India: FDI Policy Changes: Moving Towards An ‘Automatic' Regime

The Union Government, on June 20, 2016, announced certain major policy reforms to further liberalise foreign direct investment (FDI) rules in India, in order to give a boost to manufacturing in India and facilitate employment and job creation.

In pursuance to the said announcement, Department of Industrial Policy and Promotion ("DIPP") has, on June 24, 2016, issued Press Note No. 5 (2016 Series) ("Press Note") amending the Consolidated FDI Policy Circular of 2016 as issued on June 7, 2016 ("FDI Policy").

The changes brought in vide the Press Note include increase in sectoral caps, bringing more activities under the automatic route and easing of conditionalities imposed for FDI in certain important sectors, the details of which have been discussed hereunder:

Note: Only relevant conditions in respect of different sectors under FDI Policy which has undergone the change are being dealt herein. For complete text, read FDI Policy and Press Note collectively.

Existing Position Revised Position
1. Food products:
Manufacturing (including selling the products manufactured in India by the manufacturer through wholesale and/or retail, including through ecommerce)- 100% FDI under automatic route;

Trading:

(a) Multi-brand retail trading- up to 51% FDI under government route;

(b)Single brand product retail trading-100% FDIunder automatic route up to 49% and government route beyond 49%; and

(c) Cash-and-carry wholesale trading/ wholesale trading- 100% under automatic route.

Trading in Food Products manufactured/ produced in India:

100% FDI under government route for trading, including through e-commerce, in respect of food products manufactured and/or produced in India.

Applications to be processed at DIPP level before being considered by the government for approval.
Comment: In line with the statement made by the government in its budget 2016-17, 100% foreign investment has been allowed in trading of food products manufactured/ produced in India. This will not only benefit Indian farmers, but will also give impetus to food processing industry and create vast employment opportunities in India.
2. Defence:
FDI up to 49% under automatic route;

Beyond 49% under government route on case to case basis, wherever it is likely to result in access to modern and 'state-of-art' technology in the country.
FDI up to 49% is still under automatic route;

In case of government route, the condition of access to 'state-of-art' technology in the country has been done away with.

Now, FDI beyond 49% is permitted through government route in cases resulting in access to modern technology in the country or for other reasons to be recorded.

The aforesaid FDI limit has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act, 1959.
Comment: Doing away with the condition of access to 'state-of-art' technology will provide the government with more leverage in evaluating and deciding on investment proposals beyond 49% by foreign investors.

Further, allowing foreign investment in manufacturing of small arms and ammunitions is expected to encourage leading international players to enter Indian market and cater its huge demand of firearms for the armed forces, paramilitary as well as police forces.
3. Broadcasting Carriage Services:
100% FDI (automatic route up to 49% and government route beyond 49%) is allowed in following areas:

(a) Teleports (setting up of up-linking HUBs/ Teleports);

(b)Direct to Home (DTH);

(c) Cable Networks (Multi System operators (MSOs) operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability);

(d) Mobile TV;

(e) Headend-in-the Sky Broadcasting Service(HITS)

(f) Cable Networks [Other MSOs not undertaking upgradation of networks towards digitalization and addressability and Local Cable Operators (LCOs)]
100% FDI is allowed under automatic route.

However, infusion of fresh foreign investment beyond 49% in a company not seeking license/ permission from sectoral Ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require government approval.
Comment: The move to allow 100% FDI under automatic route for broadcasting carriage services like teleports, direct-to-home, cable networks, mobile TV and Headend-in-the-Sky Broadcasting is expected to speeden up the digitization process and will aid in improving infrastructure in the sector.
4. Pharmaceutical:
Greenfield- 100% (automatic route); and

Brownfield- 100% (government route)

'Non-compete' clause not allowed except in special circumstances with the approval of FIPB.
Greenfield- 100% (automatic route)

Brownfield- Up to 74% (automatic route); Beyond 74% (government route)

It has been clarified that 'non-compete' clause would not be allowed except in special circumstances with the approval of FIPB in cases of FDI both under automatic or government route.

Further, a new clause has been inserted which states that FDI in brownfield pharmaceuticals, under both automatic and government approval routes, is subject to compliance of following additional conditions:

(a) The level of production of National List of Essential Medicine (NLEM) drugs and/or consumables and their supply to the domestic market, required to be not less than highest level of production of NLEM drugs and/or consumables in any of the 3 financial years immediately preceding the year of induction of FDI, shall be maintained at an absolute quantitative level for next 5 five years.

(b)R&D expenses is required to be maintained in absolute terms for next five years which shall not be less than highest level of R&D expense incurred in any of the 3 three financial years immediately preceding the year of induction of FDI.

(c) Complete information pertaining to the transfer of technology, if any, along with induction of foreign investment into the investee company is required to be provided to the administrative Ministry.
Comments: Allowing 74% foreign investment in brownfield projects under automatic route is expected to give a major boost to the Indian pharmaceutical sector by facilitating easier funding in pharmaceutical expansion projects.

The said conditions seek to address the concerns over availability of essential medicines, continued R&D and availability of technology.
5. Civil Aviation:
- Airports

Greenfield- 100% FDI (under automatic route)

Brownfield- 100% FDI (automatic route up to 74% and government route beyond 74%)
Greenfield- 100% (under automatic route)

Brownfield- 100% (under automatic route)
- Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and Regional Air Transport Service

Up to 49% (for NRIs up to 100%) (under automatic route)

For foreign airlines up to 49% (government route)
100% FDI allowed (automatic route up to 49% and government route beyond 49%);

For NRIs- 100% under automatic route will continue to be allowed;

Foreign airlines would continue to be allowed to invest only up to the limit of 49% under government route and subject to the other conditions laid down in FDI Policy.
Comments: Increase in foreign investment limit in 'airports' will aid in modernising the existing airports in India so as to establish higher standards.

The decision of the government to allow foreign investors (barring foreign airlines) for 100% investment in the air transport services is expected to aid the cash-strapped Indian carriers to bring in the much- needed investment.
6. Private Security Agencies:
Up to 49% (government route) Up to 74% is allowed (Up to 49% under automatic route and beyond 49% and up to 74% under government route).

Other conditions remaining the same as stated FDI Policy.
Comment: This is a welcome move encouraging foreign companies to pick up stake in private security agencies in India up to 49% under approval route.
7 Animal Husbandry, Pisciculture, Aquaculture and Apiculture:
100% FDI under automatic route in respect of Animal Husbandry, Pisciculture, Aquaculture and Apiculture under 'controlled conditions', which broadly include rearing of animals under intensive farming systems with stall feeding, poultry feeding farms and hatcheries with controlled micro-climate, aquariums, honey production in spaces with controlled temperatures and climatic factors, etc. 100% FDI continues to be allowed in Animal Husbandry, Pisciculture, Aquaculture and Apiculture.

However, the requirement of said 'controlled conditions' has been done away with.
Comments: Foreign investors shall be able to invest up to 100% in companies engaged in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture without having 'controlled conditions' e.g. temperature controlled hatcheries, poultry farms, etc.
8 Single Brand Retail Trading:
100% FDI (automatic route up to 49% and government route beyond 49%), subject to certain conditions, which inter-alia, include:

- Sourcing of 30% of the value of goods purchased is mandatorily required to be done from India (preferably from MSMEs, village and cottage industries, artisans and craftsmen) in respect of proposals involving foreign investment beyond 51%.

Government may relax sourcing norms for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible.
30% sourcing norms are not applicable for up to 3 years from commencement of business i.e. opening of first store for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting edge' technology and where local sourcing is not possible. Thereafter, the said norms for 30% sourcing shall apply.
Comments: The revised condition with respect to local sourcing can be seen as a welcome change for international brands presently selling their products under single brand retail segment, which shall get a waiver from the local sourcing conditionality for 3 years from opening of the first store.
9. Establishment of branch/ liaison/ project office
Apart from the above, approval of RBI is no longer required for establishment of branch office, liaison office or project office or any other place of business in India in case where principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting and FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

The text of the Press Note No. 5 (2016 Series) dated June 24, 2016 and the Press Release dated June 20, 2016 can be viewed at:

http://dipp.gov.in/English/acts_rules/Press_Notes/pn5_2016.pdf

http://pib.nic.in/newsite/PrintRelease.aspx?relid=146338

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg 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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Authors
Vinay Vaish, Partner, Vaish Associates Advocates
Sargam Marwaha, Associate, Vaish Associates
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