India: Open To Business FDI Policy Further Liberalised & New Press Note Released

On 20 June 2016, the Prime Minister's Office issued a press release announcing the decision of the Government of India to introduce amendments to the Foreign Direct Investment (FDI) Policy, with an intent of further liberalising FDI in nine sectors (Press Release). The Press Release has been further codified in Press Note No 5 (2016 Series) issued by the Ministry of Commerce & Industry on 24 June 2016 (Press Note). With a series of liberalisations in the past few years, FDI in India in most sectors is now under the automatic route.

Key Announcements

Sr No

Sector

Previous Position

Change

Key Considerations

Food Products

Investment in the sector was nuanced and lacked clarity.

FDI up to 100% under government approval route is permitted for trading, including through e-commerce, of food products manufactured or produced in India.

The liberalisation will enable global retail chains to set up 'food only' retail stores in India, or otherwise permit Indian 'food only' retail stores to access foreign funds. This is a significant relaxation of FDI in retail trading policy of the country.

Defence

FDI was permitted up to 49% under automatic route, and above through approval route on case to case basis wherever it was likely to result in access to modern and 'state-of-art' technology in India.

FDI up to 100% is permitted (up to 49% under automatic route, beyond which with government approval), however, without the condition of 'state of art' technology. Government can now grant approval in cases resulting in access to modern technology in India or 'for other reasons'.

The new limit is also applicable to manufacturing of small arms and ammunitions under (Indian) Arms Act 1959.

  • The absence of a clear definition of 'state of art' technology had resulted in uncertainty amongst prospective investors. This change could lead to level playing field among domestic manufacturers and global original equipment manufacturers.
  • However, fresh foreign investment within the approved limits in companies not seeking industrial license that may result in change in ownership pattern or secondary transfer to non-resident will require prior government approval

Broadcasting Carriage Services & Cable Networks

FDI in Broadcasting Carriage Services was permitted up to 49% under automatic route, beyond which with government approval.

FDI in Cable Networks was permitted up to 49% under automatic route, beyond which with government approval.

FDI up to 100% under automatic route is permitted in broadcast carriage services, viz. teleports, direct to home, cable networks, mobile TV and headend-in-the sky broadcasting services.

FDI up to 100% under automatic route is also permitted in cable networks.

  • Fresh foreign investment beyond 49% in companies not seeking license / permission from sectoral ministry that may result in change in ownership pattern or secondary transfer to non-resident will require prior government approval
  • The Guidelines for Obtaining License for providing DTH Broadcasting Services prohibit cross media holdings of over 20% in DTH and cable network companies. In the absence of relaxation of such holdings, the impact of the change in the FDI policy could be limited.

Pharmaceuticals

No brownfield investment was permitted without government approval.

FDI in brownfield pharmaceutical projects up to 74% is permitted under automatic route. Investment beyond this threshold would require government approval.

  • This is a significant move that will benefit financial investors and promote joint ventures in India's buoyant pharmaceutical industry.
  • However, the much debated non-compete restrictions will continue to apply to all foreign investments (except where approved by FIPB as a special circumstance).
  • Position on asset transfers being covered under automatic route (so long as the FDI investor has less than 74% in the entity acquiring such assets) remains unclear.
  • The Government imposed certain conditions (including fixing the production levels of essential medicines, research and development expenses, etc.) which will apply to all brownfield investments.

Civil Aviation

FDI under automatic route was permitted up to 100% in greenfield projects, and up to 74% in brownfield projects (beyond which with government approval).

FDI was limited to 49% in scheduled air transport service / domestic scheduled passenger airlines.

  • FDI up to 100% is permitted under automatic route in brownfield airport projects.
  • FDI up to 49% in scheduled air transport service/ domestic scheduled passenger airline and regional air transport services is permitted under automatic route, beyond which with  government approval.

This is a significant move, however, the limitation on foreign airlines to invest only up to 49% in Indian companies operating scheduled and non-scheduled air transport services, subject to conditions laid down in the extant FDI Policy, continue.

Private Security Agencies

FDI under government route was permitted up to 49%.

FDI up to 49% is permitted under the automatic route. FDI beyond 49% but up to 74% is permitted under the government approval route

This change would need to be incorporated in the (Indian) Private Security Agencies (Regulation) Act 2005 by way of an amendment.

Government should also clarify ambiguity surrounding inclusion of companies providing cash logistics or cash management within the meaning of private security agencies.

Establishment of Branch Office, Liaison Office, Project Office, or other place of business in India (Other Offices)

Prior approval of Reserve Bank of India (RBI) is no longer required for establishment of Other Offices if the principal business of the entity establishing a branch office, liaison office or project office is defence, telecom, private security or information technology, in cases where government approval or license/permission from the concerned ministry/ regulator has been obtained.

The text of the Press Release proposed to exempt prior approval from RBI as well as need for separate security clearance. However, the Press Note grants exemption only from prior RBI approval.

Animal Husbandry

FDI up to 100% was permissible in animal husbandry provided that such activity was undertaken under 'controlled conditions'.

The requirement of conducting the business under 'controlled conditions' is inapplicable.

Single Brand Retail Trading (SBRT)

This sector entailed much debated local sourcing norms.

Local sourcing norms have been relaxed for 3 years for entities engaged in SBRT of products having 'state-of-art' and 'cutting edge' technology, and where local sourcing is not possible.

  • The Press Release mentioned a 3-year relaxation on local sourcing norms and a further 5-year relaxation on sourcing regime for entities undertaking SBRT of products having 'state-of-art' and 'cutting edge' technology. This anomaly with the Press Note should be clarified.
  • The terms 'state of art', 'cutting edge technology' and 'where local sourcing is not possible' can be nebulous. It would be interesting to see government's approach.

Liberalisation in the Past 2 Years

The liberalisations proposed by the press release are a part of a series of FDI policy reforms brought about by the Government of India in various sectors in the past 2 years. Some of sectors that have been liberalised in the past 2 years since Modi Government came into power, either by increasing the sectoral caps or by relaxation of investment conditions, are:

Closed Sectors

Certain sectors in which FDI cannot be made except through the government approval route are:

  • Broadcast Content Services (FM Radio and Uplinking of News and Current Affairs TV Channels) – FDI up to 49% permissible with government approval;
  • Print Media (Publishing of newspapers, periodicals and Indian editions of foreign magazines, dealing with news and current affairs) - FDI up to 26% permissible with government approval;
  • Print Media (Publishing of scientific and technical magazines, specialty journals and periodicals, and publication of facsimile editions of foreign newspaper) - FDI up to 26% permissible with government approval;
  • Satellite (Establishment and Operation) - FDI up to 100% permissible with government approval;
  • Multi Brand Retail Trading - FDI up to 51% permissible with government approval; and
  • Banking (Public Sector) - FDI up to 20% permissible with government approval.

Comment

The liberalisations are a step in the right direction and will boost the initiatives of the Government of India for ease of doing business, and making India an increasingly attractive destination for foreign investors.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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