Liberalization of The Fdi Regime

There has been a considerable thinking about FDI by central government since it came into power in 2014. The country which has adopted many revolutionary economic changes like GST was not considered as an “ease of business doing country” in many surveys. But, on January 10, 2018, the Union Cabinet approved certain key amendments to the Consolidated FDI Policy Circular of 2017. The amendments aim to further liberalize and simplify the FDI Policy to create a more foreign investor-friendly atmosphere and, in turn, attract more foreign direct investment in the country.

This amendment marks another step in a series of steps already taken by the government in this regard, including the recent amendments to the regime governing the transfer and issue of securities held by non-residents2 and the notification of the new rules consolidating the filing and reporting requirements under the Foreign Exchange Management Act, 1999.3.

Key Changes

The key amendments to the FDI Policy

Single brand product retail trading

Before FDI policy, foreign investment in entities undertaking single brand product retail trading (“SBRT”) was allowed up to 100%, with up to 49% being allowed under the automatic route and prior Government approval being required beyond 51%.

The amended FDI Policy now permits up to 100% FDI in SBRT through the automatic route. The companies no longer need to consult government for investment. Further, the local sourcing requirement with respect to SBRT has been eased. As a result of the amendment, an entity undertaking SBRT does not need to meet the 30% local sourcing requirement through its Indian units for the first five years, if the requirement is met through sourcing from India for its global operations, either directly or through its group companies.

After completion of the 5-year grace period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its Indian operation, on an annual basis.

Civil aviation

Another milestone happened in amended FDI policy was the removal of prohibition on foreign airlines to invest in Air India. Under the FDI Policy, foreign airlines were allowed to invest under the government approval route in Indian companies (except in relation to Air India Limited (“Air India”)), operating scheduled and non-scheduled air transport services, up to a limit of 49% under the government approval route in Air India. This is subject to the condition that foreign investment in Air India shall not exceed 49%, directly or indirectly, and substantial ownership and effective control shall continue to be vested in Indian nationals. This can be seen as a new birth of Air India which has a debt of 50000 crore rupees.

Real estate

Under the FDI Policy, no foreign players were allowed to real estate business. The amended FDI policy has clarified that a real estate broking service does not amount to a real estate business and therefore, is eligible for 100% FDI under the automatic route. This may pave way to a significant change in real estate industry as multiple bulging eyes were looking to enter this untouched industry.

Power exchanges

The FDI Policy allows 49% FDI under the automatic route in power exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. However, foreign institutional investors (“FIIs”) and foreign portfolio investors (“FPIs”) could invest only by way of secondary market transactions or subsequent purchases. The amended FDI Policy uplifted the regulation from CERM, thereby allowing FIIs and FPIs to also invest through primary markets or subscriptions, subject to sectoral limits.

Conversion of external commercial borrowings, lump sum fee and royalty into equity

Pursuant to the FDI Policy, the issue of equity shares against non-cash consideration was permitted only under the government approval route. Now, under the amended FDI Policy, the issue of equity shares against non-cash consideration, such as pre-incorporation expenses and the import of machinery shall be permitted under the automatic route in case of sectors falling under the automatic route.

FDI in an Indian company engaged only in the activity of investing in the capital of other Indian companies (regardless of its ownership or control)

The FDI policy allowed FDI up to 100%, with prior government approval, in companies engaged only in the activity of investing in the capital of other Indian companies or limited liability partnerships (“LLPs”), and in core investing companies.

To bring the conditions governing these sectors in line with “other financial services”, it has now been decided that if any financial sector regulator regulates the activities of such companies, FDI up to 100% shall be allowed under the automatic route. However, if they are not regulated by any financial sector regulator, or where only a part of their activities is regulated, or where there is doubt regarding regulatory oversight, FDI up to 100% will be allowed under the government approval route, subject to conditions including a minimum capitalization requirement, as may be decided by the government.

Pharmaceuticals

Pursuant to the FDI Policy, medical devices were defined in the Drugs and Cosmetics Act, 1940. It has now been decided that the definition medical devices shall no longer be subject to the Drugs and Cosmetics Act, 1940. A revised definition of medical devices is also proposed to be introduced in the amended FDI Policy and foreign companies can be invest in drugs and pharmaceuticals.

Joint Audits

The FDI policy has been amended to stipulate joint audits in investee companies (receiving foreign investments) in situations where the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company. One of the auditors should not be part of the same network, according to the amended FDI policy.

Prior to this change, the FDI policy did not have any provisions in respect of specification of auditors that can be appointed by the Indian investee companies receiving foreign investments.

Defence

Under the earlier FDI policy, global defence company was having 49% FDI limit while Indian partner holding remaining stake in the joint venture. The decision to allow 100 % FDI in defence marks a major push to defence manufacturing under Make in India initiative. The deals above 49%, under amended FDI policy deals not involving state of art technology can also opt the route. Government has been aggressively pushing global defence companies, due to prolonged scams and huge cots incurring, to setup companies in India. In the past, government has stated that relaxation above 49% can be given on a case by case basis through Foreign Investment Promotion Board (FIPB) for state of the art technology and depending on the extent of technology transfer. Opening up of 100% defence to FDI is still a debatable topic.