact on sectors of strategic importance, including defence, aviation, and critical infrastructure, such as power, telecommunications, and space. The government's goal was to scrutinise and potentially deter investments that could jeopardise national security or have adverse consequences for these vital sectors. Crucially, this policy was not exclusively aimed at Chinese FDI; it encompassed investments from all bordering countries. This could be a deliberate effort to avoid singling out any particular nation and to maintain a uniform approach for all countries that share a land border with India.
The immediate and substantial response to Press Note-3 was noteworthy. Numerous Indian startups and unicorns, which had previously relied heavily on Chinese investments, found themselves in a challenging situation. For years, Chinese investors have played a pivotal role in financing India's tech startups, e-commerce platforms, and various other sectors. The policy changes introduced an element of uncertainty and posed challenges for these businesses, which had previously benefited from relatively easy access to Chinese capital.
Why Must the Press Note-3 Go?
Recent reports indicate that the Indian government has yet to approve approximately 40 to 50 foreign direct investment proposals originating from nations that share a land border with India. These proposals await clearance and endorsement, underlining the administrative failure on the part of the government in clearing the applications within the committed 3-month period. According to reports, it takes around 7 months for the government to review the applications. Furthermore, there has been a sharp decline in FDI post the introduction of the Press Note-3. In FY23, India experienced a 27% decline in net FDI inflows, dropping from $38.59 billion in FY22 to $28.014 billion. This marked the first decrease in FDI over the past decade, raising concerns about the country's ability to attract foreign investments and its economic growth prospects.
The Press Note-3 entails the incorporation of the notion of 'beneficial ownership' and stipulates that FDI originating from nations that share a border with India will necessitate government authorisation if the beneficial owner is a resident or citizen of such country. The Press Note-3 has no clarity about the investments from resident non-citizen individuals or beneficial owners. This gives rise to a state of ambiguity and uncertainty regarding the specific entities or individuals whose investments are subject to approval. The absence of well-defined criteria has discouraged prospective investors and impeded the inflow of foreign investments. The introduction of Press Note-3 has raised concerns in the investment community, casting doubts on the ease of doing business in India. Investors yearn for stability and predictability in regulations to make sound, long-term investment choices. The dearth of clarity and unexpected policy shifts can erode investor confidence, underscoring the importance of a consistent and investor-friendly regulatory environment.
Furthermore, the failure of the government to effectively implement the Press Note-3 as a consequence created further hardships for investors. Therefore, like in the case of all regulations, the investors are resorting to circumventing the regulation through legal loopholes or even illegal means. A recent example could be the return of SheIn in India three years after it was banned by the Government of India. Chinese online fast-fashion retailer Shein's partnership with Reliance Retail Ventures Ltd won't need FDI approval since Shein won't hold equity in the new operations. Moreover, numerous Chinese investors are channelling investments into India through indirect and often shady routes, making it challenging to trace and regulate these funds. This undermines the primary objective of Press Note-3, which aimed to enhance transparency and scrutiny of foreign investments from bordering countries, especially China.
Last but not least, the circumstances that prompted the introduction of Press Note-3 have evolved significantly. The world has made substantial progress in overcoming the pandemic and its immediate effects. The World Health Organization no longer classifies COVID-19 as a Global Health Emergency. Given these positive developments, it is an opportune moment to consider revisiting and potentially revising PN3. Opening up Indian markets to global investors can inject much-needed capital, expertise, and innovation into the economy, supporting growth and recovery.
While Press Note-3 of 2020 was introduced with legitimate concerns over national security and foreign influence, its overextended presence in India's investment landscape now demands reconsideration. The administrative bottlenecks in reviewing FDI proposals and the subsequent decline in foreign investment flows are indicative of the pressing need for change. The policy's ambiguity surrounding 'beneficial ownership' only adds to the confusion, deterring potential investors seeking stability and clarity in regulations.
While national security remains paramount, striking a balance between safeguarding interests and fostering a welcoming environment for investors is the key to long-term economic success. Reimagining India's FDI policy can not only reignite investor confidence but also fuel the country's economic growth and development, fostering a brighter and more prosperous future. The current regulatory framework, exemplified by the security review process outlined in the Foreign Exchange Management Act 1999, adequately addresses national security apprehensions pertaining to FDI. The ongoing existence of Press Note-3 may be perceived as an extraneous regulatory component. It is time for Press Note-3 to gracefully step aside and make way for a more investor-friendly and forward-looking approach.