India: Recent Changes To The FDI Policy Of The Government Of India

Last Updated: 24 September 2019
Article by Mini Raman

The department for the promotion of industry and internal trade ("DPIIT") has issued Press Note 4 of 2019 dated 18th September 2019 ("Press Note 4") notifying the changes to the foreign direct investment policy of the government approved by the Union Cabinet of the Government of India. The changes are to come into effect from August 28th 2019.

The changes introduced by the Press Note 4 to the foreign direct investment policy circular 2017 ("FDI Policy") are as follows:

(1) Coal and Lignite Mining

Under the Press Note 4, 100% foreign direct investment under the automatic route has been permitted in Indian entities engaged in coal and lignite mining for captive consumption for power projects, iron and steel and cement units and for other activities permitted under and subject to the provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957. 100% foreign direct investment under the automatic route has also been permitted in Indian entities engaged in the sale of coal, coal mining activities including associated processing infrastructure subject to the provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957 and other relevant laws on the subject matter. A clarification has been provided that "associated processing infrastructure" includes coal washing, crushing, coal handling and separation (both magnetic and non-magnetic).

The rationale behind this amendment is to attract international players to create a competent and efficient coal market in India.

(2) Contract Manufacturing

Foreign direct investment in manufacturing was under the 100% automatic route under the FDI Policy. Press Note 4 however clarifies that foreign direct investment in Indian entities engaged in contract manufacturing through a legally tenable contract whether on a principle to principle basis or on a principle to agent basis is also permitted under the 100% automatic route.

This amendment is expected to give a boost to domestic manufacturing.

(3) Single Brand Retail Trade

Foreign direct investment in SBRT had been permitted upto 100% under the earlier FDI Policy however investments exceeding 49% had to procure prior government approval and were not under the automatic route (i.e. the route which required no prior government approval for the investment). Under Press Note 4 all foreign direct investment in SBRT is permitted 100% under the automatic route.

The Press Note 4 also introduces changes to the sourcing norms. In all cases of investments beyond 51%, 30% of the value of the good has to be procured from India as in case of the earlier FDI policy. However, under the Press Note 4 for the purpose of meeting local sourcing requirements, all procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. The SBRT entity is also permitted to set off sourcing of goods from India for global operations against the mandatory sourcing requirement of 30%. The Press Note also clarifies that, 'sourcing of goods from India for global operations' shall mean value of goods sourced from India for global operations for that single brand (in INR terms) in a particular financial year directly by the entity undertaking SBRT or its group companies (resident or non-resident), or indirectly by them through a third party under a legally tenable agreement.

Further under the previous FDI policy, an entity undertaking SBRT could only under take retail trade through e-commerce after opening a brick and mortar store. This requirement has been relaxed under Press Note 4 which provides that online retail trading can be undertaken prior to opening a brick and mortar store provided the brick and mortar store is opened within two years from the date of start of online retail trading.

(4) Digital Media

Press Note 4 introduces a new entry of digital media and permits 26% FDI under the government approval route in entities that are engaged in uploading / streaming of news & current affairs through digital media.

The prevailing FDI Policy permits 49% FDI under the government approval route in "Up-linking of News & Current Affairs' TV Channels and 100% FDI under the automatic route in the Up-linking of Non- News & Current Affairs' TV Channels/ Down linking of TV Channels".

This entry appears to be a little ambiguous as it is not clear whether uploading / streaming of non- news & current affairs through digital media would fall under the automatic route. Further the limit of 26% FDI for digital media is unclear.

COMMENTS:

Given the slowing down of the economy, the changes introduced by Press Note 4 seems to be commendable to make India more attractive as an investment destination. However the question arises whether the changes are sufficient or whether greater and bolder changes are required to the FDI Policy?

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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