India: Government Seeks To Overhaul The Foreign Direct Investment Policy

Last Updated: 23 June 2016
Article by Trilegal .

In line with its stated objective of making India an attractive destination for foreign investors, the Government has recently announced its decision to further liberalise the foreign investment regime, by increasing sectoral limits in certain sectors like broadcasting, aviation, pharma and relaxing FDI conditions in defence, single brand retail.

The FDI Policy recently released on 7 June 2016 (2016 FDI Policy) consolidated various amendments made to the policy by the Government and the Reserve Bank of India (RBI), since its last release in 2015. Less than a month after this consolidation exercise, the Government has, through a press release dated 20 June 2016, announced its decision to introduce sweeping reforms to further liberalise the foreign investment regime in India. Corresponding changes to the 2016 FDI Policy and RBI regulations are expected to follow soon which should provide further clarity on the proposed amendments.

The changes announced herald a shift in the approach of the Government. With the prohibited list for foreign investment (lottery and gambling, manufacture of tobacco and real estate) now becoming the exception, most sectors have been brought under the automatic approval route (i.e. not requiring prior approval from the Government), with a handful carrying limited restrictions. This approach has moved the burden of compliance to the sector specific regulators and therefore its success will lie in those regulators being transparent and credible.

A brief summary of the key changes announced by the Government are set out below.

Increase in Sectoral Limits

Broadcasting

The broadcasting carriage services sector which is permitted to receive FDI up to 49% without Government approval and beyond 49% with Government approval will be overhauled to receive 100% under the automatic approval route. Investment beyond 49% resulting in change of ownership of the investee company would however require Government approval, if the company is not seeking license or permission from the relevant Ministry.

Civil Aviation

The Government has decided to permit FDI up to 100% under the automatic approval route in brownfield airport projects, a change from the current position requiring Government approval for FDI beyond 74%.

Further, FDI up to 100% will be allowed in scheduled air transport service, domestic scheduled passenger airline and regional air transport services with 49% being under the automatic approval route and beyond 49% with Government approval. However, foreign airlines will be allowed to invest in entities operating scheduled and non-scheduled air-transport services only up to 49%. Regarding NRI investment, as is the position currently, NRIs will be able to continue to invest 100% under the automatic approval route.

Pharmaceutical

Foreign investment in brownfield pharma projects, which is subject to Government approval under the existing policy (irrespective of the non-resident stake), will now be allowed up to 74% under the automatic approval route and Government approval will be required only beyond 74%.

Private Security Agencies

Currently, FDI in private security agencies is permitted upto 49% with prior Government approval. With its recent announcement, the Government has decided to allow private security agencies to receive FDI upto 74%, with 49% under the automatic approval route, and anything beyond requiring Government approval.

Trading in Food Products

The Government has decided to permit 100% FDI with prior Government approval in trading, including through e-commerce, in food products manufactured or produced in India.

Relaxation of FDI Conditions

Single Brand Trading

The Government has decided to relax the condition on local sourcing of 30% for FDI in single brand retail trading for a period of 3 years and introduce a relaxed sourcing regime for a further period of 5 years for entities undertaking trade of products having 'state-of-art' and 'cutting edge' technology.

Defence

Under the existing regime, foreign investment up to 49% in the defence sector is allowed under the automatic route with proposals for FDI beyond 49% being considered on a case-to-case basis with the benchmark for evaluation being 'access to modern or state-of-art technology'. The Government has decided to remove this condition and allow foreign investment beyond 49% with Government approval, in cases resulting in access to modern technology or for other reasons. The above limit will also be applicable to manufacturing of small arms and ammunitions.

Animal Husbandry

Under the current policy, 100% FDI under the automatic approval route is allowed in animal husbandry, pisciculture, aquaculture under controlled conditions. The Government has decided to remove the pre-requisite on 'controlled condition'.

India is currently one of the most attractive destinations for foreign investment. True to the Government's commitment to carry on the reforms process and ease the business environment, this set of liberal reforms is expected to boost employment, job creation and generally improve the business and economic environment in India. What remains to be seen is whether they will contribute to the 'Make in India' campaign and to the achievement of the projected rate of growth.

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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