India: Review Of Foreign Direct Investment Policy

Last Updated: 26 February 2016
Article by Trilegal .

With the introduction of DIPP's Press Note 12 on 24 November 2015, the FDI framework has undergone several changes, including enhanced FDI limits, easing investment conditions, reducing government intervention and opening of new sectors.

The Department of Industrial Policy and Promotion (DIPP) released Press Note No. 12 of 2015 (Press Note) on 24 November 2015 introducing major reforms to the Consolidated Foreign Direct Investment Policy of India. A bevy of changes have been made to the policy in the government's latest bid to improve India's investment environment, including - enhanced foreign direct investment (FDI) limits, opening new sectors to foreign investment, attempts to ease investment conditions and reduce instances for government intervention.

THE KEY CHANGES BROUGHT ABOUT BY THE PRESS NOTE ARE SUMMARISED BELOW.

1. Across the Board Changes

FDI in holding companies: FDI in companies without any operations or downstream investment is now permitted without the requirement for prior approval of the Foreign Investment Promotion Board (FIPB), so long as the activities proposed to be undertaken at a later stage fall within the automatic approval route and without any FDI linked performance conditions.

Share swaps brought under automatic approval route: Investments by way of swap of shares in sectors which otherwise fall in the automatic approval route for foreign investments, will no longer require specific government approval.

Liberalisation of FDI regime for LLPs: FDI has been permitted through the automatic approval route in Limited Liability Partnerships (LLPs) operating in sectors where 100% FDI is allowed under the automatic approval route without conditionalities. Previously, FDI in LLPs was allowed only with prior government approval, with a blanket restriction on downstream investments. LLPs receiving FDI are now permitted to make downstream investments in another LLP or company in sectors in which 100% FDI is allowed under the automatic approval route.

Manufacturing: The Press Note adds a narrow definition for the term 'manufacture' and clarifies that FDI up to 100% is allowed under the automatic approval route in the manufacturing sector (subject to specific caps/conditionalities in regulated manufacturing activities such as defence, pharmaceuticals etc.). Further, the Press Note states that a manufacturer in India can sell its products through wholesale, retail or e-commerce without government approval.

Investments by Non Resident Indians (NRIs) liberalized: In order to attract larger investments, the special dispensation available to investments by NRIs will be extended to incorporated entities owned and controlled by NRIs. Investments (other than under the Portfolio Investment Scheme) by companies, trusts and partnership firms owned and controlled by NRIs, will be treated as domestic investments.

Threshold limit for CCEA approval raised: Under the government approval route, proposals for foreign investment exceeding a specified limit require an additional approval from the Cabinet Committee of Economic Affairs (CCEA). The threshold limit for CCEA approval has now been raised from INR 2000 Crore to INR 5000 Crore.


2. Sector Specific Changes

Defence

Foreign investment up to 49% in the defence sector has now been brought under the automatic approval route. However, any FDI in the defence sector resulting in a change of ownership pattern, or transfer of stake from an existing foreign investor to a new foreign investor will require prior FIPB approval. Portfolio investment and investment by foreign venture capital investors will be permitted in the automatic approval route up to an increased limit of 49% as against the previous limit of 24%.

Proposals for FDI beyond 49% will continue to be considered on a case-to-case basis with the benchmark for evaluation being 'access to modern or state-of-art technology'. Such proposals will now be considered by the FIPB as opposed to the Cabinet Committee on Security (CCS).

Significantly, the conditions that required the Indian investee company to be owned and controlled by resident Indians and to have a resident Indian chief security officer, have now been removed.

Real Estate

FDI in real estate business will continue to be prohibited. It has been clarified that earning of rent/income on lease of a property (not amounting to 'transfer' of property), will not be considered as real estate business. The Press Note also provides a broad definition of the term 'transfer', which includes any transaction having the effect of transferring or enabling enjoyment of an immovable property.

Construction & Development

With respect to the construction development sector, the conditions of minimum built up area (20,000 sq. ft.) and minimum capitalization of USD 5 million (to be brought in within 6 months of commencement of project) have been removed.

Each phase of a construction project will now be treated as a separate project, allowing developers to improve liquidity with respect to each milestone of the project. It is unclear what the term 'phase' is intended to mean and whether parties will be able to define 'phases' of the project themselves.

Foreign investors are permitted to exit from each phase of investment upon the earlier of a) completion of the project or trunk infrastructure; and b) expiry of three years from the infusion of the tranche of FDI. Earlier, approval of the FIPB was required for exit before the completion of the project/ trunk infrastructure. Transfer of stake from a non-resident to another non-resident (without repatriation of investment) will neither require any government approval, nor be subject to the 3 year lock-in period. The lock-in period will also not apply to Hotels & Tourist Resorts, Hospitals, Special Economic Zones, Educational Institutions, Old Age Homes and investment by NRIs.

With respect to completed projects for operation and management of townships, malls/shopping complexes and business centres, 100% FDI under the automatic approval route continues to be allowed. Additionally, transfer of ownership and/or control of the investee company from residents to non-residents will also be permitted, subject to a lock-in period of three years with regard to each FDI tranche, during which transfer of the immovable property will not be allowed. Therefore, the intent appears to be to open new opportunities for FDI in completed rent yielding projects for operations and management.

Single Brand Trading

Conditions for FDI in single brand retail trading have been relaxed.

(a) Entities may now undertake wholesale/cash and carry trading and single brand retail trading in parallel, subject to maintaining separate books of accounts and complying with the policy conditions for wholesale and for retail business separately.

(b) The 30% domestic sourcing requirement (for proposals beyond 49% FDI) would have to be met annually from the commencement of business, i.e. date of opening the first store. Earlier, the requirement for domestic sourcing was reckoned as an average of the five years' total value of goods purchased beginning in the year that the first tranche of FDI was received.

(c) Single brand entities operating physical stores are now permitted to engage in retail through e-commerce.

(d) Sourcing norms may be relaxed for entities having 'state of art' or 'cutting-edge' technology and where local sourcing is not possible.

Separately, the Press Note also states that an 'Indian manufacturer' is allowed to sell its own branded products through retail, wholesale or e-commerce. This appears to be more clarificatory in nature since there were no conditions or restrictions applicable to Indian manufacturers under the policy with regard to the channels of distribution they use.

The Press Note also introduces a definition for the term 'Indian manufacturer' to mean investee companies which manufacture at least 70% of their products in-house by value and source not more than 30% from other Indian manufacturers. It will be important to review this new conditionality, which seems to suggest that manufacturers who do not by definition qualify as 'Indian manufacturers', would not be entitled to sell their products as 'Indian' brands and may have to follow the same FDI norms as applicable to foreign brands.

Private Sector Banking

Earlier, FIIs /FPIs /QFIs were permitted to invest, in aggregate, up to 24% of the total paid-up capital of an Indian private sector bank, which could be increased up to 49% of the share capital with a special resolution of the shareholders. The Press Note has increased the composite limits for FII/ FPI investment in private banking to 74%. Therefore, fungibility of foreign investment in private banking sector is now allowed. The cap of 10% on a single FII/ FPI entity continues.


3. Enhanced sectoral caps in certain sectors

Broadcasting

FDI limit in broadcasting carriage services has been increased to 100% (automatic approval up to 49% and subject to government approval thereafter). In the broadcasting content sector, FDI limit in terrestrial broadcasting (FM radio) and up-linking of 'news and current affairs' TV channels has been increased to 49% subject to government approval. Up-linking 'non news and current affairs' TV channels is now under the automatic approval route with 100% FDI permitted.

Civil Aviation

FDI up to 49% under the automatic approval route has been allowed for regional air transport services. Chartered air transport services and ground handling services are also now under the automatic approval route with 100% FDI permitted.

Credit Information Companies

The FDI cap in this sector has been increased from 74% to 100% (under automatic approval route).

Satellites

FDI in the establishment and operation of Satellites, has been increased from 74% to 100% (subject to prior government approval).


4. Foreign investment permitted in new sectors

The government has decided to permit foreign investment in various sectors that were earlier prohibited. 100% foreign investment is permitted under automatic approval route in coffee, rubber, cardamom, palm oil tree and olive oil tree plantations. Similarly, FDI up to 49% under automatic approval route is now permitted in activities relating to regional air transport services. 100% FDI under the automatic approval route has been allowed in duty free shops.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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