India - Agri-Space As A Key Investment Destination: Some Thoughts.

Legal News & Analysis - Asia Pacific - India - Energy & Project Finance

14 August 2020
 

1. Background
 

  • India is an agrarian economy. It has the second highest population in the world, as well as the second highest arable land area in the world. With rising demand and natural resources under pressure, agriculture as a sector is drawing sharp attention from a necessity as well as interest perspective.
     

  • It must be noted that the agri-sector has wide reach, as it covers within its ambit not just the core cultivation sector, but also allied sectors that are just as critical. In recent times and, more specifically in 2020, the Indian government has also made special efforts to support this wider sector.
     

  • Hereunder, we will share a brief overview of the recent reforms in the sector and the viability of the sector from an investors’ point of view.

 

2. What are the key sectors in the agri-space?
 

2.1  As a broad categorisation, the space can be seen in two key parts:
 

  • Core agriculture space, which relates to direct cultivation, culture and rearing; and
     

  • Allied space, which supports the core agriculture space and is equally critical in the agriculture value chain.
     

2.2  Examples of what may be counted in the core space are as follows:
 

  • Floriculture, horticulture, cultivation of vegetables;
     

  • Animal husbandry;
     

  • Tea sector along with plantations; and
     

  • Other plantations like coffee, rubber, palm oil, etc.
     

2.3  On the other hand, allied areas would include the following as key components:
 

  • Chemicals and fertilisers;
     

  • Seed development and development of plantation material;
     

  • Supply chain and logistics;
     

  • Technology enhancement to improve production as well as make the value chain more efficient.
     

3. Recent Government Initiatives
 

3.1  The Ministry of Agriculture and Farmers Welfare is pivotal for the formulation and administration of rules and regulations and laws related to agriculture in India. The other key ministry is the Ministry of Fisheries, Animal Husbandry & Dairying. However, as stated above, recently this sector has garnered special attention of the Union Government. As a result, the Union Cabinet spearheaded certain decisions that may be critical to the sector in the coming months and years. Some of these are discussed briefly hereunder.
 

3.2   Amendment to Essential Commodities Act, 1955
 

  • The Essential Commodities Act, 1955, was amended through the Essential Commodities (Amendment) Ordinance, 2020. One of the key features of this Ordinance was to remove items like cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities. The objective is to reduce regulatory interference and allow freedom to produce, hold, move, distribute, supply and achieve economies of scale.
     

  • At the same time, it is intended that under certain circumstances, including war, famine, extraordinary price rise and natural calamity, with the interest of the consumers in mind, such agricultural produce can also be regulated.
     

  • The objective is to achieve price stability and viability, both for the farmers and consumers, while allowing competition, as well as private and foreign investment.
     

3.3   Farming Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020
 

  • The key objective of this Ordinance may be summarised as espousing the principle of “One India, One Agricultural Market”. In this regard, it may be noted that a typical mode of selling produce by farmers is through Agricultural Produce Market Committees (“APMC”) that are set up under state legislations. The key intent is to ensure some degree of price protection for the farmers vis-à-vis large buyers and intermediaries (distinguished from end consumer). However, this can also cause limitations for a farmer as it allows them to sell their produce only within the state, as the APMC is a state creation rather than a nationwide common platform.
     

  • The Ordinance is intended for farmers to have the option to sell outside the APMC platform as well as across state boundaries.
     

3.4   Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020
 

  • Key feature of this Ordinance is the concept of farming agreement, a model of contract farming. It is intended to allow farmers to engage with and enter into such farming agreements with processors, wholesalers, aggregators, wholesalers, large retailers, exporters (each of whom could be a “sponsor” in terms of the Ordinance).
     

  • As is evident, this model of contract farming can be facilitative of increased private participation in the sector.
     

3.5   Animal Husbandry Infrastructure Development Fund and Interest Subvention Scheme
 

  • As part of the Atma Nirbhar Bharat Abhiyan stimulus package, it was announced that the Cabinet Committee on Economic Affairs had approved the setting up of an Animal Husbandry Infrastructure Development Fund worth INR 15,000 crore (150 billion) and an associated interest subvention scheme for medium, small and micro sector enterprises and private companies. In addition, the Union Government also plans to set up a credit guarantee fund for sanctioned projects under MSME limits. This fund would be managed by NABARD (National Bank for Agriculture and Rural Development), the development finance institution.
     

  • As can be seen, this initiative is also intended to incentivise private participation and investment in the sector.
     

3.6   Agriculture Infrastructure Fund
 

  • In its recent announcement, the government of India has announced its intention to set up a INR 1,00,000-crore (one trillion) agriculture infrastructure fund, which will essentially be a debt financing fund. Under this, banks and financial institutions will be able to provide loans under interest subvention schemes and credit coverage guarantee. The spectrum of intended beneficiaries is wide and inter alia covers farmers, marketing cooperatives, self help groups, as well as agri-entrepreneurs, start-ups and central/state/local body sponsored public-private partnership projects. The amount that can be given out to a recipient from this fund is capped at INR 2 crore (twenty million).
     

  • The second part of the coverage is especially interesting because it has the ability to create a more viable start-ups and PPP projects’ environment. This can in turn improve scales and innovation/ technology-based practices in the sector. Such an outcome would no doubt interest both strategic and financial investors.
     

4. Private Participation and Foreign Investment Regime
 

4.1   Private Enterprise in the Agri-Space
 

  • Agriculture is not only labour intensive, but also capital intensive for a variety of reasons, including the scale at which the sector has its spread. While government and public sector investment and support is critical, there is also a good case for private investment and participation in the sector.
    With the deployment of suitable capital and best practices, this essential sector has the ability to meet farmer and consumer needs; as well as serve the commercial interests of a private sector player.
     

  • The Indian agri-space (both core agri as well as the allied sectors) is witnessing increasing private interest, both strategic and financial, even by foreign investors. On the other hand, the agri-tech space has seen interest from venture capital and early stage funding.
     

4.2   Foreign Investment Framework
 

  • As is evident, the agri-space is not a homogenous sector, but an amalgamation of various business activities in the core as well as in the allied sectors. Foreign participation is allowed in major areas, while in the remaining spaces it is not yet permitted, or may have restrictions attached. We shed some light on this hereinafter.
     

  • The key regulation that governs foreign investment in the agriculture space is the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”).
     

  • Provided below are the areas wherein under the NDI Rules, foreign investment is permitted up to 100% (equity/equity linked) under the automatic route (i.e. no Union Government approval):
     

(a)   Floriculture, horticulture and cultivation of vegetables and mushrooms under controlled conditions (i.e. the practice of cultivation wherein rainfall, temperature, solar radiation, air humidity and culture medium are controlled artificially. Control in these parameters may be effected through protected cultivation under green houses, net houses, poly houses or any other improved infrastructure facilities where micro-climatic conditions are regulated anthropogenically);
 

(b)   Development and production of seeds and planting material;
 

(c)   Animal Husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture;
 

(d)   Services related to agro and allied sectors;
 

(e)   Tea sector, including tea plantations; and
 

(f)    Coffee, runner, cardamom, palm oil and olive oil tree plantations.
 

However, in the plantation category, prior approval of the state government is required in case there is change in land usage in the future.
 

  • A point worth mentioning here is that other than those listed above, no foreign investment is permitted in agriculture/plantation sector/activity.
     

  • It must also be noted that while the NDI Rules specify that foreign venture capital investment would be permitted in sectors of seed research and development, dairy industry and poultry industry, the same needs to also be reconciled with sectoral caps and entry route conditions. Further, areas like food retail would be covered under the sectoral cap, entry route and related conditions that are applicable to single brand and/or multi-brand retail under the NDI Rules, as applicable.
     

  • Notwithstanding the above under the NDI Rules, as a recent development, Press Note 3, dated April 17, 2020, and issued by the Department for Promotion of Industry and Internal Trade under the Union Ministry of Commerce & Industry (“PN 3”) has created certain additional conditionalities around proposed foreign investment into India, across sectors for certain category of investors. Under PN 3, an entity of a country, which shares land borders with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. In other words, for this category of investors, prior union government approval is needed even to invest in the automatic route activities in the agriculture sector listed in the NDI Rules. The intent of PN 3 is to curb opportunistic takeovers and acquisitions of Indian companies due to the Covid-19 pandemic.
     

5. Closing Remarks
 

From the above discussion, it is apparent that the agri-space (whether core or allied) is of great importance and also a viable destination for private enterprises and investment (both domestic and foreign). With recent initiatives by the Union Government, the playing field for investors has been smoothened further; thereby making it more attractive for both strategic as well as financial investors. Even the foreign investment regime for most investors is welcoming, and only in limited cases, it may require navigation and/or obtaining of governmental approval. In light of the above, the sector is expected to see increased activity and improvements through innovation and implementation of best industry practices.
 

*The author would like to thank Vivek Raval, Associate for his assistance

 

 

For further information, please contact:

 

Saurya Bhattacharya, Partner, Cyril Amarchand Mangaldas

[email protected]