India: Recent Liberalization Of FDI Policy – An Update

I. Background

Foreign investment, comprising, amongst others, of foreign direct investment (FDI) and portfolio investment, in India is regulated by the (Indian) Foreign Exchange Management Act, 1999 (FEMA). Additionally, the Government of India, from time to time, notifies its policy on FDI and prescribes the sectoral caps and other conditions for FDI. The current FDI policy is reflected in the consolidated FDI policy circular of 2016 dated June 07, 2016 and the subsequent press notes issued by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India that are available at www.dipp.nic.in (FDI Policy). The FDI Policy subsumes and supersedes all previous policies relating to FDI in India and reflects the FDI policy effective as on date. The FDI Policy is adopted by the Reserve Bank of India (RBI), regulator for foreign exchange transactions, and notified under relevant regulations under FEMA (FEMA Regulations).

As per the FEMA Regulations and the FDI Policy, FDI in India can be made either under the automatic route (i.e., without any prior approval from the Government of India) or under the approval route (i.e. with prior approval of the Government of India). A distinct feature of Indian FDI policy has been the limits prescribed on total foreign investment for different sectors called sectoral caps and conditions applicable to foreign investment in certain instances. Where sectoral caps are prescribed, it means that the total foreign investment in the relevant sector cannot exceed the cap.

The FDI Policy has been progressively liberalized to permit FDI in most sectors under the automatic route and to remove limits on FDI in various sectors. The Government has in the last two years actively liberalized the FDI Policy particularly in defense, insurance, retail trading (single and multi-brand), e-commerce, construction development, pension sector, plantation, etc. Recently, on June 24, 2016, the Government further amended the FDI Policy by press note number 5 of 2016 (Press Note) which further liberalizes FDI in several sectors.

II. Liberalized Sectors

The amendments made by the Press Note include, inter alia, increase in sectoral caps for certain sectors, bringing more activities under automatic route and easing of conditions applicable to FDI in certain sectors.

Food Products manufactured/produced in India

India's Finance Minister, while presenting the Indian budget earlier this year, had proposed increase in FDI in marketing of food products produced and manufactured in India up to 100% through approval route. This was to prevent wastage of domestically grown fruits and vegetables and for providing a suitable market to farmers.

As per the FDI Policy, trading activities are categorised as: (a) cash & carry wholesale trading/wholesale trading; (b) e-commerce activities; (c) single brand product retail trading (SBRT); and (d) multi brand retail trading. Currently, FDI in (a) and (b) above is permitted up to 100% under automatic route. FDI in (c) is permitted up to 100% under approval route (with automatic route up to 49%) and in (d) is permitted up to 51% under approval route. Further, FDI in e-commerce activities is only permitted in marketplace based model1 and is prohibited in inventory based model2. Additionally, subject to compliance with sectoral restrictions for FDI in manufacturing sector, manufacturers are allowed to sell their products manufactured in India through wholesale and/or retail, including through ecommerce, under automatic route.

The Press Note has created a separate category permitting 100% FDI under approval route for all forms of trading, including through e-commerce, in respect of food products manufactured and/or produced in India.

Foreign Investment in Defence Sector

The FDI Policy applicable prior to the Press Note (Earlier FDI Policy) permitted up to 49% FDI in the defense sector under the automatic route. FDI beyond 49% was permitted under approval route on a case to case basis if the proposed FDI was likely to result in access to modern and "state-of-art" technology in the country. While the Earlier FDI Policy did not provide a meaning of "state-of-art" technology and caused significant confusion, the Press Note has done away with the pre-condition of "state-of-art" technology in the country for FDI beyond 49%. FDI beyond 49% would now be permitted in cases resulting in access to modern technology in the country or for other reasons to be recorded. The permission and caps and conditions as above have also been extended to manufacturing of small arms and ammunitions.

Broadcasting Carriage Services

Only last year the Government had increased FDI in broadcasting carriage services i.e. teleports, direct-to-home (DTH) services, cable networks, mobile television and headend-in-the sky broadcasting services (HITS) to 100% under approval route (with up to 49% under automatic route). The Press Note has further liberalized FDI in the aforementioned sectors and up to 100% FDI is now permitted under the automatic route. However, any foreign investment beyond 49% in a company in the above sectors which is not seeking license/permission from sectoral Ministry, which results in a change in the ownership pattern or transfer of shares from an existing investor to a new foreign investor, will require Government approval.

Pharmaceutical

The Earlier FDI Policy permitted FDI up to 100% in greenfield, i.e., new projects in the pharmaceutical sector, under automatic route and up to 100% in brownfield, i.e., old projects in the pharmaceutical sector, under approval route. The Press Note has permitted FDI up to 74% in brownfield category under automatic route. FDI beyond 74% in brownfield category would continue to remain under approval route.

In case of FDI in brownfield category, the Press Note further requires the entity receiving FDI to maintain the: (a) production and supply in domestic market of National List of Essential Medicines (NLEM)3 drugs and/or consumables at the same level as at the time of induction of FDI for a period of 5 years thereafter; and (b) research and development (R&D) expense (in value terms) at the same level as at the time of induction of FDI for a period of 5 years thereafter. The level of production and supply of NLEM drugs and/or consumables and for R&D expenditure as at the time of induction of FDI, will be determined with reference to the highest level of production of NLEM drugs and/or consumables and highest level of R&D expenses incurred, respectively, in immediately preceding three financial years from the date of induction of FDI. Additionally, administrative Ministry have to be provided with complete information pertaining to the transfer of technology, if any, along with FDI proposal in brownfield category.

Civil Aviation Sector

The Earlier FDI Policy permitted up to 100% FDI in greenfield airport projects under automatic route and brownfield airport projects under approval route (with up to 74% under automatic route). The Press Note has increased the FDI limit in brownfield airport projects up to 100% under automatic route.

Similarly, the Earlier FDI Policy permitted FDI up to 49% in scheduled air transport service/domestic schedule passenger airline and regional air transport service under the automatic route. The Press Note has raised the overall ceiling to 100% FDI under approval route while maintaining 49% under automatic route. However, foreign airlines investing in Indian companies operating scheduled and non-scheduled air-transport services are still prohibited from investing more than 49% of their paid up capital under the approval route.

Private Security Agencies

The Earlier FDI Policy permitted up to 49% FDI in private security agencies under the approval route. The Press Note has raised the overall FDI limit to 74% under approval route with 49% under automatic route.

Animal Husbandry

The Earlier FDI Policy permitted up to 100% FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture done under "controlled conditions" under automatic route. The Earlier FDI Policy defined "Controlled conditions" as controlled climatic conditions/habitat required to be created/maintained for carrying out aforesaid activities. The Press Note has omitted the requirement of "controlled conditions" as a precondition for FDI in the aforesaid sectors.

Single Brand Product Retail Trading

Pursuant to the Earlier FDI Policy, if foreign investment in an entity undertaking SBRT exceeded 51%, at least 30% of the value of the goods purchased by such entity was required to be sourced from within India. This requirement was to be met, in the first instance, on an average of five years of total value of goods purchased beginning 1 April of the year of commencement of business i.e. opening of first store. Thereafter, this requirement was to be met on an annual basis. The Earlier FDI Policy also provided that where it was impossible to source goods locally due to the need for "state-of-art" or "cutting-edge" technology, upon request, the government may relax the sourcing requirements.

The Press Note has now omitted the condition regarding request to the Government to relax the sourcing norms and instead has provided a waiver from sourcing norms for a period of 3 years from the date of opening of the first store for entities undertaking SBRT of products having "state-of-art" and "cutting-edge" technology and where local sourcing is not possible.

Establishments of branch office, liaison office or project office

Pursuant to the Earlier FDI Policy, opening of a branch office, liaison office or project office in India by a person resident outside India engaged in the principal business of defence, telecom, private security and/or information and broadcasting required prior approval from the RBI. The Press Note has dispensed with the RBI approval requirement if Government approval under FDI Policy or license/permission by respective Ministry/regulator has already been obtained by such person resident outside India.

III. Conclusion

The amendments effected by the Press Note are significant and liberalize FDI in various sectors. It is expected that this liberalization will result in further foreign investments and help in creating more employment. However, the notification amending FEMA Regulations (that will give legal effect to the Press Note) is still awaited.

Footnotes

1 "Market place based model of e-commerce" under FDI Policy is defined to mean provision of information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

2 "Inventory based model of e-commerce" under FDI Policy is defined to mean an e-commerce model where inventory of goods and services is owned by e-commerce entity and is directly selling such products to end consumers.

3 NLEM is a list of essential medicines prepared by the Ministry of Health and Family Welfare.

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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Authors
Pranav Srivastava
Nikhil Pareek
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