An Update on the FDI Reforms

[The
following guest post is contributed by Bhushan
Shah
and Neha Lakshman of Mansukhlal
Hiralal & Company. The views expressed are personal.]
After significant changes in the Foreign Direct
Investment (FDI) policy in November
2015, the Union Government through Press Note No. 5 (2016 Series) issued on 24
June 2016[1]
announced further important changes to the FDI Policy. Changes introduced in
the FDI policy include (a) increase in the FDI sectoral caps; (b) bringing more
activities under the automatic route; and (c) easing of conditions for foreign
investment in certain sectors.
Following are the significant changes
introduced by the Government:
1.         Defence Sector: Earlier,
FDI beyond 49% was permissible only through the government approval route in
cases of access to modern or ‘state of the art’ technology in the country. But
now, this condition of ‘state of the art’ technology has been removed. Government
approval is required for investments beyond 49%, in cases wherever it is likely
to result in access to modern technology in the country or other exceptional
reasons, which are to be recorded.
Further,
this FDI limit for the defence sector has also been made applicable to
Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959, which
was until recently reserved exclusively for Government Agencies.
However,
foreign investment in this sector is subject to the clearance of the Ministry
of Defence. Further the investee company should be self-sufficient in areas of
product design and development. The investee/joint venture company, along with
a manufacturing facility should also have 
maintenance and life cycle support facility of the product being
manufactured in India.
2.         Civil
aviation:
100% FDI has now been allowed in Greenfield projects and existing
projects in the civil aviation sector. Earlier the policy on airports permitted
100% FDI under automatic route in Greenfield Projects and 74% FDI in Brownfield
Projects under automatic route. Now 100% FDI is permitted in both Greenfield
and Brownfield projects under the automatic route.
Earlier,
in the case of domestic airlines, FDI of up to only 49% (under automatic route)
was permitted. Now FDI up to 49% has been allowed under the automatic route and
up to 100% after government approval. However, 100% automatic FDI has been
allowed for non-resident Indians (NRIs) in case of domestic airlines.
100%
FDI has now been allowed in non-scheduled air transport services and helicopter
services/ seaplane services requiring approval of the Director General of Civil
Aviation.
3.         Single
Brand Retail Trading (SBRT):
Earlier, FDI above 49% in SBRT was permitted
under the government route. However, if the FDI exceeded 51%, additional conditions,
including the condition on sourcing 30% of the value of goods from India, was
imposed. This sourcing requirement now has to be met in the first instance as
an average of five years total value of the goods purchased beginning on the
financial year where the first store was opened. Thereafter it has to be met on
an annual basis.
4.         Pharmaceuticals:
74% FDI is now permitted under automatic route in brownfield pharmaceutical
sector and the government approval route will continue beyond 74%. Earlier,
100% FDI in brownfield pharma was allowed only through the government approval
route. A non-compete clause would not be allowed under the government or
automatic approval route except with the approval of the Foreign Investment
Promotion Board (FIPB). The Press Note also lays down additional conditions for
investment in brownfield pharma projects.
                                                         
100%
FDI is under the automatic route is permitted for manufacturing of medical
devices. Hence the  aforesaid conditions
are not applicable to greenfield and brownfield projects in this industry.
5.         Food
Products Manufactured in India:
100% FDI is now permitted under the government
approval route for trading in respect of food products manufactured or produced
in India. This also includes trading through e-commerce. Earlier, the sectoral
limit on the trading of the aforesaid food products depended on the nature of
trade (whether it was single brand, multi brand or wholesale cash and carry).
Applications for FDI in food products retail trading would be processed by the
DIPP before being considered by the Government for approval.
6.         Entry routes in Broadcasting
Carriage Services
: Earlier 100% FDI was
permitted with up to 49% being under automatic route and above 49% was under
the government route in Teleports (setting up of up-linking HUBs/Teleports);
Direct to Home; Cable Networks; Mobile TV; Headend-in-the Sky Broadcasting
Service (‘Broadcasting Carriage Services’).
Broadcasting Carriage Services can now avail of 100% FDI under automatic route.
However, infusion of fresh FDI beyond 49% in a company, which has not sought
license/permission from sectoral Ministry, resulting in a change in the
ownership pattern or transfer of stake by existing investor to new foreign
investor, will require FIPB approval.
7.         Private
Security Agencies
: FDI up to 49% is now
permitted under automatic route in this sector and FDI beyond 49% and up to 74%
would be permitted with government approval route. Earlier, only up to 49% FDI
was permitted under the government route.
A
Private Security Agency  has been defined
to mean a person or body of persons other than a government agency, department
or organization engaged in the business of providing private security services
including training to private security guards or their supervisor or providing
private security guards to any industrial or business undertaking or any person
or property.
8.         Establishment
of branch office, liaison office or project office
: For
establishment of branch office, liaison office or project office or any other
place of business in India if the principal business of the applicant is
Defence, Telecom, Private Security or Information and Broadcasting, it has been
decided that approval of Reserve Bank of India or separate security clearance
would not be required in cases where FIPB approval or license/permission by the
concerned Ministry/Regulator has already been granted. 
9.         Animal
Husbandry
: Earlier, 100% FDI in Animal Husbandry (including breeding of
dogs), Pisciculture, Aquaculture and Apiculture was allowed under Automatic
Route under controlled conditions. It has now been decided to do away with this
requirement of ‘controlled conditions’ for FDI in these activities.
These changes are in consonance with the
Make in India initiative of the government. The aim of Government is clearly to
liberalise the FDI regime and provide an environment where doing business in
India much easier than before.
– Bhushan Shah and Neha Lakshman



[1] http://dipp.nic.in/English/acts_rules/Press_Notes/pn5_2016.pdf.

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.

1 comment

  • "Changes introduced in the FDI policy include (a) increase in the FDI sectoral caps; (b) bringing more activities under the automatic route; and (c) easing of conditions for foreign investment in certain sectors."
    <> INSTANT (to simply share own thoughts, with a view to provoking more thoughts):
    These are, to be specially noted, the latest of the quite significant and material changes in the economic policies. As may be readily inferred, primarily, these changes by way of further liberalization aim at and have the objective of improving and augmenting the national economy with foreign investments and induction of more capital. On the flip side, as per individual perspective, if and when that happens, and gets translated into implementation and enforcement, would, and must, in consequence, inevitably yield to softening of the implementation and enforcement of the lately introduced statutory provisions, such as GAAR, by way of reforms of tax legislation.
    May be, the foregoing aspect, if so thought fit, is for the economic cum tax /tax accounting experts, both within and outside the government portals, to study and first enlighten selves; then share their well -considered views for the ultimate benefit of the PEOPLE.

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