Here’s How Foreign Investment Helps Our Economy
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Foreign investments in India help our economy grow at a very rapid pace, along with employment generation. For the economic development of India, foreign investment has been a major non-debt financial resource. Foreign companies invest in India to take advantage of relatively lower wages and special investment privileges like tax exemptions, etc. For a country where foreign investment is being made, it also means achieving technical know-how and generating employment.
The Indian Government’s favorable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The Government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defense, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.
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Key Benefits of Foreign Investments
Increased Employment & Economic Growth
This is one of the key benefits of a developing economy with foreign investments. There’s a creation of jobs and it helps reduce unemployment among the educated youth and both skilled and unskilled labor in the country. The increase in employment increases the income of individuals, which increases their purchasing power and hence boosts the economy.
Skill Development
Skill development is also a benefit that our people gain from foreign investments because when foreign companies come to India, they not only employ, they train and make human capital skilled as per the technical requirements, which further increases and helps other people enhance their skills and capabilities.
Development of Backward Areas
Foreign Investments enable the transformation of rural and backward areas of the country into industrial centers, which provides a boost to the social economy of that area along with indirect employment in that area.
Finance & Technology
Foreign Companies also introduce the latest world-level finance & banking operation technologies to the country which enhances the efficiency and effectiveness of the industry.
Exchange Rate Stability
The constant investment flows from foreign companies in India help the central bank to maintain the foreign exchange reserves that ensure exchange rate stability.
Competitive Market
The entry of foreign companies into India creates a competitive environment and also breaks the domestic monopolies, which forces other competitors to improve and do product enhancements, which increases innovation in the country. This also helps consumers choose competitively priced and better quality products.
But when it comes to the legalities of operating in India do Foreign Investors get the support they need? Here are a few things that we need to understand about Future Retail Limited Merger’s fight between Reliance & Amazon to be able to answer the question.
Why a Tussle for Future Retail Limited?
Future Retail operates 1,800 retail stores in India’s 400+ cities and towns. Amazon saw Future’s stores as essential to its plan to deliver products in select cities within two hours of a customer ordering them. Any partnership between Future and Amazon would have given Amazon a huge advantage in terms of customer experience.
Similarly, a deal with Future Retail would have cemented Reliance’s position as India’s largest retailer, with a presence in smaller cities and towns almost overnight, as well as providing last-mile access for the Mukesh Ambani-led company’s eCommerce delivery to small towns. Reliance would have risen to the top of the online and offline retail segments as a result of the deal with Future Retail.
What’s from Apex Court?
The Supreme Court took up Future’s new petition, along with Amazon’s plea, on November 11, 2021, and advised all parties to wait until the court’s final determination of the dispute in the second round. And then there have appeals and many more appeals which is diminishing the trust of investors and the common man in the judiciary.
What’s from SIAC?
SIAC is Singapore International Arbitration Centre, SIAC denied Future’s application on October 21, 2021 to lift the interim stay on its Rs 24,713-crore deal with Reliance. SIAC also found that Future Retail was a party to the ongoing arbitration between Amazon and Future Coupons over the sale of Future Coupons’ assets to Reliance Retail. Future Retail argued that because it is not a party to the dispute between its promoter Future Coupons Pvt Ltd and Amazon, it should be excluded from arbitration proceedings. The tribunal found that the EA Award’s orders were correctly granted and that Future had failed to show that circumstances had materially changed to justify any changes to the EA Award.
SIAC initiated the arbitration case for a detailed hearing and final judgment after Future’s application was dismissed.
Impacts of These Issues for Start-Ups In India
Investor Confidence
India must ensure that the legal framework for contracts and investment agreements is stable to attract foreign investment. If the current dispute is decided in Reliance-FRL, it will not only set a bad precedent, but it will also severely erode investor confidence, as it did after the Cairn arbitration. This will have a particularly negative impact on the growing startup ecosystem. When large corporations can’t hold their own in court, startup investments have no chance in India’s legal system.
Sanctity of Contracts
Contracts are necessary for the operation of a business. To grow and stay in business, all businesses must rely on agreements. In this context, if contracts with Amazon and FRL are breached without repercussions due to pressures from large domestic corporations, India’s business will suffer significantly.
Enforcement of Foreign Arbitral Awards
Arbitration is the primary mode of dispute resolution between domestic corporations and foreign entities in India, as it is a member of the New York Convention. International arbitration must be respected in terms of enforcement in Indian jurisdiction in order for foreign entities to do business.
Minority Shareholder Rights
Minority shareholders will be severely harmed if the proposed deal between FRL and Reliance goes through, as they will not gain much from the deal. The promoters and related parties will be the primary beneficiaries. Such a deal will not only reflect poorly on corporate India but will also set a bad precedent for companies willing to sacrifice minority shareholder interests in exchange for a larger slice of the pie.
Corporate Governance
Companies’ directors have a fiduciary responsibility to manage the company’s affairs, which is enshrined in the Companies Act. Directors must ensure that a company is run fairly and transparently as part of their legal responsibilities. However, in this case, the board has approved disbursements from loans acquired by public sector banks in the form of related party transactions. These transactions have no business purpose and are a breach of the public trust because they are made with taxpayer funds. A deal in this situation would essentially be a bailout for inefficient and possibly fraudulent directors, while thousands of employees and shareholders suffer.
To ensure that India can take advantage of the benefits foreign investments provide in the growth of the economy it is pertinent that we send out the right signals through policies, settlement of disputes and judiciary.
References:
https://www.ibef.org/economy/foreign-direct-investment.aspx
https://www.investindia.gov.in/team-india-blogs/advantages-foreign-direct-investment
Hi, I’m Managing Director at Gurpreet Saluja Financial Services where I help my investors to invest in mutual funds and achieve their financial goals. I’m also a Value Investor and here I write about Personal Finance & Investing.
