India: Foreign Direct Investment In Single Brand Retail Trading – Streamline Of The Approval Process

Last Updated: 5 September 2017
Article by Sarthak Sarin

Most Read Contributor in India, August 2018

Background

The regulatory regime governing foreign direct investment (FDI) in single brand retail trading (SBRT) sector is encapsulated in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 read with the Consolidated FDI Policy, as amended from time to time by the Government of India (FDI Regulations). In terms of the FDI Regulations, FDI in SBRT is permitted up to 100% in the following manner:

  1. FDI up to 49% is permitted under the automatic route (i.e. such investment does not require the prior governmental approval); and
  2. FDI in excess of 49% falls under the approval route (i.e. such investment requires the prior approval of the government).

The proposals for FDI beyond 49% in the SBRT sector were processed and approved by the Department of Industrial Policy and Promotion (DIPP) and the Foreign Investment Promotion Board (FIPB). However, given the recent dissolution of FIPB by the Government of India on 24 May 2017, there has been an overhaul of the approval process for FDI proposals (falling under the approval route) across all sectors wherein FDI is permitted. Instead of FIPB acting as the nodal authority, such proposals will now be processed, scrutinised and approved by the concerned Department/ Ministry of the Government of India relevant to the particular sector in question (Competent Authority). In order to provide clarity on, and to streamline the mechanism related to the FDI approval process, the DIPP issued a standard operating procedure (SOP) on 29 June 2017. The SOP is meant to act as a guidance note for applicants and the officials of the Competent Authority and, amongst other things, sets out the procedure to be followed while (i) seeking the FDI approval; and (ii) processing the FDI applications, under the approval route.

While the overhauled procedure and timelines for the processing of FDI proposals by DIPP is detailed in the SOP, a snapshot of such procedure and the underlying timelines is as follows:

STEPS                TIMELINE

  • The FDI proposal is required to be electronically filed on the existing Foreign Investment Facilitation Portal along with the documents which are mentioned in Annexure-1 of the SOP. If the electronic application is digitally signed, then the applicant is not required to file a physical copy of the application with the DIPP.
  • If the electronic application is not digitally signed, then the applicant is required to submit a physical copy of the application to the DIPP within 5 days of making the electronic filing.
  • Once the FDI proposal has been filed with DIPP in the manner as set above, DIPP will share a copy of the proposal with Reserve Bank of India (RBI) within 2 days in order to seek its comments from the standpoint of Foreign Exchange Management Act, 1999. All proposals are also required to be sent to the Ministry of External Affairs and Department of Revenue for information for their information and comments.
  • DIPP is required to scrutinise the proposal and documents within 1 week and requisition the relevant additional information/documents, if required.
  • If DIPP needs to consult any other Ministry/Department of the Government of India, the Secretary of DIPP is required to give full justification and rationale for such consultation.
  • The concerned Ministries/Departments consulted on the proposal are required to upload their comments on the website of the FIPB within 4 weeks from the date of receiving the proposal online, failing which it shall be presumed that they have no comments on the proposal.
  • On completion of the (assessment of the) FDI proposal in all respects, DIPP is required to, within the next 2 weeks, process the FDI proposal for decision and intimate the same to the applicant electronically.
  • Approval letters are required to be issued by DIPP in the format as prescribed in Annexure-2 to the SOP.
  • FDI proposals involving total foreign equity inflow of more than INR 5000 crore, are required to be placed for consideration of the Cabinet Committee on Economic Affairs within the above timelines. After the receipt of the decision of the Cabinet Committee on Economic Affairs, the approval letter is required to be issued within 1 week to the applicant.

As is evident from the aforementioned new process, the total timeframe envisaged for the approval/rejection of the FDI proposal is now 8 - 10 weeks from the date of filing of the online application. However, any time expended in making corrections to the proposals or supplying additional information to DIPP by the applicants will extend the foregoing timelines accordingly. At the same time, where a physical copy of the application is also required to be filed, then the foregoing time limit is determined from the date of filing of the physical application.

The new regime is a welcome change as it now transparently sets out the approval process explicitly, which up until now was opaque. Further, the new timeline of 8 to 10 weeks (which has been significantly reduced from the erstwhile typical period of 5 to 6 months), even though not binding, provides a sense of clarity and certainty to the investors, which in our view reinforces the Government's commitment to attract more FDI in India and at the same time improves the ease of doing business in India. Nevertheless, in practice it remains to be seen how effectively this regime will function, and if the new timeline is adhered to by DIPP (more particularly in cases where security clearance is required from Ministry of Home Affairs).

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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