Foreign Direct Investment Regulations

[By Karan Anand] The author is a student of OP Jindal University.   Introduction The recent announcement by ArcelorMittal Nippon Steel (AMNS) India regarding itsambitious expansion plans at the Hazira steel plant presents a compelling juncture to explore the strategic dynamics within India’s steel industry.[1] In a landscape characterized by heightened industrial growth and governmental emphasis on self-reliance, the trajectory of investments in steel production assumes paramount significance. With AMNS India’s noteworthy investment of approximately Rs 60,000 crore towards capacity enhancement and technological modernization, the industry witnesses a confluence of global expertise and indigenous potential. This piece aims to delineate the viability and implications of cross-border mergers in contrast to greenfield investments within India’s steel industry. By leveraging the recent developments at Hazira as a transition point, we delve into the strategic imperatives driving investment decisions and their ramifications on industrial sustainability and national economic objectives. Greenfield and brownfield investment In the case of Greenfield investment, various ancillary regulations become pertinent and applicable because an entity is being created from scratch. Firstly, there exists a multitude of licensesand registrations that are required. These include MSME/SSI registration which is a mandatory registration for a business to start functioning in India, as per the Supreme Court’s judgmentin the case of Silpi Industries v Kerala State Road Transport Corporation.[2]This registration divides industries into Micro, Small and Medium Enterprises based on the amount invested. In addition, GST registration is compulsory for all businesses involved in the sale and purchase of goods in India. The tax slab for the steel industry stands at 18%.[3] Entities entering the Steel industry also need to meet certain environmental regulations, which are set in place by the Ministry of Environmental, Forest and Climate Change (MoEF&CC), EAC (Expert Appraisal Committee) and State PCB (Pollution Control Board).[4] The firm entering the Indian market is also required to identify land parcels and fulfill the requirements that are laid down by the Ministry of Steel. In the event that such land is forested, clearance is also required from the State Forest Department. The governing regulationsfor the same are the Forest (Conservation) Act, 1980[5] and Forest Conservation Rules, 2003.[6] The process of securing necessary clearances thus becomes extremely burdensome for firms, extending over 3-5 years, considering the interests of numerous stakeholders involved in the same. Firms entering the Indian market are also required to comply with the provisions that regulate labour and employment conditions. The Factories Act, 1948,[7] was introduced to regulate the working conditions for labour in factories and workspaces.Any entity setting up a plant must comply with the safety and welfare provisions mentioned in the Act. Such entities must also create a provident fund for employees, for their welfare, medical, maternity and disability benefits and maintain balances in accordance with the State Insurance Act, 1948[8] the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.[9]The case of Hindustan Lever Ltd v Regional Provident Fund Commissioner,[10] laid down that it is the responsibility of the Employer to create a provident fund for employees, and that such compliance is mandatory. In the case of Brownfield investments, while there may not be compliance with regulations for starting a business, there are still authorities that monitor and regulate the effects and mode of such investment. The Indian regime for Merger control, is governed by the Competition Act 2002, the CCI and notifications from the Ministry of Corporate Affairs.[11] The Competition Act mandates the reporting of all combinations that would breach the prescribed asset and turnover threshold, set by the Commission. These thresholds vary based on the value of the assets and turnover of the parties to the combination and are put for review bi-annually as per Section 20(3) of the Act.[12] The motive of the Competition Act is to ensure that such brownfield investments are not anti-competitive. Moreover, the Competition Act also ensures that there is no abuse of dominant position in the market. If the combination pertains to a company that is publicly listed, i.e., listed on a stock exchange, then such a combination may also be subject to Securities Exchange Board of India (SEBI) regulations. One such regulation is the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, more commonly referred to as the Takeover Code.[13]As such the regulations pertaining to acquisitions under the code, being Regulation 3 and 4 must be complied with, and announcements must be made upon the meeting of the trigger requirements in the code as per Regulation 3(2). Comparison from a regulatory standpoint While the mode of investment that a company opts to use, is extremely subjective, it is also possible to deduce an ideal mode of investment based solely on the regulatory framework. This is especially true for the Steel industry; wherein regulatory compliances are not only capital intensive but time intensive as well.[14]One of the major challenges in this regard is the development and identification of land, fit for the construction and development of a plant. The same can be seen in the case of POSCO, a South Korean firm, which was the world’s fourth largest producer of steelthat sought to enter the Indian Steel market in 2005, by setting up a plant in Odisha. The investment, had it gone through would have been the largest Foreign Direct Investment into India at that time. After 12 years of trying, the deal eventually fell through, due to the unavailability of land that met the various regulations set in place.[15]Thus, greenfield investments aredaunting and often take longer to generate returns thancompanies may expect, due to its lengthy regulatory requirements. Conversely, Brownfield investments require fewer regulatory requirements, as the foreign entity buys into or redevelops an existing setup, which has already fulfilled the procedural regulations.4This can be seen in the case of the acquisition of Essar Steel which took place in 2017. ArcelorMittal Nippon Steel India (AM/NS India) has purchased infrastructural assets that provide “strategic advantages” to the joint venture in the steel business. The duo has entered into agreement with Essar Steel to purchase 3 ports, 2 power plants