Challenges of Beneficial Ownership in India's Growth
Foreign investments are crucial for India to achieve its goal of becoming a $5 trillion economy by 2025-26. However, certain regulatory hurdles must be addressed to attract these investments.
The Amendment Challenge
In 2020, an amendment to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEMA NDI), introduced a requirement for prior government approval for investments from neighboring countries or where the “beneficial owner” is from these countries. This was aimed at preventing opportunistic takeovers during the pandemic but has created confusion and delays due to the unclear definition of “beneficial owner.”
Approval Delays
The approval process is slow and has a high rejection rate. Approximately ₹50,000 crore worth of proposals are pending, withdrawn, or rejected. This uncertainty deters investors.
Severe Penalties
Non-compliance with the PN3 requirement can lead to fines up to three times the investment, posing significant risks to start-ups and small businesses.
Potential Solutions
Clear Definition
The term “beneficial owner” needs a clear definition, with specified thresholds (10-25%) and control-conferring rights to reduce ambiguity.
Consultation Mechanism
Introducing a consultation mechanism with regulatory authorities can help clarify control issues in complex cases.
Conclusion
Addressing the beneficial ownership hurdle through clear regulations and streamlined processes will make India more attractive to foreign investors and support its economic growth.
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