Major FDI Reforms: A Snapshot

[The
following guest post is contributed by Bhushan Shah & Labdhi Shah from Mansukhlal Hiralal &
Company]
The Government last week issued a Press Note
announcing reforms (“Reforms“)
in 15 major sectors in respect of Foreign Direct Investment (FDI). The objective of the Government is
to ease the process of foreign investments in the country and bring substantial
foreign investments under the automatic route in order to avoid the delay in
FDI investment in India. These Reforms are also another example of the Government’s
emphasis on the ease of doing business. The Key Reforms are as follows:
1.
        Limited Liability Partnership (LLP): FDI in LLP was permitted under
the government approval route only in sectors in which: (i) 100% FDI was
allowed through the automatic route; and (ii) there are no FDI-linked
performance conditions (such as minimum capitalisation norms, etc.). Also, LLPs
with FDI were not eligible to make downstream investments.
As
per the Reforms, FDI in LLPs is now permitted under the automatic route in
sectors in which 100% FDI is allowed under the automatic route and in which there
are no FDI linked performance conditions. Further, LLPs with FDI are now
permitted to make downstream investments in companies or LLPs engaged in
sectors in which 100% FDI is allowed under the automatic route and in which
there are no FDI linked performance conditions.
2.         Companies owned and controlled by Non
Resident Indians (NRIs)
: NRIs include non-residents who are
Indian citizens or are Overseas Citizens of India (OCI) cardholders. Currently, investments made by NRIs on non-repatriation
basis is treated at par with domestic investments made by residents. Further,
for investments made by NRIs on non-repatriation basis, special dispensation
for investment is allowed in construction development (i.e. FDI-linked
conditions are not applicable) and civil aviation sector (there are no caps).
However, the Government of India realised that larger investments can be
attracted not through individuals but largely through corporate entities.
Pursuant
to the Reforms, the above-mentioned special dispensation is also extended to
companies, trusts and partnership firms, which are incorporated outside India
but are owned and controlled by NRIs. Henceforth, such entities owned and
controlled by NRIs will be treated at par with NRIs for investment in India.
3.         Construction Development Sector: FDI in the construction projects is
permitted under the automatic route, subject to fulfilment of certain
conditions. The Reforms have liberalised fulfilment of the said conditions,
namely:
(a)
Conditions of restriction of floor area of 20000 square meters in construction
development projects have been removed;
(b)
Investee company’s obligation to bring in a minimum of USD 5 million within 6
months of commencement of the project has been done away with;
(c)
For projects under the automatic route, a foreign investor will be permitted to
exit and repatriate the foreign investment before the completion of the
project, provided that the lock-in requirement of three years is complied with;
(d)
Transfer of stake from one non-resident to another non-resident on a
non-repatriation basis will not be subject to any lock-in period or to any
government approval;
(e)
Exit is permitted at any time if the project or trunk infrastructure is
completed before the lock in period;
(f)
Condition of lock-in period will not apply to Hotels &Tourist Resorts,
Hospitals, Special Economic Zones (SEZs),
Educational Institutions, Old Age Homes and investment by NRIs; and
(g)
100% FDI under 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. However, there would
be a lock-in-period of three years, calculated with reference to each tranche
of FDI, and transfer of immovable property or part thereof is not permitted
during this period.
4.         Single Brand Retail Trading (SBRT): Currently, the FDI Policy on SBRT mandates that: (i) sourcing of
30% of the value of goods purchased should be reckoned from the date of receipt
of FDI; (ii) products are required to be sold under the same brand
internationally and that the foreign investor is required to be the brand owner
or have the right to use the brand name under a legally tenable agreement with
the brand owner. Also, SBRT by means of e-commerce is not permissible.
As
per the Reforms, the 30% sourcing rule would be triggered only after the first
store is set up (and not immediately post receipt of foreign investment). For
‘state-of-art’ and ‘cutting-edge technology’, sourcing norms may be relaxed
with Government approval. Also, entities with foreign investment in SBRT can
sell products with an Indian brand name, and in that case the requirement of
using the same brand name internationally and the foreign investor having right
to use or own the brand name does not apply. Instead, Indian brands are
required to be owned and controlled by resident Indian citizens and/or
companies, which are owned and controlled by resident Indian citizens. Further,
SBRT can now be undertaken through e-commerce platform.
5.         Wholesale
and Retail without Government Approval
: As per the Reforms, Indian
manufacturers with foreign investment would be allowed to sell their products
through wholesale and/or retail formats, including through e-commerce platform,
without Government approval. However, for this purpose, the manufacturer is
required to be the owner of the Indian brand and manufacture at least 70% of
its products (in terms of value) in-house, i.e. in India, and source at most
30% from Indian manufacturers. It is pertinent to mention herein that the
requirement of sourcing 30% from Indian manufacturers is a new concept
introduced by the government. 
6.         Defence
Sector
:
Currently, foreign investment upto 49% is allowed in the Defence Sector under
the Government approval route. Portfolio investment and investment by foreign
venture capital investors (FVCIs) is
restricted to 24% only. Foreign investment
above 49% is also permitted, subject to approval of Cabinet Committee on
Security (CCS) on case to case
basis, wherever the investment is likely to result in access to modern and
‘state-of-art’ technology in the country.
The
Reforms have introduced the following changes:
(a)
Foreign investment up to 49% will be under automatic route;
(b)
portfolio investment and investment by FVCIs will be allowed up to permitted
automatic route level of 49%;
(c)
proposals for foreign investment in excess of 49% will be considered by Foreign
Investment Promotion Board (FIPB);
(d)
in case of infusion of fresh foreign investment within the permitted automatic
route level, resulting in change in the ownership pattern or transfer of stake
by existing investor to new foreign investor, Government approval will be
required.
7.         Broadcasting Sector: FDI policy
on broadcasting sector has also been amended. New sectoral caps and entry
routes are as provided hereinbelow:
Activity
Announced cap and
route
Existing cap and
route
Teleports(setting up of up-linking  HUBs/Teleports);
100%
(Up to 49% – Automatic route;
Beyond 49% – under Government approval route)
74%
(Up to 49% – Automatic route;
Beyond 49% and up to 74%- under Government
approval route)
Direct to Home (DTH);
Cable Networks (Multi System operators (MSOs)
operating at National or State or District level and undertaking upgradation
of networks towards digitalization and addressability)
Mobile TV
Headend-in-the Sky Broadcasting Service(HITS)
Cable Networks (Other MSOs not undertaking
upgradation of networks towards digitalization and addressability and Local
Cable Operators (LCOs))
Terrestrial Broadcasting FM (FM Radio)
49%
Government route
26%
Government route
Up-linking of ‘News & Current Affairs’ TV
Channels
Up-linking of Non-‘News & Current Affairs’ TV
Channels
100%
Automatic route
100%
Government route
Down-linking of TV Channels
8.         Banking Sector: The Government
has decided to introduce full fungibility of foreign investment in the private banking
sector. Accordingly, FIIs/FPIs/QFIs can now invest up to sectoral limit of 74% after
following the due procedure, provided that there is no change of control and
management of the investee company.
9.         Enhancing
limits for certain sectors
:
Foreign
equity caps of (a) Non-Scheduled Air Transport Service; (b) Ground Handling
Services; (c) Satellites- establishment and operation; and (d) Credit Information
Companies have now been increased from 74% to 100%. Further, sectors other than
Satellites-establishment and operation have been placed under the automatic
route.
10.       Tea
/ Coffee / Rubber / Cardamom / Palm Oil & Olive Oil Plantations
: 100%
FDI to be allowed under automatic route in the said sectors. Currently, FDI is
not allowed in either of the above (except tea plantation where FDI is allowed
under the approval route).
11.       Single
entity to carry out both Wholesale and SBRT
:
As
per the current FDI policy, 100% foreign investment is permitted under the
automatic route in wholesale cash & carry activities (e.g. Metro Cash and
Carry Stores), but a wholesale/cash & carry trader cannot open retail shops
to sell to the consumer directly (i.e. only B2B is permitted).
Now,
as per the Reforms, it has now been decided that a single entity will be
permitted to undertake both the activities of single brand retail trading and
wholesale with the condition that conditions of FDI policy on wholesale/ cash
& carry and SBRT have to be complied by both the business arms separately.
12.       Companies
without Operations
: Government approval is not required for i
nfusion
of foreign investment into an Indian company which does not have any operations
and any downstream investments, for undertaking activities which are under
automatic route and which have no FDI-linked performance conditions, regardless
of the amount or extent of foreign investment.
13.       Transfer
of Ownership and Control of Indian Companies
:
Currently,
the FDI Policy provides that approval of the Government will be required for
establishment and ownership or control of an Indian company in
sectors/activities with caps.
However,
as per the Reforms, this provision has been amended to provide that approval of
the Government will be required if the company concerned is operating in
sectors/ activities which are under Government approval route rather than
capped sectors. Further, no approval of the Government is required for
investment in automatic route sectors by way of swap of shares.
14.       Simplification
of Conditionalities
:
It has been announced in the
Reforms that certain conditions of FDI policy on Agriculture and Animal
Husbandry, and Mining and mineral separation of titanium bearing minerals and
ores, its value addition and integrated activities have been simplified.
However, the details with respect to these reforms have not been announced yet.
15.       Raising
the threshold limit
:
As per the FDI policy, Foreign
Investment Promotion Board (FIPB)
considers proposals having total foreign equity inflow up to Rs. 3000 crore and
proposals above Rs. 3000 crore are placed for consideration of Cabinet
Committee on Economic Affairs (CCEA).
In order to achieve faster approvals on most of the proposals, it has been
decided that the threshold limit for FIPB approval may be increased to Rs.5000
crore.
Overall, we believe the aforesaid Reforms are
a dynamic step to integrate the Indian market with the rest of the world for
attracting investments, technology, and enhancing India’s position destination
as a destination for foreign investments.
– Bhushan Shah & Labdhi Shah

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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