Bid to attract foreign investors: FEMA rules to be eased further, says DEA Secretary

New Delhi: The finance ministry and the Reserve Bank of India (RBI) are in talks to further ease foreign exchange rules, especially with regard to non-debt instruments, economic affairs secretary Ajay Seth told ET. He said the exercise focused on simplifying Foreign Exchange Management Act (FEMA) regulations and updating them to modern standards will be completed in three-four months.Given that sector-specific limits for foreign direct investment (FDI) have already been substantially relaxed, the government is turning its attention to easing restrictive rules to woo foreign investors.

These changes will further liberalise the rules on equity investments, helping India attract more risk capital.

“The (legislation) was designed with assumptions and economic situations 25 years ago and certainly requires a closer look,” Seth said. Some measures had been initiated after the July 2024 budget and more will follow once the review process is over, he said.

Having scaled a peak of almost $85 billion in FY22, total FDI fell over two years to $71 billion in FY24. To be sure, equity FDI has surged 45% on year in the first half of FY25 to $29.8 billion from $20.5 billion.

Regulations for foreign portfolio investors (FPIs) were relaxed in November. Their investments would be categorised as FDI once they exceeded the 10% FPI ownership limit in an Indian company. This was done after the July 2024 budget said a simpler foreign investment regime would be put in place.The government had in August 2024 eased crossborder share swaps, allowing the issue or transfer of equity instruments of a local company in exchange for those of a foreign firm. Also, investments by an overseas citizen of India on a non-repatriation basis would not be counted as indirect foreign investment.

FACTOR MARKET REFORM

Seth said the government will prepare medium-tolong-term plans for land reforms in urban areas, building on the July 2024 budget announcements. Financial sector reforms are also being discussed.

“The Financial Stability Development Council (FSDC), which is looking at financial sector reforms, will also look at the capital-side reforms,” Seth said. “These are all work in progress and we have some distance to go.”

The FSDC, a platform on which all the financial sector regulators are represented, is headed by the finance minister.

BROADER REGULATORY EASING

Seth said the expert committee proposed in the February 1 budget to review non-financial sector regulations will examine licences, compliance and inspections among other matters with the broad principle of “trust first and scrutinise later,” as FM Nirmala Sitharaman had said in her speech.

He said states are being encouraged to participate in this exercise. Rules in the financial sector are largely driven by the Union government and the relevant watchdogs. However, several non-financial sector regulations are primarily handled by the states, he said.