Note4Students
From UPSC perspective, the following things are important :
Prelims level: Indian Foreign Exchange Management (Non-debt Instruments) Rules
Mains level: Challenges with the Recent Amendment
Why in the News?
To achieve a $5 trillion economy by 2025-26, India must eliminate obstacles hindering Foreign Investments and facilitate smoother processes for companies and investors.
About the Indian Foreign Exchange Management (Non-debt Instruments) Rules
Introduction of Press Note 3 (PN3) Requirement:
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Challenges with the Recent Amendment
- Undefined ‘Beneficial Owner’: The term ‘beneficial owner’ isn’t clearly defined in the PN3 Requirement, leading to confusion. Different laws define the term differently, making it hard for companies to know which standards to follow.
- Regulatory Uncertainty: Since the latter half of 2023, the Reserve Bank of India (RBI) has adopted a stricter interpretation of these rules. This shift has caused anxiety among investors and companies, as practices previously deemed acceptable are now being scrutinized.
- Regulatory Burden: Companies now face significant delays and a high rate of rejection when seeking approval for investments. According to some officials, proposals worth ₹50,000 crore have been stalled or rejected in the past three years, with 201 applications being turned down.
- Severe Fines: Non-compliance with the PN3 Requirement can result in fines up to three times the amount of the investment. For many startups, this could mean financial ruin, as the fines could exceed their revenue or assets.
- Legal Battles: Violations could lead to lengthy and costly legal disputes, further burdening the already slow judicial system in India.
What can be the better solution? (Way forward)
- Ownership Thresholds: Define beneficial ownership with clear thresholds, such as 10% to 25% ownership stakes. This would help companies understand whether they need to seek approval.
- Control-Conferring Rights: Specify which rights indicate control, such as the ability to influence board decisions or veto significant operational changes. Exclude rights that merely protect investor interests, such as veto powers over mergers.
- Investor Representations: Allow Indian companies to require foreign investors to provide assurances about their compliance with the PN3 Requirement, backed by indemnities.It would provide a safety net for Indian companies.
- Time-Bound Reviews: Introduce a system where companies can seek timely advice from regulatory authorities on whether specific clauses in their investment agreements confer control. This would be similar to mechanisms in competition law, offering clarity and reducing the risk of penalties for inadvertent non-compliance.
Mains PYQ:
Q Foreign Direct Investment (FDI) in the defence sector is now set to be liberalized: What influence this is expected to have on Indian defence and economy in the short and long run? (UPSC IAS/2014)
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