India: India Set-Off To New Round Of Foreign Investment Reforms

The Government on Friday i.e. September 15, 2012, considering the specific needs of the various sectors and to revive growth and stimulate investor sentiment has taken proactive steps and announced a flurry of reforms. The various foreign investment related reforms that were announced are as follows:

  1. Allowing foreign direct investment (FDI) in multi- brand product retailing;
  2. Modifying the policy on singlebrand product retailing;
  3. Permitting foreign investments in scheduled and non scheduled air transport services in the civil aviation sector;
  4. Review of foreign investment policy in the broadcasting sector; and
  5. Permitting foreign investments in the power trading exchanges.

The announcements are expected to boost investment, which has been on the downside in recent months. The essential changes brought forth through these measures and their conditions are briefed herein below:

I. FDI in Multi Brand Product Retail Trading:

Hitherto, FDI in multi-brand retail was not allowed. The Government has now approved 51 per cent FDI in multi-brand retail through approval route.

The proposal had earlier been approved by the Cabinet in its meeting on November 24, 2011. However, implementation of the proposal had been deferred, for evolving a broader consensus on the subject. The Government has now approved FDI in Multi Brand Product retail trading subject to the following key conditions:

  1. Retail sales outlets may be set up in those States which have agreed or will agree in future to allow FDI in multi brand retail trade under this policy. The establishment of such retail sales outlets will be in compliance of applicable State laws/ regulations, such as the Shops and Establishments Act etc. The implementation of the policy is not a mandatory requirement for all States.
  2. Retail sales outlets may be set up only in cities with a population of more than 1 million as per 2011 Census and may also cover an area of 10 kms around the municipal/ urban agglomeration limits of such cities. In States/ Union Territories not having cities with population of more than 1 million as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/ urban agglomeration limits of such cities.
  3. At least 50% of the total FDI shall be invested in 'back-end infrastructure' within three years which includes investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals are not to be counted for purposes of back-end infrastructure. Back-end infrastructure investment excludes capital expenditures on front-end units.

The Cabinet in November 2011 had approved certain other conditions which would remain unchanged, such as:

  1. The minimum amount to be brought in as FDI by a foreign investor would be USD 100 million with a mandate that one half of any investment be made in back end infrastructure including coldstorage chains, refrigeration, transportation, packing, sorting, processing and warehouses; and
  2. At least 30 per cent of the goods to be sold have to be sourced from Indian micro and small industry having capital investment of not more than USD 1 million.

II. Modifications to the policy on single-brand product retailing:

The Government had permitted FDI (vide Press Note 1, 2012 dated January 10, 2012), up to 100% in single brand product retail trading under the approval route. The new revised conditions for single brand retailing are as follows:

  1. Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought; and
  2. In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible. The quantum of domestic sourcing will be selfcertified by the company, to be subsequently checked, by the statutory auditors.

Prior to the above modifications, Press Note 1 of 2012 dated January 10, 2012, stipulated that for proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. Moreover, it was also mandated that foreign investor should be the owner of the brand for undertaking single brand product retail trading.

III.Permission to foreign investments in scheduled and non scheduled air transport services in the civil aviation sector:

The Government has approved the proposal to allow foreign carriers to buy 49 percent stake in civil aviation sector under Government approval route in both scheduled and nonscheduled air transport services. The 49 percent ceiling includes both FDI and FII investments.

Until now, the current FDI norms only allowed foreign investors, not related to airline business, to directly or indirectly own an equity stake of up to 49 percent in the Indian carrier and foreign airlines were only allowed to participate in the equity of companies operating cargo airlines, helicopter and sea plane services, but not in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services. The applicable conditions for investments by foreign airlines in the civil aviation sector are as follows:

(a) A Scheduled Operator's Permit can be granted only to a company:

  1. that is registered and has its principal place of business within India;
  2. the chairman and at least two third of the directors should be citizens of India; and
  3. the substantial ownership and effective control be vested with Indian nationals.

(b) All foreign nationals likely to be associated with Indian scheduled and non-scheduled air transport services, as a result of such investment, shall be cleared from security view point before deployment, and

(c) All technical equipment that might be imported into India, as a result of such investment, shall require clearance from the relevant authority in the Ministry of Civil Aviation.

IV. Review of foreign investment policy in the broadcasting sector:

The Government has liberalized the policy on foreign investment for companies operating in the broadcasting sector as below:

  1. Under the extant policy, FDI of only up to 49 percent was permitted in teleports (setting up up-linking HUBs/ Teleports); Direct to Home (DTH); Cable Networks (Multi-System- Operators operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability). It has now been decided to increase the current foreign investment limit from 49 percent to 74 percent, with the provision that up to 49 percent to be permitted under the automatic route and beyond 49 percent and up to 74 percent be permitted under the Government route.
  2. Hitherto there was no specific dispensation for mobile TV. It is decided to permit foreign investment up to 74 percent for mobile TV, with the proviso that up to 49 percent be permitted under the automatic route and beyond 49 percent and up to 74 percent be permitted under the Government route.
  3. For Headend-in-the Sky Broadcasting Service, the existing limit of 74 percent foreign investment - automatic route up to 49 percent and Government route beyond 49 percent and up to 74 percent would continue.
  4. In respect of Cable Networks (Other Multi-System-Operators not undertaking up-gradation of networks towards digitalization and addressability and Local Cable Operators), the existing limit of 49 percent foreign investment, under the automatic route, would continue; and
  5. For up-linking of 'News & Current Affairs' TV channels, FM Radio, the existing limit of 26 percent foreign investment under the Government route, would continue and for up-linking of Non-'News & Current Affairs' TV Channels, Down-linking of TV Channels, the existing policy of 100 percent foreign investment, through the Government route, would continue.

Foreign investment in companies engaged in all the aforesaid services will be subject to sectoral and security conditionalities and guidelines as may be specified from time to time by the concerned ministries. Moreover, the methodology of calculating direct foreign investment is rationalized and shall be the same as applicable to telecom sector. Accordingly, the foreign investment limit for companies engaged in the I&B sector (except cable services) shall include, in addition to FDI, investment by Foreign Institutional Investors (FIIs), Non Resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entities.

With this the foreign investment policy for the broadcasting sector is being made consistent with that for the telecom sector because of the convergence of technologies involved in these two sectors.

V. Permission to foreign investments in the power trading exchanges:

FDI in power sector (except atomic energy) is allowed up to 100%, but so far, India did not have a stated policy on FDI in power trading exchanges, creating ambiguity among investors. The Government has now decided to permit foreign investment, up to 49 percent at an FDI limit of 26 per cent and FII limit of 23 percent in the power trading exchanges.

FII investments would be permitted under the automatic route and FDI would be permitted under the government approval route. However, FII purchases are to be restricted to secondary market only, and no non-resident investor/ entity, including persons acting in concert, holding more than 5 percent of the equity in these companies.

© 2012, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Sandhya Iyer, Partner, Vaish Associates Advocates
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