The present context of the Indian market is such that most of the foreign companies want to invest in India. The “Make in India” scheme has also invited many foreign investors on this land. Moreover, during this global pandemic of Covid-19 many industries are moving out of China and want to come to India for setting up their companies but the investment in India is governed by some laws which cannot be overlooked and have to be kept in compliance while investing in the Indian market. The amendment is done under Section 46 of the Foreign Exchange Management Act, 1999 which legally empowers the central government to make rules by public notification related to foreign investment. So the act of the government to channelise the foreign investment policy is legally valid and has been done in the wake of giving opportunities to the domestic entrepreneurs of the nation.
The necessity to reform the foreign investment policy
The Chinese business unicorns are now investing in startups and purchasing the stakes in large shares globally. This has apprehended the business in India so the government has amended the FDI rules and notification published by DPIIT (Department for promotion of industrial and internal trade) specifies that – “A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.”
This step was taken during the pandemic tenure to curb the opportunities being taken over by the Chinese investors. These takeovers are dismantling the national market. A few weeks before, only the People’s Bank of China raised its stake by purchasing a large share in HDFC Bank. China’s FDI in India is small at about 6.2 billion $ but its impact is already out-sized given the deep penetration of Chinese technology in the Indian market which in turn is down-trading the national technology.
The allegation raised by the Chinese investors that India is being the signatory member of the World Trade Organisation is not obligated to curb the foreign companies is totally vague. As the amendment has not curbed or restricted any foreign investor from China to invest. It has only put one obligation that the investment has now to be done through the government channel. So there is only one screening test which they need to pass and hence there is not any kind of violation of the WTO’s regulations.
According, to Section 5 of the Foreign Exchange Management Act, 1999 “Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawl is a current account transaction: Provided that the Central Government may, in the public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transaction as may be prescribed.”
According to Section 6 subsection 2 clause b of the FEMA, 1999 it is specified that the RBI can put the limit on foreign transactions after having a consultation with the Central government. In Section 6 sub-section 2A it is specified that the Central government in consultation with the Reserve Bank of India prescribes in clause (a) class should be permitted in capital amount transactions. Then in clause (b), there is a prescribed limit up to which foreign exchange shall be admissible for such transactions. So there are the limits of investment of foreign exchange which are directed by the laws of FEMA to protect the domestic market also.
As if the limit of investment will not be debarred by the penal laws then the foreign technology will capture the market of India and the Indian technocrats will lose the opportunity in their own market and nation. So to give opportunities to the domestic investors the stand of the Indian government to amend the FDI law of the country is very well suited.
Technology transfer is also governed by technology transfer agreements in which the nature of the contract is such that it can be governed either by a license agreement or know-how agreement. The license agreement normally refers to the licensing of the intellectual property rights such as patents, trademarks, designs etc. and know-how agreement involves the transfer of information or skills which have not received statutory recognition.
Then the supply of services through the foreign nation is governed by Section 2 (102) of CGST Act which specifies that “Supply includes import of services for a consideration whether or not in the course or furtherance of business.” Also as per point 4 of Schedule 1 of Section 7 (1) (c) of the CGST Act “It is held that supply even if made without consideration includes imports of services from a related person or from any of his establishments outside India, in the course of the furtherance of business.” So these imports of technology or services which will be transferred in the territory of India will also fall within the levy of taxes under the above-mentioned laws.
In the transfer of biotech technology like medicine and drugs Section 47 clause 4 of the Patents Act, 1970 comes into play which entails that the Central government can import the medicine for its own use or distribution in any dispensary, hospital or other medical institution maintained by or on behalf of the government.
Now when the foreign technology is coming into India, they have to comply with the national laws of the nations or else they will be charged under the unfair trade practices act for the non-compliance of the prescribed standards. They can also be charged under this law if they falsely represent themselves regarding approval, performance, characteristics and accessories of goods and services.
Then the business in India is also governed by the Competition Commission laws to protect the legitimate interest of manufacturers and the consumers. Section 3 clause 1 of The Competition Act, 2002 provides that “No enterprise or association of enterprise or person or association of persons shall enter into an agreement regarding production, supply, distribution, storage, acquisition or control of goods or services which is likely to cause an adverse effect on competition within India.”
On the other hand, Proviso of this section entails that “Nothing of this subsection will apply to any agreement entered into by way of the joint venture if such agreements increase the efficiency of production, supply, distribution, storage, acquisition or control of goods or provision of services.”
The incorporation of foreign companies is also governed by the Companies Act, 2013 in which Section 379 provides the law in which compliance provision by a foreign company incorporated in India has to follow up. Their documents within 30 days of the incorporation of its business in India shall deliver certain documents to the Registrar for registration.
So in this way by various amendments of FDI Policy the Indian government is trying their level best to curb the menace of the foreign investment and to give the opportunity to the Indian business persons and their products so that we can be self-reliable on our own product and that will not only boost the economy of the nation but also bring tremendous jobs opportunities for the youngsters of the nation.
Foreign technology in India has already expanded its space in the domestic market. So to protect the market of India and to preserve the interest of the domestic technology the laws of India has to be kept in compliance. The foreign companies coming to India are both boon and bane for the nation. Initially, the positive aspect of this law is that it will create many job opportunities in the nation as in the global pandemic of Covid-19 about 29 lakhs people in India directly employed lose their job who was in the organized sector. We cannot imagine the ratio of losing jobs in the unorganized sectors of employment. India has always been the market of international players. After this global pandemic also most of the foreign companies are shifting themselves from China and are looking forward to India which will push up their business in the Indo – Pacific region but this will then degrade the business of the domestic players, entrepreneurs who want to be self-reliable.
Section 46 of the Foreign Exchange Management Act, 1999.
DPIIT FDI Policy section, revised position, Para. 3.1.1 (a).
Palak Shah, How China dominates tech investments in India, The Hindu Business line, April 19, 2020.
Section 5 of the Foreign Exchange Management Act, 1999.
Section 6 (2) (b) of Foreign Exchange Management Act, 1999.
Priyanka Rastogi, “Licensing and Technology Transfer: A Glance on Indian Scenario”, Monday, Oct. 13, 2014.
Sarang Saria, “Import of services under GST”, Tax Guru, Apr. 19, 2020.
Section 47 (4), The Patents Act, 1970.
Section 3 (1), The Competition Act, 2002.
BY- AAYUSH SINHA
Bharati Vidyapeeth New Law College, Pune