India: Changing Landscape Of The Indian Foreign Direct Investment Policy

Last Updated: 28 September 2017
Article by Seema Jhingan, Neha Yadav and Saniya Kothari

The foreign direct investment ("FDI") policy of India has in the recent past witnessed a series of reforms introduced by the Government with the aim of increasing FDI inflows into India inter alia by liberalizing FDI in various sectors and streamlining the approvals processes. According to the Ministry of Commerce and Industry, FDI inflows hit an all-time high of USD 60.1 billion in 2016-17 as compared to FDI inflows of USD 55.6 billion for the year ending March 2016, (as against record high of USD 139 billion FDI inflows in China in 2016).

The abolishment of the Foreign Investment Policy Board ("FIPB"), allowing start-ups to issue convertible notes (a debt instrument) to non-residents under the FDI regime, and notification of a new consolidated FDI policy circular of 2017 dated August 28, 2017 ("FDI Policy-2017") consolidating the changes brought in since 2016 and also introducing certain new changes, have been amongst the most notable changes introduced this year, as discussed in brief below. 

A.              Abolishment of FIPB; New SOP for processing of FDI applications.

In line with the budget speech of the Finance Minister earlier this year, the abolishment of FIPB has been notified by the Government vide its office memorandum dated June 5, 2017. The FDI approvals would now be granted by the administrative ministries/departments ("Competent Authority"), as more particularly specified in the said office memorandum and Standard Operating Procedure ("SOP") released by Department of Industrial Policy & Promotion ("DIPP") on June 29, 2017. For instance, FDI proposals in sectors like mining, broadcasting, print media, civil aviation, satellites, telecommunications, banking, pharmaceuticals, would be approved by the relevant sector specific ministries/departments. Additionally, certain applications involving investments from Countries of Concern (like Pakistan and Bangladesh) or applications seeking investment in defence, telecommunications, broadcasting, satellite etc. would need security clearance from the Ministry of Home Affairs. DIPP has been notified as the Competent Authority to approve FDI proposals in the trading sector. In cases of sectors where there is a doubt about the Competent Authority, DIPP will identify the Competent Authority for processing of the application. The earlier requirement of proposals for FDI above Rs. 5,000 crore requiring consideration of the Cabinet Committee on Economic Affairs, however, continues to apply. 

FDI proposals are required to be filed online on the revamped FIPB Portal (now Foreign Investment Facilitation Portal), which will thereafter be e-transferred by DIPP to the Competent Authority for necessary action. Submission of a physical copy would not be required if the online proposal has been signed digitally. DIPP will also circulate the proposal online to RBI, and proposals requiring security clearance would be additionally referred to the Ministry of Home Affairs. All proposals would also be forwarded to the Ministry of External Affairs and the Department of Revenue for information and comments. The SOP, thereafter, goes into step by step timelines for submission of comments by the consulted ministries/departments/RBI and expects the entire approval process to take approximately 8 weeks from the date of filing of a complete application with the Competent Authority and about 10 weeks for applications requiring security clearance.

B.              Issuance of Convertible Notes by Start-Ups.

Earlier this year, RBI by its notification dated January 10, 20171 permitted start-ups to issue 'convertible notes' to foreign investors, which was defined as an instrument evidencing receipt of money initially as debt, which is (a) repayable at the option of the holder, or (b) convertible into such number of equity shares of such startup 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 agreed terms and conditions. Issuance of such convertible notes is, however, subject to certain prescribed conditions, such as:

(i)                The convertible notes should be for a minimum amount of Rs. 25 Lacs in a single tranche.

(ii)               If the startup is in a sector where FDI requires Government approval, issuance of convertible notes to a non-resident or any transfer of such convertible note would also require Government approval.

(iii)              Issue of shares against convertible notes is to be in accordance with the Schedule 1 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, which inter alia prescribe certain pricing guidelines. Similarly, acquisition or transfer of convertible notes between residents and non-residents would also need to be in accordance with the pricing guidelines prescribed by RBI, thereby treating them at par with other FDI instruments.

(iv)              The remittance of consideration can also be received in an escrow account which can continue until the requirements are completed (i.e. remittance of consideration into the issuer's account and issuance of convertible notes to the investor) or a period of 6 months, whichever is earlier.

The above regulations have now been reflected in the FDI Policy – 2017, bringing the FDI policy in line with the RBI regulations. This is a welcome move for start-ups, as the FDI policy till now, had only recognized equity shares or equity linked instruments (such as compulsorily convertible debentures or preference shares) as FDI compliant instruments, and instruments which were non-convertible or optionally convertible into equity shares were considered as 'debt' instruments and therefore subject to external commercial borrowing norms. This policy change caters to the particular needs of the start-ups, where foreign investors are more attracted to instruments which do not necessarily require them to take the equity risk of a fledgling start-up, but at the same time allows them to share the upside if the start-up does well. It is for this reason that instruments like convertible notes have become very popular in other countries who have a more established start-up base.

That said, the real impact of this policy change depends on the number of start-up companies which would be able to take its benefit, as it is only available to private companies recognized as a start-up in accordance with DIPP's notification dated May 23, 2017. As per this notification, an entity would be considered as a start-up for a period of up to 7 years (or 10 years in case of biotechnology sector) from the date of its incorporation, if it's turnover for any of the financial years since incorporation has not exceeded Rs. 25 crores, and if it is working towards "innovation, development, or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation". Further, to be recognized as a start-up and avail the benefits, an entity is required to register itself with DIPP by submitting an application (with prescribed documents) online.

C.              Consolidated FDI Policy of 2017.

The DIPP on August 28, 2017 released the new FDI Policy-2017, consolidating the recent changes brought in the FDI policy. A brief snapshot of certain major changes is given below:

(i)                Conversion of a Company into LLP and vice versa: The FDI Policy – 2017, permits conversion of an Limited Liability Partnership ("LLP") with FDI into a company, and conversion of a company with FDI into an LLP, under the automatic route, as long as the said LLP or company, is operating in a sector where 100% FDI is allowed under automatic route and where there are no FDI-linked performance conditions. A definition of 'FDI Linked Performance Conditions' has also been added, to mean sector specific conditions for companies receiving foreign investment.

(ii)               Limit on additional FDI within approved foreign equity percentage or wholly owned subsidiary: Under the erstwhile FDI policy for the government route sector, any additional foreign investment into the same entity (which has already received government approval) within an approved foreign equity percentage or into a wholly owned subsidiary did not require prior government approval i.e., such approved entities could have generally received foreign investment exceeding Rs. 5000 crore without additional approval as long as (i) the earlier investments in the entity were government approved and (ii) such additional investments are within the approved foreign equity percentage. However, the FDI Policy-2017, has modified this paragraph and stated that additional foreign investment up to cumulative amount of Rs 5000 crore within the approved foreign equity percentage/or into a wholly owned subsidiary, would not require prior government approval. Therefore, by implication, any additional foreign investment beyond the said limit of Rs. 5,000 crores would require a fresh government approval.

(iii)              Single Brand Retail Trading: In case the proposed FDI in a single brand retail trading ("SBRT") entity is beyond 51%, sourcing of 30% of the value of goods purchased, has to be done from India. However, the Press Note 5 of 2016, dated June 24, 2016 allowed SBRT entities undertaking trading of products having 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible, to seek exemption from these sourcing norms for a period of 3 (three) years from opening of its first store. Thereafter, the sourcing norms would become applicable. The FDI Policy-2017, reflects this change and further provides that examination of claims of applicants (and recommendations of relaxations) on the issue of products being in the nature of 'state-of-art' and 'cutting-edge' technology, where local sourcing is not possible would be undertaken by a committee under the Chairmanship of Secretary, DIPP.

In the absence of clear definitions on what constitutes "state-of-art" and "cutting-edge" technology, constitution of this committee would allow applicants to approach the committee with their individual case and seek exemptions. However, to bring in further clarity, the Government should consider coming out with certain basic guidelines or qualifying parameters on the basis of which such applications would be examined and approved by the committee.    

(iv)             Wholesale Trading entity permitted to undertake both single brand and multi-brand retail trading: Earlier, a wholesale/cash & carry trader was not allowed to undertake retail trading in the same entity, which restriction was later relaxed and an entity undertaking wholesale trading was permitted to undertake single brand retail trading provided it maintained separate books of accounts for these two areas of business. The FDI Policy -2017 replaces the reference to "single brand retail trading" by "retail trading", thereby allowing a wholesale/cash and carry trader to undertake both single brand and multi-brand retail trading in the same entity.

(v)                          E-Commerce – Clarification on computation of 25% sales value cap: Last year saw detailed guidelines on FDI in the e-commerce sector being brought in by the Government, which inter alia restricted an e-commerce entity from permitting more than 25% of the sales affected through its marketplace from one vendor or their group companies. This restriction has been further clarified in the FDI Policy-2017 to be calculated as 25% of value of sales, on a financial year basis.

D.              Concluding Remarks.

The last couple of years have seen a flurry of reforms aimed at making the FDI policy more streamlined and investor friendly. The extent of actual impact of the changes, however, remains to be seen. For instance, while the FDI liberalizations being brought in are indeed welcome, the much touted institutional change of abolishment of FIPB which is expected to cut away the bureaucracy and red tape hurdles faced by applicants under the erstwhile regime, may just be a classic case of old wine in a new bottle, given the number of ministries/departments which continue to remain involved in the FDI approval process. That said, due credit needs to be given to the Government, for bringing in all these measures and initiatives to facilitate foreign investment inflows into the country. However, whether the FDI inflows will continue to be on an upward swing on March ending 2018 in the backdrop of shaky Indian economy impacted by the effects of demonetization and confusions created by GST is yet to be seen.

Footnotes

1 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fifteenth Amendment) Regulations, 2016

Disclaimer: LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Seema Jhingan
Neha Yadav
Saniya Kothari
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.