MAJOR FDI REFORMS| A SNAPSHOT
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:
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.
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 are 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.
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:
- Conditions of restriction of floor area of 20000 square meters in construction development projects have been removed;
- 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;
- 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;
- 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;
- Exit is permitted at any time if the project or trunk infrastructure is completed before the lock in period;
- 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
- 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.
Single Brand Retail Trading (SBRT): Currently, the FDI Policy on SBRT mandates that: (a) sourcing of 30% of the value of goods purchased should be reckoned from the date of receipt of FDI; (b) 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.
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.
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:
- Foreign investment up to 49% will be under automatic route;
- Portfolio investment and investment by FVCIs will be allowed up to permitted automatic route level of 49%;
- Proposals for foreign investment in excess of 49% will be considered by Foreign Investment Promotion Board (FIPB);
- 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.
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% Automatic route Down-linking of TV Channels
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.
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.
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).
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.
Companies without Operations: Government approval is not required for infusion 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.
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.
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.
Raising the threshold limit: As per the FDI policy, 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.
This update was released on 17 Nov 2015.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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