Globalisation of Indian firms: Is it a new dawn?

The finance ministry notified the Foreign Exchange Management (Overseas Investment) Rules, 2022, on 22 August 2022. The revised regulatory framework is a shot in the arm for India Inc’s efforts to integrate with the global market and participate in the Global Value Chains (GVC). The liberalisation of the Indian economy in the 1990s provided an impetus to the internationalisation efforts of Indian firms. Overseas Direct Investment (ODI) limits for automatic approvals were raised in the early 1990s, backed by privatisation and deregulation of industries. The transition to a more open and liberal policy regime concerning ODI by Indian firms was ensured with the Foreign Exchange Management Act (FEMA) coming into effect in 2000. The limits for overseas investments were further raised in 2002 and later in 2014, in addition to the policy measures to ease the financing of overseas investments. These policy measures combined with the positive global macroeconomic factors helped ODI flows rising from $1 billion in 2001 to $11 billion in 2014, with a peak outflow of $21 billion registered in 2008. The ODI flows since 2016 stay in the $11-$15 billion range. In contrast, India witnessed $ 45 billion of Foreign Direct Investment (FDI) inflows in 2021 and was ranked seventh in the list of top ten FDI-receiving economies. According to the UNCTAD, India’s ODI flows for 2021 stood at $15.5 billion, constituting around 1 percent of the total global outflows. India’s ODI flows lag behind some of the other major developing countries like China ($145 billion), Brazil ($25 billion), and the UAE ($23 billion), suggesting a scope for policies to boost them. Critical aspects dealt with in the new regulations pertaining to ODI include the procedures, round-tripping structures, easing of rules for investments by non-financial companies in foreign entities operating in the financial sector, tweaking of norms concerning wilful defaulters, and the inclusion of hitherto neglected aspects such as bringing International Financial Services Centres (IFSC) under the definition of a foreign entity. The new regulations have drawn a clear distinction between what constitutes an ODI and an Overseas Portfolio investment (OPI), which often proved to be a sticky point in the earlier regime. The Finance Ministry expects this to bring more transactions under the automatic route, enhancing the ‘Ease of Doing Business’. Another important aspect that has gained greater clarity is the issue of ‘Round-tripping’. The previous regulatory regime viewed round-tripping with suspicion. Firms involved in such transactions found themselves at the receiving end of notices issued by enforcement agencies. The new regime will not require the approval of the RBI if the investee company involves less than two levels of subsidiaries. These changes ensure that regulations keep pace with the changing dynamics of global production networks where two-way investments are commonplace. These changes may not only enhance the participation of firms in GVCs but will enhance their ability to raise funds overseas. The modified regulations allow non-financial Indian entities to invest in overseas entities operating in the financial sector (except banking and insurance) subject to certain conditions. This opens up an array of opportunities for industrial houses to expand their global footprint and is slated to be a game changer. For example, non-financial Indian companies can invest in foreign fintech start-ups and tap into the potential offered by such companies. Similarly, surplus funds of industrial conglomerates can be deployed into such acquisitions, thereby diversifying their business. The concept of ‘strategic sector’ introduced in the new regime includes oil and gas, coal, and mineral ores, among others. Although the financial commitment limits have not been altered, firms operating in the ‘strategic sectors’ have been given certain relaxations. This policy change is an indication of the sectors where the preference of the government lies with regard to the promotion of overseas investments. These measures will provide greater leverage to the government in ensuring the nation’s energy security as greater acquisitions are expected to take place in these sectors. By including various aspects like the restructuring of the balance sheet, deferred payment of consideration for transfer of shares, and transfers involving write-offs under the automatic route, deal-making activity may gather steam in the years ahead. In addition to the policy measures introduced to enhance the ease of doing business, certain restrictions have been placed as well. For e.g., entities with NPAs or persons declared as wilful defaulters or under investigation will have to obtain a NOC from the concerned investigating agency before investing abroad. Even as this is expected to help tackle the menace of wilful defaulters siphoning off funds to overseas entities, it does not hinder Indian entities from investing overseas as there is a provision of ‘deemed approval’. In a similar vein, investment in foreign start-ups can be made using only the internal accruals of the firm and not borrowed funds. The share of developed countries in global ODI flows dropped to 47 per cent in 2021 from the highs in the 1980s when their share was more than 90 per cent (UNCTAD). International business literature identifies that emerging economy firms invest overseas to seek access to global supply chains, natural resources, state-of-the-art technology, patents, superior managerial skills, other strategic resources like brands, and the knowledge flows associated with such investments. Empirical evidence also points to the positive impact of ODI activities on the activities of the parent firm, such as production, exports and R&D. Emerging market firms are often placed at the lower end of the GVCs, with activities revolving around labor-intensive activities. It is imperative that these firms move up the value chain and engage in greater value creation activities if it has to catch up with the developed country firms. ODI in developed countries often acts as a catalyst in the firm’s efforts to move up the value chain and enables greater integration with global production networks in addition to the benefits accrued to the domestic activities of the parent firm. Overall, the regulations can enhance the ease of doing business considerably. Nevertheless, greater clarity is required on certain aspects like ‘strategic sector’, ‘bona fide business activities’, ‘control’, etc. Success lies in the implementation of the rules in an effective and hassle-free manner. Amal Krishnan is a Research Scholar, NIT Trichy. Padmaja M is an Assistant Professor, NIT Trichy. Badri Narayanan Gopalakrishnan is Lead Adviser, Trade and Commerce and Strategic Economic Dialogue, NITI Aayog, Government of India. Views expressed are personal. Read all the Latest News , Trending News ,  Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook , Twitter and Instagram .