Finance ministry now notifying authority for any change in FDI policy

Four years after the Foreign Exchange Management Act, 1999 (Fema) was amended to switch control on equity inflows from the central bank to the North Block, the finance ministry has finally notified Foreign Exchange Management (Non-debt Instruments...

Agencies
RBI has been notifying the FDI policy changes under Fema, operationalising it. But now this would be done by the finance ministry.
The government has notified a new rules framework for investments through nondebt instruments making it clear that finance ministry will be the notifying authority for any change to foreign direct investment policy instead of the Reserve Bank of India.

Four years after the Foreign Exchange Management Act, 1999 (Fema) was amended to switch control on equity inflows from the central bank to the North Block, the finance ministry has finally notified Foreign Exchange Management (Non-debt Instruments) Rules, 2019 that deals with all forms of non-debt investments, including equity, mutual funds that are dominantly equity oriented, depository receipts issued based on equity instruments, and immovable property.

“RBI and the finance ministry had reached an agreement after which the rules have been issued,” said a person privy to the development.


The latest set of rules under Fema, notified on October 17, lists in detail permitted sectors for foreign investment, countries allowed, and also various entities and instruments covered.

The finance ministry will consult RBI on any changes to the rules in future, people familiar with the development said.

Experts said it needs to be ensured that the consultation process between RBI and the government does not impede the process timelines.
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“Government will have the responsibility of drafting rules for non-debt investments and RBI shall be responsible for granting approvals in consultation with government,” said Akash Gupt, partner at PwC. “Further, coherence in approach and policy interpretation would be required between RBI and government, since one will be responsible for policy making and the other for monitoring and adjudication.”

THE TRIGGER
The amendment was carried out in the 2015-16 budget, putting the government in charge of all capital flows after differences widened between the central bank and the finance ministry over pricing regime governing exits in quasi-equity instruments in the backdrop of the Tata-DoCoMo case.

In this particular case, DoCoMo had sought to exit its joint venture with Tata Group at predetermined price stated in the contract, which was not permitted by the policy.

Besides, there were instances of delays in notification of changes in the FDI policy by RBI after issuance of press notes.
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“Capital Account Controls is a policy, rather than a regulatory, matter,” the then finance minister Arun Jaitley had said in his budget speech in 2015. “I, therefore, propose to amend, through the Finance Bill, Section 6 of Fema to clearly provide that control on capital flows as equity will be exercised by the government in consultation with the RBI.”

Foreign investment policy is managed by three entities — the finance ministry, RBI and the Department for Promotion of Industry and Internal Trade.
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RBI has been notifying the FDI policy changes under Fema, operationalising it. But now this would be done by the finance ministry.
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