Introduction to Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) in India involves investments made by non-resident individuals or entities into Indian companies, which can lead to the transfer of capital, technology, management expertise, and access to new markets. This can significantly contribute to job creation, economic growth, and development. The recent investment by Emaar in Jammu and Kashmir is a prime example, with a total investment of RS 500 crore, including RS 250 crore for a mega-mall and additional investments for IT towers, expected to create over 10,000 jobs. This project marks the first significant FDI investment in the region since the abrogation of Article 370 in 2019, highlighting the potential for FDI to drive economic growth and development in the region.
In Jammu & Kashmir, the real estate/tourism industry is a significant employment generator. It’s set to attract more non-resident Indian (NRI) investments in the short and long term. While FDI is not new in India, its impact on regions like J&K may not be well understood by the local population, necessitating a deeper understanding of FDI’s implications. Investors are seeing opportunities in India not just in traditional assets such as commercial offices, residential and retail segments, but also in alternative asset classes such as workspaces, IT towers, resorts, hotels, co-living, etc.
Regulatory Framework in India:
Consolidated FDI Policy
The Consolidated FDI Policy, 2020, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), governs FDI in India. It classifies investments into two routes:
FDI Routes in India
- Automatic Route: The automatic route allows foreign investors in India to invest in sectors without requiring prior approval from Indian authorities. Under this route, investors are only required to notify the Reserve Bank of India (RBI) within a specified time frame.This route is designed to promote ease of doing business and attract foreign capital, making it particularly attractive for sectors open to higher FDI limits or do not have specific security concerns.
- Government Route: The government route necessitates prior approval from the Indian Government of India, Ministry of Finance and Foreign Investment Promotion Board (FIPB). This route is typically reserved for sectors that involve national security, strategic interests, or have specific regulatory concerns.This route helps the government maintain control over sensitive areas of the economy while still allowing foreign investments in India on a case-by-case basis. Government route is the route where prior approval is required.
Restrictions
Certain sectors such as defence, atomic energy, and print media have restrictions or are prohibited from FDI to safeguard national interests and security. Foreign Direct Investment (FDI) in India is subject to stringent regulatory controls, leading to prohibitions and limitations across various sectors and activities. These constraints encompass diverse FDI prohibited sectors in India, including gambling, lotteries, certain government sectors like atomic energy and railways, and most of the retail trading industry, with exceptions for single-brand product retailing. Additionally, FDI limit in India restrictions apply to chit-fund businesses, Nidhi companies, real estate operations, trading in Transferable Development Rights (TDRs), and tobacco manufacturing. While agriculture typically prohibits FDI, some specific areas within agriculture, such as floriculture and animal husbandry, permit foreign investment.
Regulatory Bodies
FDI in India is regulated by various bodies, including:
- DPIIT (policy formulation).
- Reserve Bank of India (RBI) (monetary aspects).
- Securities and Exchange Board of India (SEBI) (capital market regulation).
Primary Legislations
- The Foreign Exchange Management Act, 1999 (FEMA).
- The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
- The Consolidated Foreign Direct Investment Policy, 2020.
These rules and regulations provide the framework for foreign investment in India, specifying the terms and conditions for international investors. They outline the industries open to foreign investment, investment caps, and sector-specific requirements. Noncompliance with these standards may result in penalties and other consequences, such as the repatriation of invested funds and restrictions on future investments in India.
Case Study: Jammu & Kashmir
According to the DPIIT, cumulative FDI inflow in Jammu & Kashmir was valued at USD 7 million between October 2019 and March 2023. India’s economy is projected to become the world’s third largest by 2031, with the real estate sector playing a critical role. Jammu & Kashmir has emerged as a promising investment destination post the abrogation of Article 370. Recent initiatives include the approval of the Policy for Promotion of Foreign Investment in the Industrial Sector in Jammu and Kashmir-2022 and the commencement of large-scale projects aimed at job creation and economic growth.
The new policy is based on the guiding framework on FDI issued by the Government of India through the RBI and DPIIT and will be valid for the next 10 years. It aims to facilitate large foreign investments greater than Rs 100 crore with a minimum of 51 per cent foreign stakes. The policy also provides for identifying parcels of land in various industrial estates to be given exclusively to industries with foreign investments including vertical rise premises in the form of multi-purpose buildings and complexes, with plug and play facilities.The demand for housing, commercial space, townships, and infrastructure in Jammu & Kashmir can be met if foreign investment into this sector is streamlined. Foreign participation will bring quality and professionalism to real estate development in the region.
Single-Window Portal
To facilitate foreign investors, Jammu & Kashmir has implemented a Single-Window Portal through the Investment, Promotion, and Facilitation Cell (IPFC) available at investjk.in. This system is designed to streamline the investment process for non-resident investors, ensuring a smoother inflow of foreign capital into the region. All interested foreign investors must register via the IPFC Portal on www.investjk.in. The portal consolidates all necessary formalities that a non-resident investor must complete, thereby simplifying the investment process. Upon submission, the application for investment is scrutinized by a District Nodal Officer, who then forwards it to the Single Window Nodal Officer within a stipulated timeframe.
If any clarification or additional information is needed by the competent authority, the applicant will be notified. Applicants have a maximum of thirty days to complete any required application submissions. If the necessary documentation is not submitted within this period, the application will be dropped from the portal. In case of rejection, the reasons will be documented, and the decision will be updated in the system within the prescribed timeline. If the Departmental Nodal Officer or the Competent Authority does not respond to the forwarded application within the stipulated timeline, the clearances applied for by the investor will be deemed granted, and no further objections will be raised.
RERA and FDI in Kashmir’s Real Estate
The Department for Promotion of Industry and Internal Trade (DPIIT) reports that between October 2019 and March 2023, the total foreign direct investment (FDI) inflow into J&K was valued at US$07 million. By 2031, India’s economy is projected to become the third largest in the world, and real estate will be vital to this development. After Article 370 was repealed in 2019, Jammu & Kashmir became a very attractive place to invest.
The impact of the Real Estate Regulatory Authority (RERA), among other factors, has led to a notable growth in foreign investments in India’s real estate market over the past five years. Increased accountability and openness in the industry as a result ofthis Act gave investors more faith. But the Act, like it does in other jurisdictions around the nation,was extended to the former state of J&K five years ago by the Real Estate Regulation and Development Act 2016, it has not yet been possible to establish the same in the recently formed Union Territory. The Act was extended by the centre to J&K on October 31, 2019, but the J&K RERA is not operational, and the important vacanciesas per the Act have not yet been filled.
According to FEMA regulations, any FDI in the real estate sector may result in several restrictions. According to the FDI policy of 2014, the real estate sector was initially closed to foreign investment, and in general, FDI in the “real estate business” is prohibited in India. Under the purview of FDI, the policy states that the “real estate business or the construction of farmhouses is a prohibited sector.” However, these things have changed.
In March 2022, the Department for Promotion of Industry and Internal Trade (DPIIT) released a press note that made it clear that foreign direct investment (FDI) is not allowed in any entity that is involved in or plans to engage in the real estate business, farmhouse construction, or trading in transferable development rights. It further stated that receiving rent or income from the leasing of a property does not qualify as a real estate business because it does not involve a transfer. “Real estate business means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential /commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships…”.
Foreign Direct Investment in the purchase and sale of real estate, real estate trading, and using real estate as a business endeavour for profit without creating or developing new value are all prohibited. The development of townships, the building of residential or commercial buildings, the building of roads and bridges, are all exempt from the law.
Jammu & Kashmir’s natural beauty, strategic location, and untapped market potentialmake it an ideal place for various businesses to set up operations.Some of the key sectors that have the potential to attract investments in Jammu & Kashmir include:
- Tourism and Hospitality. 2. Infrastructure Development (roads, airports, and logistics). 3. Sericulture. 4. Floriculture, Horticulture, Animal husbandry &Food Processing. 5. IT and IT-Enabled Services. 6. Handicrafts and Handlooms. 7. Pharmaceuticals. 8. Mineral based industry, Gems & Jewellery.
Conclusion
In conclusion, Foreign Direct Investment (FDI) is a vital driver of economic growth in India, and the government’s efforts to attract foreign investors to untapped regions like Jammu & Kashmir are crucial for the region’s development. While FDI brings capital, technology, and market access, understanding FDI regulations and leveraging opportunities is essential for sustainable economic development and global integration. To boost investor confidence in J&K, improving the ease of doing business, upgrading infrastructure, enhancing basic amenities, and reducing bureaucratic hurdles are essential. The implementation of RERA in J&K will also ensure transparency and accountability in the real estate sector, protecting the interests of homebuyers and promoting fair play.
By unlocking its potential, J&K can become an attractive destination for foreign investors, driving economic growth and development in the region, and contributing to India’s economic growth story. Overall, a comprehensive approach that addresses regulatory, infrastructure, and business environment issues can help J&K harness the benefits of FDI and achieve sustainable economic growth.
(Adv. Romaan Muneeb is Corporate Lawyer), Partner at “Malik and Romaan Law Offices, J&K,” along with intern Osheeba Bashir. The authors can be reached out at [email protected])
