Press Note 1 of 2018: Revision of the FDI Regime

[Amitabh Robin Singh is a corporate lawyer practising in Mumbai]

The Department of Industrial Policy and Promotion has issued Press Note 1 of 2018 dated January 23, 2018 (“PN 1”), which liberalizes the foreign direct investment (“FDI”) regime across various sectors.

However, I would like to open this post by not discussing a particular sector, but with the language that concludes PN 1. There has been an interesting deviation in PN 1 from previous press notes. At the end of PN 1, it is mentioned that the above decision will be effective “from the date of FEMA notification”, while erstwhile press notes would conclude with a statement that the above decision “will take immediate effect.

This was a topic of discussion: whether one can act upon a mere press note or whether they would have to await the relevant amendments to the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations 2000/2017 (“FEMA 20”). In some cases, there would be a time lag of months between the press note being issued and the FEMA 20 amendment being notified.

Sometimes there would even be deviations between the press note and the relevant FEMA notification. For example, the liberalization of private security agencies from a cap of 49% under the government route to 49% under the automatic route and beyond 49% up to 74% on the government route was not incorporated in the FEMA 20 amendment of December 2016 which substantially incorporated Press Note 5 of 2016 (which was issued in June 2016) into FEMA 20.

The former general counsel of the Tata group had authored a compelling article contemplating whether press notes have the force of law. With PN 1 having this language at the end, it is clear (at least in relation to this particular press note) that the law will come into force upon the relevant FEMA notification being issued.

Now, I will proceed to discuss a few of the other changes brought in by PN 1. One of the marquee changes brought in is in light of the privatization of Air India. The paragraph which used to state that the FDI policy in relation to civil aviation will not apply to Air India has been deleted. Further amendments have been made to mandate that foreign investment in Air India (either directly or indirectly) shall not exceed 49%. This cap is inclusive of any investment made by foreign airlines. A condition has also been added which mandates that substantial ownership and effective control of Air India remain with Indian nationals.

In a relief to the real estate broking industry, PN 1 explicitly clarifies that real estate broking will not amount to “real estate business” and will be allowed to receive foreign investment up to 100% under the automatic route. Previously, whether real-estate broking fell under the “dealing in land and immovable property…” component of the definition of real estate business was open to interpretation. That question has been settled by PN 1.

What may perhaps be the most interesting sectoral change brought in through PN 1 relates to single brand retail trading. The sectoral cap has been liberalized to 100% on the automatic route; previously 49% investment was permitted on the automatic route and on the government route beyond that (up to 100%). Also, the mandate that 30% sourcing of goods (in cases of proposals for investment beyond 51%) be done from India has been relaxed by permitting off-setting through sourcing from India for the investor’s global operations for a period of 5 years from April 1 of the year in which the first store is opened in India. Once 5 years have elapsed, the retailing entity will need to meet the 30% sourcing requirement directly towards its India operations annually.

On a separate note, for sectors under the automatic route, issuance of shares against capital goods/ machinery/ equipment and pre-operative/ pre-incorporation expenses will now be permitted under the automatic route. Earlier, such issuance of shares was under the government route, regardless of the sector.

In relation to investing companies, previously any foreign investment in such companies required government approval. PN 1 contemplates permitting such investments under the automatic route if the company is overall regulated and registered with the Reserve Bank of India as a non-banking financial company. Further, foreign investment in core investment companies and other investing companies will continue to require government approval. This liberal regime for certain regulated entities may be similar to the introduction of “other financial services” through Press Note 6 of 2016 (“PN 6”). PN 6 stipulated that for a company engaged in “other financial services” to qualify for receiving 100% investment on the automatic route, the activity of the investee company must be wholly regulated. If there is an unregulated component to the investee’s activities or there is ambiguity regarding the regulatory oversight, government approval is to be obtained. Similarly, certain investing companies that are overall regulated will now be permitted to receive foreign investment under the automatic route.

PN 1 has clearly introduced interesting changes to the FDI regime. It remains to be seen how the results pan out, be it bidders’ interest in Air India, retail giants’ enthusiasm for the Indian market, or otherwise.

– Amitabh Robin Singh

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