Consolidated FDI Regime Operational

As we had discussed in December 2009, the Government had proposed a draft master press note to consolidate the regime relating to foreign direct investment (FDI). The consolidation exercise has now fructified with the issue of the Consolidated FDI Policy (Circular 1 of 2010), which takes effect from April 1, 2010.

The policy document itself contains evidence of the complexity that has afflicted the regime thus far:

1.1.4 The Legal basis: Foreign Direct Investment by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and Government of India and Reserve Bank of India regulate this under the FEMA, 1999 and its various regulations. Keeping in view the current requirements, the Government from time to time comes up with new regulations and amendments/changes in the existing ones through order/allied rules, Press Notes, etc. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendment to notification No. FEMA 20/2000-RB dated May 3, 2000. These notifications take effect from the date of issue of Press Notes/ Press Releases. The procedural instructions are issued by the Reserve Bank of India vide A.P.Dir. (series) Circulars. The regulatory framework over a period of time thus consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

Therefore, a need has been felt for comprehensiveness in the policy on FDI, which the new Circular seeks to achieve:

1.1.5 This circular consolidates into one document all the prior policies/ regulations on FDI which are contained in FEMA, 1999, RBI Regulations under FEMA, 1999 and Press Notes/Press Releases/Clarifications issued by DIPP and reflects the current ‘policy framework’ on FDI. It is clarified that this is a consolidation/compilation and comprehensive listing of most matters on FDI and is not intended to make changes in the extant regulations. This Consolidation deals comprehensively with all aspects of FDI Policy which are covered under the various Press Notes/Press Releases/ Clarifications issued by DIPP.

All earlier Press Notes/Press Releases/Clarifications on FDI issued by DIPP which were in force and effective as on March 31, 2010 stand rescinded as on March 31, 2010. The present circular consolidates and subsumes all such/these Press Notes/Press Releases/Clarifications as on March 31, 2010.

Evidently, the consolidation is not intended to be a complete one, as it is clarified that it is a consolidation of “most matters on FDI and is not intended to make changes in the extant regulations”. While the earlier Press Notes of the Central Government stand rescinded, the various regulations issued by RBI appear to continue to operate. The effectiveness of the consolidation would depend on necessary adaptation of the RBI regulations to conform to the new FDI policy of the Central Government.

While the purpose of this post is not to undertake a detailed analysis of the consolidated policy, there are some substantive changes (or at least clarifications) to the FDI regime. For example, the Economic Times points to specifications in the new policy regarding what amounts to “wholesale trading” because FDI is permitted only in wholesale and single-branded retailing, but prohibited in multi-brand retailing. This can be found in para. of the Circular. As readers may recollect, this issue had also been the subject-matter of litigation before the Delhi High Court in Federation Of Associations Of Maharashtra And Ors. vs Union Of India (Uoi) And Ors.

The consolidated policy is set to be reviewed every six months, with the first review due on September 30, 2010.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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