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Overview of Recent FDI Policy Reforms
By Rishabh Shroff - Partner Cyril Amarchand Mangaldas

INTRODUCTION


The Department of Industrial Policy and Industry (“DIPP”) notified amendments in the Consolidated Foreign Direct Investment Policy, dated May 12, 2015 (“FDI Policy”) spanning across 15 (fifteen) sectors including defence, construction, civil aviation, media, eased norms for businesses such as single-brand retail and private banking, etc on November 24, 2015[1] subsequent to an earlier press release dated November 10, 2015[2].

The government introduced these reforms to boost the ease of doing business in India and to further promote ‘Make in India’ and ‘Startup India’ initiatives by rationalising and simplifying the process of foreign investments in the country and by allowing more Foreign Direct Investment (“FDI”) through the automatic route.

In relation to approval requirements, the threshold limit for approval from the Foreign Investment and Promotion Board (“FIPB”) has been increased to proposals below INR 5,000 crores from INR 3,000 crores. The Cabinet Committee on Economic Affairs (“CCEA”) will now consider proposals with total foreign equity inflow of more than INR 5,000 crores or any other proposal referred to it by FIPB or the Ministry of Finance.[3]

As mentioned above, the government has introduced changes in relation to 15 (fifteen) sectors in the industry. Some changes are clarificatory, whereas others are made consequent to requests by domestic/international business houses. The biggest gainer is real estate and Single Brand Retail Trading sector (“SBRT sector”). This article briefly discusses some of the major changes brought about by the present government to the extant FDI Policy.

CONSTRUCTION DEVELOPMENT SECTOR

Aiming to iron out the ambiguities in the earlier foreign investment policy in relation to the construction sector, Press Note 12 has ironed out most of the unresolved creases thus making it lucrative for foreign investors to acquire equity interest in the real estate space. The key changes[4] brought in this sector are:

  •  Dispensation of conditions regarding area restriction and minimum capitalization.

  • Permission to foreign investors to exit and repatriate foreign investment (calculated with reference to each tranche of foreign investment) before the completion of project under the automatic route, subject to completion of the lock-in-period of 3 years.

  • Exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period.

  • No lock-in period or Government approval required for transfer of stake from one non-resident to another non-resident, without repatriation of investment. The lock-in period will not apply to FDI in hotels and tourist resorts, hospitals, special economic zones, educational institutions, old age homes and investments by non-resident Indians (“NRIs”).

  • Clarification on the meaning of real estate business to mean “dealing in land” and not including development of townships and other similar matters as stated therein. Further, earning of rent/ income on lease of the property, not amounting to transfer, is not covered within the ambit of “real estate business”.

  • 100% FDI under the automatic route is permitted in completed projects for operation and management of townships, malls/shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted subject to compliance with the lock-in-period for each tranche of investment. However, transfer of immovable property or part thereof is not permitted during this period.

SBRT SECTOR 

The SBRT sector is one of the major gainers as a result of the recent review of the FDI Policy. The following are the amendments brought about in relation to the same:

 

SBRT SECTOR

The SBRT sector[5] is one of the major gainers as a result of the recent review of the FDI Policy. The following are the amendments brought about in relation to the same:

  • The existing condition regarding the timing for complying with the local ‘sourcing of goods’ requirement has now been changed such that the commencement of time has to be reckoned from opening of the first store and not from when the first tranche of foreign investment is made.

  • Dispensation from the sourcing norms with the prior approval of the Government in case of ‘state-of-art’ and ‘cutting- edge technology’ SBRT entities.

  • An entity having permission to undertake SBRT will be permitted to undertake e-commerce activities as well.

  • Dispensation of conditions like selling of the products under the same brand internationally and investment by non-resident entity/entities as the brand owner or under legally tenable agreement with the brand owner in case of FDI in Indian brands.

  • An Indian manufacturer is permitted to sell its own branded products in any manner i.e., wholesale, retail, including through e-commerce platforms.

    For the purposes of FDI Policy, an Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers. Further Indian brands should be owned and controlled by resident Indian citizens and/or companies, which are owned and controlled by resident Indian citizens.

  • Permission granted to a single entity to undertake both SBRT as well as wholesale, subject to compliance with the conditions of FDI Policy on wholesale/cash and carry and SBRT. 

LIMITED LIABILITY PARTNERSHIPS (“LLPs”)

FDI in LLPs was hitherto permitted under the approval route, in sectors where 100% FDI was permitted under the automatic route, and where there were no FDI linked performance conditions.

Press Note 12 has introduced the following amendment [6] :

  • Permission for 100% FDI under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed and there are no FDI-linked performance conditions.

  • Permission to an LLP having foreign investment to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. 

INVESTMENTS BY NRI OWNED COMPANIES/TRUSTS, ETC.

Press Note 7 of 2015 [7] liberalized the investments by NRIs on non-repatriation basis under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 to be treated at par with domestic investment.

Being treated at par with domestic investors meant that the investment was not subject to any of the conditions to be complied with under the FDI Policy.  Now, even investments by companies, trusts and partnership firms which are incorporated outside India and are owned and controlled by NRIs will be treated at par with and as if made by NRIs in their individual capacity [8].

 


BROADCASTING SECTOR

The amendments regarding the broadcasting sector is as follows:

  • Foreign investment up to 49% under the automatic route and above 49% under the Government approval route allowed in [9]

    a)      teleports, direct to home, cable networks (multi system operators (“MSO”s) operating at National, State or District level and undertaking upgradation of networks towards digitalization and addressability), mobile  television and head end-in-the sky broadcasting services.

    b)   Cable networks (other MSOs not undertaking upgradation of networks towards digitalization and addressability and local cable operators). 

  • Broadcasting content services [10]

    a)          Foreign investment up to 49% under the Government route allowed in FM Radio and up-linking of ‘news & current affairs’ television channels.

    b)       Foreign investment up to 100% under the automatic route allowed in up-linking of non-‘news and current affairs’ television channels and down-linking of television channels.

DEFENCE SECTOR [11]

  • Foreign investments in the defence sector are subject to security clearances and guidelines of the Ministry of Defence.
  • Liberalization of the defence sector to now allow foreign investment (including portfolio investment and foreign venture capital) up to 49% under the automatic route and above 49% under the Government approval route.
  • License applications will be considered and licenses will be given by the DIPP, Ministry of Commerce & Industry, in consultation with the Ministry of Defence and Ministry of External Affairs.
  • The investee company should be structured to be self-sufficient in areas of product design and development. The investee / joint venture company and the manufacturing facility should also have maintenance and life cycle support facilities of the product being manufactured in India.
  • Requirement of Government approval in case of infusion of fresh foreign investment within the permitted automatic route level, resulting in a change in the ownership pattern or transfer of stake by existing investor to new foreign investor. 

OTHER SIGNIFICANT CHANGES

There are several amendments made in relation to foreign investments in various other sectors like the banking sector, agricultural sector, air transport services, etc.

Some of the significant changes are listed below:

  • Foreign institutional investors/foreign portfolio investors/qualified foreign investors to invest up to sectoral limit of 74% in the banking- private sector following due procedure, subject to no change in control and management of the investee company.

  • Apart from tea plantations, foreign investment is now permitted under automatic route up to 100% in the entire plantation sector including coffee, rubber, cardamom, palm oil tree and olive oil tree plantations [12]

  • Permission for 100% FDI under the automatic route in duty free shops located and operated in the customs bonded areas [13]

  • Like scheduled air transport service/domestic scheduled passenger airline, permission for 49% FDI under the automatic route for regional air transport services has also been granted [14]

  • Permission for 100% FDI (up from existing 74%) in non-scheduled air transport service, ground handling services, satellites-establishment and operation and credit information companies [15]

  • Foreign investment upto 100% under the automatic route for Credit Information Companies [16]

  • Dispensation of requirement to obtain Government approval to invest in companies without operations and which do not have any downstream investments for undertaking activities, which are under the automatic route and have no FDI-linked performance conditions [17]

  • Dispensation of government approval required for establishment and transfer of ownership and control of Indian companies in sectors/activities with caps.[18] Approval is now only required if the company concerned is operating in sectors/activities which are under Government approval route.

  • Dispensation of approval for investment by way of swap of shares in sectors under the automatic route [19]


CONCLUSION

On the careful consideration of the reforms surrounding the foreign investment regime in India, it can definitely be considered a big step forward. Government approval has been dispensed with in many scenarios to make India more investment friendly than what the recent World Bank reports state. [20] Each of these amendments reinforces the government’s narrative on economic reforms in the last one year. 

Even though the media has cautioned the players saying that the relaxation of the norms might not act like a magic wand unless there is some actual use of the capital infusion [21] in the country, it can not be denied that the rationalisation of the norms with the inflow of foreign capital definitely paves a way forward for India.

 

[1]Government of India, Ministry of Commerce & Industry, DIPP (FC-I Section), Press Note No. 12 ( 2015 Series), Review of FDI Policy on various sectors (“Press Note 12”)

[2] Press Release available at http://indembassy.or.kr/pdf/fdi_review_10112015.pdf

[3]Point 11 of Press Note 12 – Amendment to Paragraph 5.2 of the FDI Policy

[4] Point 21 of Press Note 12 – Amendment to Paragraph 6.2.11 of the FDI Policy

[5]Point 23 of Press Note 12 – Amendment to Paragraph 6.2.16.3 of the FDI Policy

[6] Point 3 of Press Note 12 – Amendment to Paragraph 3.2.5 of the FDI Policy

[7]Government of India, Ministry of Commerce & Industry, DIPP, Press Note No. 17 ( 2015 Series), Review of FDI Policy on investment by NRIs, Persons of Indian Origin and Overseas Citizens of India, available at http://dipp.nic.in/English/acts_rules/Press_Notes/pn7_2015.pdf

[8]Point 10(vi), (vii) of Press Note 12 – Amendment to Paragraph 3.6.2 of the FDI Policy

[9]Point 16 of Press Note 12 – Amendment to Paragraph 6.2.7.1 of the FDI Policy

[10]Point 16 of Press Note 12 – Amendment to Paragraph 6.2.7.2 of the FDI Policy

[11]Point 15 of Press Note 12 – Amendment to Paragraph 6.2.6 of the FDI Policy

[12]Point 12 of Press Note 12 – Amendment to Paragraph 6.2.2 of the FDI Policy

[13]Point 24 of Press Note 12 – Introduction of Paragraph 6.2.16.5 of the FDI Policy

[14]Point 17 of Press Note 12 – Amendment to Paragraph 6.2.9.3 of the FDI Policy

[15] Point 17 of Press Note 12 – Amendment to Paragraph 6.2.9.3 of the FDI Policy

[16]Point 20 of Press Note 12 – Amendment to Paragraph 6.2.18.5.1 of the FDI Policy

[17]Point 7 of Press Note 12 – Amendment to Paragraph 3.10.3.3 of the FDI Policy

[18]Point 10 of Press Note 12 – Amendment to Paragraph 3.6.2 of the FDI Policy

[19]Point 8 of Press Note 12 – Amendment to Paragraph 3.5.6 of the FDI Policy

[20]India was ranked 130 out of 189 countries by World Bank in its Ease of Doing Business - Economy Rankings 2016, Available at http://www.doingbusiness.org/rankings . India has moved up 12  ranks since the 2015 rankings, available at http://economictimes.indiatimes.com/news/economy/indicators/ease-of-doing-business-india-improves-ranking-singapore-tops-the-list-says-world-bank/articleshow/49559515.cms.

[21]http://economictimes.indiatimes.com/news/economy/policy/fdi-reforms-sensible-even-if-incremental/articleshow/49765024.cms


DISCLAIMER 

This document is meant only for informational purposes and is intended merely to highlight issues. The information and/or observations contained in this document do not constitute legal or taxation advice and should not be acted upon in any specific situation without appropriate legal advice. Although we have made considerable efforts to be thorough in the construction of these pages, we offer no assurance that the information posted here is timely, accurate, complete or applicable to any particular set of facts. The details contained herein are updated up to December 6th, 2015. The views expressed in this document do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas on the issues reported herein and should you have any queries in relation to any of the issues reported herein or on other areas of law, please feel free to contact us at the co-ordinates mentioned herein.


Rishabh Shroff
Partner
Cyril AMarchand Mangaldas 

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