India considers new measures to revitalise foreign investment amid five-year low

In response to a significant decline in foreign investment, the Indian government is exploring expanded measures to enhance flexibility for strategic foreign investors seeking stakes in local companies. This comes as offshore investment has fallen to its lowest level in five years, with gross foreign direct investment (FDI) recorded at $71 billion for the 2023-24 fiscal year, a slight decrease from $71.4 billion in the previous year and down from $84.8 billion in 2021-22.

Policymakers are contemplating the introduction of foreign investments through a combination of equity and debt—commonly referred to as "mezzanine instruments"—which are currently not permitted under India's foreign exchange laws. Sources familiar with the discussions indicate that this move would liberalise the nation's capital markets and encourage foreign capital flows, particularly as the Indian currency remains non-fully convertible.

The proposed changes aim to attract more stable forms of capital, as FDI has remained lacklustre despite India's rapid economic growth. Finance Minister Nirmala Sitharaman recently highlighted the need for $100 billion in FDI annually to meet the country's investment demands, an increase from the current $70-$80 billion.
If approved, the new measures could potentially lead to an influx of $20-30 billion in overseas investments, according to internal estimates. The finance ministry is reportedly in favour of the changes, which are still in the discussion stage.
Currently, foreign investors can raise equity or securities convertible to equity, but face caps in certain sectors like banking and defence. 

Allowing mezzanine investments would provide greater flexibility and facilitate easier exits for foreign investors, as large equity stakes can be harder to sell compared to debt instruments. However, experts warn that these investments could also introduce currency volatility, potentially putting pressure on the Indian rupee.

India attracted 2.1 per cent of global FDI in 2023, a notable drop from a peak of 6.5 per cent in 2020, according to data from India Ratings and Research.