WHAT IS FOREIGN INVESTMENT? GUIDELINES PROVIDED UNDER FEMA? WHAT ARE THE PENAL PROVISIONS?

WHAT IS FOREIGN INVESTMENT? GUIDELINES PROVIDED UNDER FEMA? WHAT ARE THE PENAL PROVISIONS?

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INTRODUCTION-

Foreign Investment involves an investment from other countries to enhance the economic culture of the country. Economic liberalization started in India in the wake of the 1991 economic crisis and since then FDI has steadily increased in India.[1] It allows the individuals or companies from foreign countries to invest their money in the businesses of private Indian companies which ultimately results in the benefit of both the investors along with the companies bearing that investment. Under it, the various multinational companies had opened their branches or production houses in other countries along with other monetary investments also, which results in the expansion and diversification of their business.

TYPES OF FOREIGN INVESTMENT-

There are different kinds of foreign investments-

  1. Foreign Direct Investment- The direct investment is in physical form which remains long-lasting and is considered as more concrete as it authorized the investors to have their controlling in that particular investment and get it to operate according to them-
  • Opening factories, industries, buildings, and other business operations in other countries as their investments.
  • Acquiring already existed business or interest in the India companies

It is further divided into two forms-

  1. Inward investment- Under it, foreign companies or individuals invest in India
  2. Outward investment- Under it, Indian companies or individuals make their investment abroad.[2]
  3. Foreign Indirect Investment- This is a kind of non-long-lasting investment as under it investor doesn’t owe the factories or buildings in another country but just invest in the shares of the foreign stock exchange which can be sell to other on the circumstantial requirements that’s why it is not considered as a long-lasting mode of investment.

ROUTE OF INVESTMENT IN INDIA-

In India foreign investors can invest through two routes-

  • Automatic route- If an investor is going to invest through an automatic route then he needs no prior permission of the government and can invest according to his and recipients’ requirement.
  • Government route- under this government needs the prior-permission of government to invest in India.[3]

FDI INFLOWS IN INDIA-

FDI inflows in India increased to $55.56 bn. in 2015-16, $60.22 billion in 2016-17, $60.97 bn. in 2017-18 and the country registered its highest ever FDI inflow of $62.00 bn. (provisional figure) during the last Financial Year 2018-19,[4] this data indicates that the practice of foreign investment is increasing rapidly in India which indicates that it is benefitting our country that’s why it is gaining that much popularity here, so it needs to be promote to give more well-being to our business companies.

AUTHORITY RESPONSIBLE FOR ITS REGULATION IN INDIA-

Foreign Exchange Management Act, (FEMA) 2000 is the authority responsible for making a track of the foreign investment in India which is further governed by the Reserve Bank of India.

FEMA GUIDELINES-

RBI introduced FEMA in 1999 to make the checks and balances for foreign investment in India, which officially came into existence on 1 July 2000 by replacing the previous FERA act, (Foreign Exchange and Regulation Act) and sets the following guidelines-

  • FEMA doesn’t apply to the Indian citizens who are not residing in India.
  • Under FEMA central government is authorized to set the restrictions.
  • It authorized the central government to supervise three things- payment made to outside India or received from them, foreign exchange, and foreign security deals.
  • It requires the prior permission of RBI before taking the foreign exchange.[5]
  • It puts the foreign exchange transactions into two categories-

Capital account transaction-

It means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of Section 6;

Current account transaction-

It means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes, —

(i) Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

(ii) Payments due as interest on loans and as net income from investments,

(iii) Remittances for living expenses of parents, spouse, and children residing abroad, and

(iv) Expenses in connection with foreign travel, education and medical care of parents, spouse and children;[6]

PUNISHMENT CRITERIA IN FEMA-

Section 13 of chapter 4 of the FEMA act provides for the provision of penalties-

If any person violates any provision, rule, regulation, notification, direction or order issued under this Act, or contravenes any condition issued by the Reserve Bank, then that person shall be liable to a penalty up to thrice the sum where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, a further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

Any adjudicator adjudging any contravention if finds fit then can seize any currency, security, property or any other money along with the penalty to the central government and further can direct to bring back if any foreign exchange to India.

For this sub-section, “property” in respect of which contravention has taken place, shall include—

(a) Deposits in a bank, where the said property is converted into such deposits;

(b) Indian currency, where the said property is converted into that currency; and

(c) Any other property which has resulted out of the conversion of that property.[7]

CONCLUSION-

Foreign investment is introduced so that businesses of different countries can conjointly achieve the path of success and it makes it sometimes survivable for that business also who are not able to raise fund for them or may arrive at the stage of being bankrupt, by providing them the way of international investment which works as a fuel for them sometimes. Also, there are proper guidelines provided to it so that the chances of future misappropriation which becomes high due to the involvement of different monetary or other investments by different countries can be reduced to the extent.

Sources:

[1] R. Nagaraji. “What Has Happened since 1991? Assessment of India’s Economic Reforms” (PDF). Igidr.ac.in. Retrieved 12 October 2015

[2] http://economyria.com/types-foreign-investment-fdi-fii-fpi-qfi/

[3] https://www.toppr.com/guides/commercial-knowledge/government-policies-for-business-growth/fdi-in-india/

[4] https://www.investindia.gov.in/foreign-direct-investment#:~:text=FDI%20inflows%20in%20India%20increased,last%20Financial%20Year%202018%2D19.

[5] https://www.dripcapital.com/en-in/resources/blog/all-you-need-to-know-about-rbi-fema-guidelines

[6] https://www.mondaq.com/india/financial-services/924432/capital-and-current-account-transactions-under-fema-transactional-

[7] http://femaindia.in/femaact/section-13-penalties##showsection

This blog is written by Anjali Tripathi, Nirma University

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