UK: New Foreign Investment Hub

Last Updated: 3 December 2012
Article by Vaishakh Kapadia

Second Wave of Reforms

The last quarter saw a very active Government taking all possible steps to boost investor confidence in the Indian market. Undeterred by growing negative publicity and corruption scandals, the Manmohan Singh Government took a hard stand on some critical and long pending policy reforms, which are being seen as a huge milestone towards revival of the Indian economy.

The Government of India ("GOI") has recently introduced certain robust economic reforms relating to foreign direct investments ("FDI"). Some significant reforms and the implications thereof are set out below.

1. Multi-brand product retail trading

The GOI has now approved FDI in multi-brand retail trading, up to 51% through government approval route. The Department of Industrial Policy and Promotion ("DIPP") has vide Press Note No. 5 of 2012, notified this amendment to the consolidated FDI policy dated 10 April 2012 ("Consolidated FDI Policy"). FDI in multi-brand retail trade is permissible subject to the following conditions:

  1. The State government will have the prerogative to decide as regards the implementation of the policy in the concerned state.
  2. Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.
  3. The minimum FDI to be brought in by a foreign investor is US$ 100 million.
  4. 50% of total FDI brought in is required to be invested in 'backend infrastructure' within three years of first tranche of investment.
  5. At least 30% of the value of procurement of manufactured processed products shall be sourced from Indian 'small industries' which have a total investment in plant and machinery not exceeding US$ 1 million. This condition has to be met in the first instance, as an average of five years' total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter it has to be met on an annual basis.
  6. The company in which FDI is made will have to self certify compliance of (ii), (iii) and (iv) above, which may be verified, as an when required.
  7. Retail stores can be set up only in those cities which have a population of more than 1 million as per the 2011 census..
  8. FDI will not be allowed in online trading or e-commerce.
  9. Government will have the first right of procurement of agricultural products.

2. Single-brand product marketing

The government had previously raised the FDI limits from 51% up to 100% in single-brand product retailing, vide Press Note No.1 of 2012 dated 10 January 2012, under the government approval route and subject to inter alia the following conditions:

  1. Products to be sold should be of a 'Single Brand' only.
  2. Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.
  3. 'Single Brand' product-retailing would cover only products which are branded during manufacturing.
  4. The foreign investor should be the owner of the brand.
  5. In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen'. 'Small industries' would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million.

The government has now reviewed the policy on single-brand product retail trading and amended conditions (iv) and (v) above:

  1. Firstly, only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought.
  2. Secondly, the language for the sourcing requirement has been modified and now states "In respect of proposals involving FDI beyond 51% sourcing of 30% of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors". This has diluted the previous condition to 'mandatorily' source 30% of requirements from micro, small and medium enterprises (MSMEs) in India.

Companies with FDI single-brand retail will not be allowed to engage in online trading or e- commerce.

3. Civil Aviation

No foreign airlines were previously allowed to participate directly or indirectly in the equity of an 'Air Transport Undertaking' engaged in operating scheduled and non-scheduled air transport services except cargo airlines. The government has revised its policy by Press Note No. 6 of 2012, whereby it has approved investment by foreign airlines up to 49% in the equity of Indian companies operating scheduled and non-scheduled domestic air-transport services. As per the press note, 'Air Transport Services' would include 'Domestic Scheduled Passenger Airlines'; 'Non-Scheduled Air Transport Services', helicopter and seaplane services. Foreign airlines are now also allowed to invest, in the capital of Indian companies, operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. Such investment would be subject to the following conditions:

  1. The investment must be made under the Government approval route.
  2. The 49% limit includes FDI and Foreign Institutional Investors ("FII") investment.
  3. The investments so made would need to comply with the relevant regulations of SEBI.
  4. A Scheduled Operator's Permit would be granted only if the company in which the investment is made:
  1. is registered and has its principal place of business within India;
  2. has a Chairman and at least two-thirds of the Directors are citizens of India; and
  3. is substantially owned and effectively controlled by Indian nationals.

iv. All foreign nationals likely to be associated with Indian scheduled and non-scheduled air transport services, as a result of such investment shall be cleared from a security view point before deployment; and

v. All technical equipment that may be imported into India as a result of such investment should have obtained clearance from the relevant authority in the Ministry of Civil Aviation.

4. Broadcasting

The government vide DIPP Press Note No. 7 of 2012 has raised the FDI limit in companies engaged in broadcasting carriage services from 49% to 74% subject to certain conditions specified by the Ministry of Information and Broadcasting. Significant modifications to the existing policy are:

  • i. Teleports (setting up up-linking HUBs/teleports); Direct to Home; Cable Networks (MSOs (multi-system operators) operating at National or State or District level and undertaking up-gradation of networks towards digitalization and addressability):

    a) Foreign investment cap has been increased from 49% to 74%, in the manner set out below:

    b) Foreign investment up to 49% being permitted under the automatic route; and

    Foreign investment beyond 49% and up to 74% being permitted under the Government route.

  • ii. Mobile TV:

    Previously the FDI Policy did not have any specific sectoral cap for 'mobile TV'.However now the policy expressly sets out sectoral caps for FDI, as follows:

    a) Foreign investment up to 49% being permitted under the automatic route; and

    b) Foreign investment beyond 49% and up to 74% being permitted under the Government route.

    iii. Cable Networks (Other MSOs (multi- system operator) not undertaking up-gradation of networks towards digitalization and addressability and Local Cable Operators (LCOs)

    Previously FDI up to 49% was permitted under the Government approval route 49% FDI is now permissible under the automatic route.

    iv. Headend-in-the Sky ("HITS") Broadcasting Service

    The FDI policy with respect to HITS broadcasting service remains unchanged and the existing sectoral cap of 74% foreign investment will continue to apply for this service.

    v. Broadcasting Content Services Terrestrial Broadcasting FM (FM Radio)

    The FDI policy in this sector remains unchanged.

    Foreign investment limits in companies engaged in various activities of providing broadcasting carriage services will include, in addition to FDI, investments by FIIs, NRIs, FCCBs, ADRs, GDRs and convertible preference shares held by foreign entities, thereby bringing it in line with the telecom sector.

    5. Power Exchanges

    The Government has vide Press Note No. 8 of 2012, reviewed the FDI policy and decided to permit foreign investment of up to 49%, in power exchanges, registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, subject to inter alia following conditions:

    1. i. Such foreign investment would be subject to an FDI limit of 26% and FII limit of 23% of the paid-up capital;
    2. FII investments would be permitted under the automatic route and FDI would be permitted under the government approval route;
    3. FII purchases are to be restricted to the secondary market only;
    4. No non-resident investor/ entity, including persons acting in concert, would be permitted to hold more than 5% of the equity in these companies; and
    5. The foreign investment would be in compliance with SEBI Regulations; other applicable laws/regulations; security and other conditions.

    This move will remove the ambiguity relating to FDI in power exchanges. Further, FDI in these exchanges means that Indian power exchanges can have tie-ups with foreign bourses and share knowledge and expertise. This move should give a boost to this potential sector.

    Conclusion Although the industry has greeted these reforms with open arms, only time will decide the success of these reforms.

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