India: The Foreign Direct Investment Policy 2017 Notified By DIPP

Last Updated: 8 September 2017
Article by Dhir & Dhir Associates

The Department of Industrial Policy and Promotion (DIPP) has notified India's Consolidated Foreign Direct Investment Policy 2017 ("FDI Policy 2017"), effective from August 28, 2017. The FDI Policy 2017 is a consolidation of the various decisions taken by the Government of India in the past one year. The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars, which were in force as on August 28, 2017 and reflects the FDI policy as on August 28, 2017.

During the last one year, the Government has liberalised FDI regime by easing norms for a host of important sectors such as Defence, Civil Aviation, Pharmaceuticals, Private Security, Broadcasting etc. to boost FDI investment. Most of the changes have already been notified by the DIPP and Reserve Bank of India (RBI), which are now consolidated in the present FDI Policy 2017.

The FDI Policy 2017 for the first time contains provisions specific to start-up companies. The start-up companies can issue equity or equity linked instruments or debt instruments to foreign venture capital investor (FVCI) against receipts of foreign remittance, as per the FEMA Regulations. In addition, start-ups can issue convertible notes to person resident outside India, subject to certain conditions mentioned therein. This was already notified by the Reserve Bank of India ("RBI") vide Notification No. FEMA.377/2016-RB dated January 10, 2017. The aforesaid notification also provides for the meaning of a 'start-up company' which means a private company incorporated under the Companies Act, 2013 or the Companies Act, 1956 and recognised as such in accordance with the notification number G.S.R. 180(E) dated February 17, 2016 issued by the DIPP. The FDI Policy 2017 also provides for the definition of "Convertible Notes" which means an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such start-up company within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument. A person resident outside India (other than citizens/entities of Pakistan and Bangladesh) will be permitted to purchase convertible notes issued by an Indian start-up company for an amount of Rs. 25 lakh or more in a single tranche.

The FDI policy 2017 now has a definition of "Competent Authority" which means the concerned Administrative Ministry/Department empowered to grant Government Authorities for foreign investment under the extant of FDI Policy and FEMA Regulations. Further, Chapter 4 pertaining to Procedure for Government Approval provides for the relevant Competent Authorities for grant of approval for foreign investments for sectors/activities requiring government approvals in light of Foreign Investment Promotion Board (FIPB) being abolished. It inter-alia provides that the proposals for foreign investment would be examined by the relevant Competent Authorities as per the Standard Operating Procedure laid down by the DIPP (available at http://www.fifp.gov.in/Forms/SOP.pdf). In the event the proposals involves total

foreign equity inflow of more than Rs. 5000.00 Crore the relevant competent authority will place the proposal for consideration of Cabinet Committee on Economic Affairs ("CCEA"). Further, the FDI Linked Performance Conditions, which is also a new addition, means the sector specific condition for companies receiving foreign investment. The FDI Policy 2017 also clarifies that conversion of an LLP into a company or vice-a-versa having foreign investment and operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions is permitted under automatic route.

The FDI Policy 2017 also simplifies the definition of 'Venture Capital Fund', which is now defined as a fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Some of the key decisions taken by the Government in the past one year, which are now consolidated in the FDI Policy 2017 are provided below:

  1. Branch office, Liaison office or Project office: For establishment of branch office, liaison office or project office or any other place of business in India if the principle business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of the RBI is not required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted. This was already notified by the RBI last year.
  2. Defence Sector: Foreign investment beyond 49% has now been permitted through government approval route, wherever it is likely to result in access to modern technology or for other reasons to be recorded.
  3. Broadcasting Sector: The sectoral cap in broadcasting carriage services such as Teleports, DTH, Cable Networks (Digital), Mobile TV, HITS has been raised from 49% to 100% automatic route. However, in case of infusion of fresh foreign investment beyond 49% not seeking license/permission from Sectoral Ministry resulting in change of ownership pattern or transfer of stake by existing investor to new investor will require government approval.
  4. Food Products: 100% FDI under automatic route for trading, including through e- commerce, is permitted in respect of food products manufactured and/or produced in India.
  5. Civil Aviation: With a view to aid in modernization of the airports to establish a high standard while helping in easing the pressure on the airports, 100% FDI under automatic route has been permitted in existing projects under automatic route. The earlier FDI Policy 2016 permitted upto 74% under the automatic route and beyond that upto 100% through government approval route. Further, in terms of the Scheduled Air Transport Service/Domestic Scheduled Passenger Airlines and Regional Air Transport Service, the FDI Limit has been raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval.
  6. Private Security Agencies: The FDI Policy 2016 permitted FDI upto 49% under government approval route in Private Security Agencies. However, the FDI Policy 2017 permits FDI up to 49% under automatic route and beyond 49% and upto 74% is permitted through government approval route.
  7. Single Brand Product Retail Trading: Sourcing norms have been relaxed up to three years from the date of commencement of the business, i.e. opening of the first store for entities undertaking single brand retail trading of products having 'state of art' and 'cutting edge' technology.
  8. Other Financial Services: The earlier FDI Policy 2016 provided that an NBFC having FDI under the automatic route is permitted to engage in only 18 specified NBFC activities and financial activities other than those 18 specified NBFC activities required prior approval of the Government. The FDI Policy 2017 now allows the foreign investment in other financial services beyond the 18 specified NBFC activities under automatic route provided the activities are regulated by financial sector regulators such as RBI, Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority, Insurance Regulatory Authority of India etc. Further, minimum capitalization norms as mandated under FDI Policy 2016 for foreign investment in NBFCs have been done away with, considering the financial regulators prescribe their own set of capitalization norms. This was much awaited change which is likely to provide a level playing field in the concerned sector.
  9. Pharmaceutical Sector: The earlier FDI policy on pharmaceutical sector provided for 100% FDI under automatic route in greenfield pharma and FDI up to 100% under government approval in brownfield pharma. The FDI Policy 2017 permits 74% FDI under automatic route in brownfield pharmaceuticals and beyond 74% will be permitted through Government approval route.

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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