India – Review Of The Foreign Direct Investment Policy

29 January, 2016

 

Source – http://www.123rf.com/profile_akhilesh

 

The Government of India has issued Press Note No. 12 dated November 24, 2015 (‘Press Note’), inter alia, setting out various amendments to the Consolidated Foreign Direct Investment Policy (effective from May 12, 2015) (‘FDI Policy’) issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India . This edition briefly sets out the major reforms that have been introduced to the FDI Policy by the Press Note. The amendments take effect from the date of the Sector Specific Reforms.

 

Single Brand Retail Trading (‘SBRT’)
 

The requirement for domestic sourcing of 30% of the value of goods in respect of proposals involving foreign direct investment (‘FDI’) beyond 51%, is now to be calculated from the date of opening of the first store, and not from the date of FDI being received by the company;

 

For entities undertaking SBRT of products having ‘state of the art’ and ‘cutting edge technology’ and where local sourcing is not possible, the sourcing norms can be further relaxed, subject to Government approval;

 

SBRT entities operating through brick and mortar stores are now permitted to un- dertake retail trading through e-commerce activities;

 

With respect to entities undertaking SBRT of Indian brands, the following requirements will not apply: (i) the use of the same brand name internationally in one or more countries, and (ii) the requirement of entering into a licensing/franchise/ sub–license agreement with the brand owner by the foreign investor. Further, Indian brands are required to be owned and controlled by resident Indian citizens and/or companies that are owned and controlled by resident Indian citizens;

A single entity is now permitted to undertake both SBRT as well as wholesale trad- ing, subject to the condition that both business arms maintain separate books of accounts and must separately comply with the conditions of the FDI Policy appli- cable to SBRT and wholesale trade/ cash and carry respectively; and An Indian manufacturer is now permitted to sell its own branded products in any manner i.e. wholesale, retail, including through e-commerce platforms. For the purposes of the FDI Policy, an ‘Indian manufacturer’ refers to an investee company, that is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, no more than 30% of the products retailed by it from Indian manufacturers.

 

Construction Development Sector

 

The following requirements for FDI in construction projects will no longer apply: (i) area restriction on floor area of 20,000 square meters in construction develop- ment projects; and (ii) foreign investor’s obligation to bring in a minimum capital of US$ 5 million into the investee company within 6 months of commencement of the project;

 

For projects under the automatic route, a foreign investor is now permitted to exit and repatriate the foreign investment before the completion of the project, subject to compliance with the lock-in requirement of 3 years, calculated with reference to each tranche of foreign investment. Further, exit is permitted at any time after completion of the project or after development of trunk infrastructure; Transferofshareholdingfromonenon-residentinvestortoanothernon-resident investor without repatriation of the investment will not be subject to any lock-in period or Government approval; Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy.

 

Earning of rent/income on lease of the property, not amounting to transfer, will not amount to real estate business.

No lock-in period will apply to FDI in hotels and tourist resorts, hospitals, Special Economic Zones, educational institutions, old age homes and any investments made by non-resident investors (‘NRIs’);

 

100% FDI under the automatic route is permitted in completed projects for opera- tion and management of townships, malls, shopping complexes and business cen- tres (including transfer of ownership and/or control of the investee company from residents to non-residents), subject to a lock-in-period of 3 years, which will be calculated with reference to each tranche of FDI, and transfer1 of such immovable property (whether whole or in part) is not permitted during the lock-in-period.

 

Retail Trading – Duty Free Shops

 

100% FDI is now permitted in duty free shops under the automatic route, subject to the conditions prescribed by the Customs Act, 1962 and other laws, rules and regulations. It has also been clarified that a duty free shop will not engage in any retail trading activity in the Domestic Tariff Area of the country.

 

New Definition of Manufacture

 

Indian manufacturers with foreign investment are now allowed to sell their products through wholesale and/or retail formats, including through e-commerce plat- forms, without Government approval;

A new definition of ‘manufacture’ has been introduced viz. ‘a change in a non-liv- ing physical object or article or thing – (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct ob- ject or article or thing with a different chemical composition or integral structure’.

 

Banking Sector

 

Full fungibility of FDI in the private banking sector has now been permitted. The aggregate investment by FII / FPI / QFIs can be increased from 24% to 74% after following the prescribed procedure.

 

Defence Sector

 

Foreign investment (including portfolio investment and investment by foreign venture capital investors) up to 49% is now permitted under the automatic route; However, Government approval is required for infusion of fresh foreign investment within the permitted automatic route (i) in a company in the defence sector not seeking an industrial license; (ii) that results in a change in the ownership pattern; or (iii) that results in transfer of shareholding by an existing investor to a new foreign investor;

 

Proposals for foreign investment in excess of 49% will be considered by the Foreign Investment Promotion Board (‘FIPB’) on a case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country; and

 

Several conditions specified under the erstwhile FDI Policy for investment in the defence sector, such as the requirements for: (i) the management, board majority, Chief Executives and Chief Security Officer of such entities to be resident Indians; and (ii) provision of adequate safety and security procedures, and standards and testing procedures, etc., have been removed, and replaced by the condition that such foreign investment will be subject to security clearance by, and compliance with the guidelines of the Ministry of Defence. Such security clearance procedures and guidelines for FDI in the defence sector are yet to be issued by the Ministry of Defence. 

 

Broadcasting Sector

 

• The sectoral caps and entry routes have been revised as follows: 

 

 

1 The definition of ‘Transfer’ has been provided in the Press Note to include: (a) the sale, exchange or relinquish- ment of the asset; or (b) the extinguishment of any rights therein; or (c) the compulsory acquisition thereof under any law; or (d) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (e) any transaction, by acquiring shares in a company or by way of any agreement or any ar- rangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property. 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com