Covid Has Disrupted FDI Adversely Impacted Economic Globalisation

The Covid-19 pandemic has exposed the intertwined nature of the global supply chain and hindered the over-all investment scenario. Unsurprisingly, the foreign direct investment (FDI) has been disrupted and the economic globalisation has been adversely impacted.

According to Global Investment Trends Monitor Report released by UNCTAD, the global FDI flows fell 49 per cent in the first half of 2020 compared to 2019. However, in comparison, the developed countries faced the biggest decline (i.e. decline of 75 per cent compared to 2019). The developing countries weathered the storm with a 16 per cent decline in FDI – much less than expected. Further, Asia exhibited the lowest decline in investment among developing regions.

In India, as per data released by DPIIT, the FDI inflow for the first quarter (Q1) of FY 2020-21 tumbled by 60% compared to Q1 of FY 2019-20 (i.e. USD 6,562 million in FY2020-21 compared to USD 16,330 million in FY2020-19).For Q1, at a state level, Karnataka attracted the highest FDI inflow followed by Maharashtra and Delhi.

However, as India steps into the third quarter of FY 2020-21, the situation appears to be steadily improving. To elaborate, as per the information provided by the ministry of commerce and industry in October 2020, for the first five months of FY 2020-21, the total FDI inflow has increased to around USD 35.73 billion, which stands 13 per cent higher than last fiscal figure. The investments from MNCs like Google, Amazon, various private equity firms and venture capital firms have led to a boost in FDI. Further, such an increase in FDI can be attributed to: (i) investment facilitation; (iii) ease of doing business; and (iii) steady reforms in the FDI Policy.

In this regard, it is essential to note that the government released the Consolidated FDI Policy of 2020 on October 28, 2020. Some essential changes in the FDI Policy 2020 (FDI Policy) are as follows:

The FDI Policy has incorporated provisions of Press Note 3 of April, 2020 under its Clause 3.1.1(a) – restricting an entity of a country, which shares land border with India to invest in India unless such investment is done under the government route. This is to prevent the opportunistic takeovers of entities that have been generally impacted as a result of Covid-19 pandemic. As there is no minimum threshold provided for such investments, it is evident that even a fraction of such investment will trigger government scrutiny.

Additionally, the FDI policy has introduced a 26 per cent cap on FDI in the digital news media broadcasting segment (i.e. uploading/ streaming of news and current affairs through digital media), which also requires government approval. As FDI cap already existed for print and broadcast news platforms, this change has created a level playing field for all mediums. However, the move has created significant buzz of ambiguity and discontentment with the change being compared to “license raj” form of restriction. Further, the 26 per cent cap is applicable on: (i) digital media entity; (ii) news agency; (iii) news aggregator. This has exposed a dire need of clarity on the scope of “news aggregator”. To elaborate, will social media platforms which aggregate news, amongst various other functions, qualify as a “news aggregator”? Further, scope of “news” is also unclear – will this cover politics or any information on specific sector? Digital media entities have been granted one year (i.e. October 15, 2021) to comply with the 26 per cent cap. On November 24, 2020, Huffpost India operations were shut down, becoming the first casualty of the new regulation.

The enforceability of such restrictions in today’s globally digital era is unclear and clarifications will be required to ensure that such restriction do not end up leveraging foreign news aggregators and hamper business growth in India.

Further, the Policy has also incorporated certain compliances for e-commerce entities, the implications of which are as follows:

• e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform. This will give brands additional autonomy to sell their products elsewhere and it is likely that advertisements on “exclusive” releases by a specific e-commerce entity may go down;
• e-commerce marketplace entity with FDI shall have to obtain and maintain a report of statutory auditor by September 30 (every year) for the preceding financial year confirming its compliance with the e-commerce guidelines. The growth of information technology has had a direct impact on the financial information of companies. As such, the presence of a systematic requirement of examination of books of accounts, will aid in recognizing the accuracy, validity and completeness of the records while ensuring compliance with guidelines;
• Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies. This will prevent e-commerce entities from making bulk purchases from vendors;
• An entity having equity participation in the e-commerce marketplace entity (or its group companies), or having control on its inventory will not be permitted to sell its products on the platform run by such marketplace entity. This may be problematic for the likes of Amazon as it has been boosting its market share by steadily raising its stakes. With minority stakes in the parent company of Cloud tail and 5 per cent stake in Shopper’s Stop, such revamped compliance will potentially require re-negotiation of contracts to ensure continued adherence to guidelines.

Post Covid-19

 Growth in FDI is a significant driving force for globalisation. With the presence of global supply chains, there is a need to facilitate a strong international cooperation in investment and trade policy. Having said that, to ensure the sustained growth in a post-pandemic world, dependence on FDI will not be sufficient. To ensure continuity in business, India needs to continually strengthen its self-reliance practices – Atmanirbhar Bharat – by supporting local firms and small businesses.

(The authors are partner and associate partner, Shardul Amarchand Mangaldas & Co. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Further, the views in this article are the personal views of the authors)