The radical shift by India in liberalising its foreign investment policy in 1991 is often quoted as a landmark event and has aided the country in strengthening its position as an economic powerhouse.

After 1991, the foreign investment policy has undergone several changes with the changing times and sometimes with the changing governments as well. In 1999, the considerably harsh Foreign Exchange Regulation Act, 1973 paved way for a more liberal and forward looking Foreign Exchange Management Act, 1999 (?FEMA?).

Despite several relaxations, for a layman, the regulatory framework on foreign investment is a fairly complex conundrum consisting of FEMA, the regulations, the Press Notes, press releases, clarifications, Reserve Bank of India (?RBI?) circulars, etc. FEMA is largely a delegated legislation, with RBI having substantial powers. The foreign investment policy being as dynamic and complex as it is, the need for a consolidated policy document was felt necessary by all interested parties, especially the foreign investor community.

In a welcome move, the government recently released a draft ?Press Note on FDI Regulatory Framework? (?FDI Press Note?). The preface to the FDI Press Note says ?..It is the intent and objective of the government to have a regulatory framework, which is transparent, predictable, understandable, simple and clear to reduce the regulatory burden and promote foreign direct investment. The new system of continuous consolidation and updation is primarily evinced as a measure of investor and investment friendliness.? These words, coming from the government, are indeed soothing and comforting, especially to the foreign investors. The draft FDI Press Note is currently open to public comments until this month-end and is expected to be made effective from April 1. Once effective, all other existing Press Notes on FDI issued by the commerce ministry would stand rescinded. The Press Note states that it will be updated once every six months. Foreign investment policy and related regulatory aspects, being a critical and vital aspect from a macroeconomic perspective, arguably, this FDI Press Note or a similar document was long due. While, there are quite a few FDI policy-related matters that are still in the grey zone and some others on which there has been a flip-flop in the thinking of the government, this consolidated Press Note, if regularly updated, would aid in making things more predictable and clear. Probably, it would do well if, as part of the regular updates to the FDI Press Note, the government tries and sorts some of the ambiguous matters as well. In fact, the FDI Press Note mentions that it is the government?s intention and objective to have a regulatory framework, which is more understandable and clear.

In a related development, the Reserve Bank of India (RBI) has recently streamlined the process of setting up branch offices and liaison offices by foreign companies in India. The RBI has delegated most of the review and audit role to the banks in India, while retaining the overall decision making powers.

While there is no drastic regulatory , policy change or change in the sphere of activities in which these branch offices can engage themselves in, the RBI has listed out the broad criteria for establishment of these offices in India to increase transparency. One of the two notable changes is that the RBI has prescribed a track record and net worth criteria separately for branch and liaison offices. This may be seen as discouraging smaller players from testing the waters in India and may also disentitle some genuine players in setting up a presence in India, who may now have to look at a more permanent presence in the form of setting up joint ventures or wholly owned companies in India.

The writer is partner, BMR Advisors. Sharath Rao, Manager, contributed to the article