During the last decade, there have been a number of major policy and regulatory changes. These include the introduction of the Insolvency and Bankruptcy Code, the restructuring of bilateral investment treaties (BITs), and changes in the tax treatment of capital incomes. The present piece attempts to conduct a thought experiment on the potential adverse transitional impacts of some of these changes.
Let us begin with the Insolvency and Bankruptcy Code. It was introduced in 2016 with the express intent of bringing in financial discipline while focusing on corporate recovery. Ten years on, the Code has nudged certain behavioural changes in the corporate sector. There was an initial period of significant deleveraging observed across the board. The changed regulatory environment created a shift in corporate investment behaviour. Investments were now sought to be financed out of retained earnings, qualified institutional placements and equity markets. In other words, companies built significant treasuries of retained earnings to support debt servicing in uncertain times as well as to undertake investment.
A thought experiment: The consequences of this change in investment behaviour. Equity tends to be more expensive than debt as a source of financing. The risk associated with equity commands a higher return. As a result of this structural shift in regulatory environment, the expected rate of return on new ventures would need to be higher for the project to be undertaken. Could this work as a dampener for investment? This impact could be further reinforced by the specificities of the period — supply and demand shocks from the Covid-19 pandemic and the robust returns emanating from the capital markets. The former could reduce the incentive to invest, while the latter could increase the threshold return required for an investment to be viable and attractive.
The second significant regulatory change relates to the restructuring of BITs. After losing several high-profile investor-state disputes, such as White Industries and Vodafone, India unilaterally terminated around 75 BITs in 2016. The subsequent 2016 Model BIT was tilted towards state sovereignty, demanding investors exhaust local judicial remedies for a period of five years before approaching international arbitration. It can be argued that such a change in the regulatory regime would discourage investment into the country. A sharp decline in the net foreign direct investment (FDI) flows into India seems to corroborate such a narrative.
Thought experiment: Should the negative impact of BIT restructuring manifest as lower net FDI flows or even in gross FDI flows? If this changed regime implies a worsening of the investment climate for foreign investors, the gross flows too should be affected. However, it is worth noting that gross FDI inflows over the last 10 years recorded a decline only during 2022-24. In 2025-26, gross FDI inflows reached a record level of $94.53 billion. With sustained gross FDI flows, the problem appears to be located elsewhere. Another factor contributing to a sharp decline in net FDI flows is the surge in outward direct investment from India. This component could be viewed as a healthy diversification of interests by Indian investors. Alternatively, it could be a reflection of challenges to domestic investment in India. If so, it could be connected to the discussion on the IBC.
A third change in the business environment relates to taxation of capital incomes. Taxation of dividends as well as capital gains has undergone some changes in the last decade. Dividends were taxable in the hands of the company at the rate of 20.56 per cent. In 2020, this regime was abolished and these incomes are now taxable in the hands of the investor. On the other hand, long-term capital gains tax was re-introduced on listed securities. During the period from 2004 to 2018, listed securities were subject to securities transaction tax (STT) and were free of long-term capital gains (LTCG) tax. In 2018, LTCG was reinstated but STT was not eliminated. These steps taken together could suggest an increase in the tax on capital incomes, especially for individuals with high net worth, including promoters of companies.
Thought experiment: Would higher taxes discourage investment? Some recent literature exploring the impact of a cut in dividend taxes in the United States and Sweden suggest a cut in the tax rate does not lead to any change in aggregate investment, but might affect individual firms differently. In particular, for firms dependent on retained earnings to finance investment, a change in dividend taxes may not be crucial in determining the level of investment decisions.
Taken together, the Indian economy requires some mechanism for stimulating private investment in the real economy. The withdrawal of foreign portfolio investment (FPI) from the equity markets and the resultant reduction in the rate of return on investments in equity markets might serve as a much-needed impetus to move the cash-rich corporate sector towards investment in the real economy. If this trigger works, it could also bring back interest of foreign capital.
The author is director, National Institute of Public Finance and Policy. The views are personal 
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