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12 August, 2016
The Prime Minister of India announced (Announcement) [1] a number of key changes to India’s foreign direct investment (FDI) policy, as set forth in Consolidated FDI Policy Circular of June 7, 2016 (Policy)[2]. Broadly, these changes pertain to enhancing the limits of foreign investment (FI) and easing of existing conditions regarding FI in some sectors. Through this short update post, we seek to highlight some prominent changes thus announced.
Single Brand Retail Trading: As per the Policy, FI of over 49% was permissible in single brand product retail trading (Single Brand Retail) provided an approval from the Government of India (GOI) was obtained (Approval Route).
Additionally, where such proposed FI exceeded 51%, certain additional conditions were imposed, including in relation to sourcing of materials. This specific condition on sourcing mandated that 30% of the value of goods would have to be sourced from within India, preferably from certain GOI-classified micro, small and medium enterprises, cottage industries and artisans /craftsmen. There were additional stipulations as to how such sourcing norm would operate and its compliance. The Announcement has relaxed this sourcing requirement for up to 3 years and has further proposed a relaxed sourcing regime for an additional 5 years for entities indulging in Single Brand Retail provided the said entity possesses state-of-the-art and cutting edge technology.
Defence Sector and Arms and Ammunition: The Policy permitted FDI over 49% in the equity of a company engaged in the defence sector under the Approval Route where the FI was likely to result in access to modern and state of the art technology. As per the Announcement, the requirement of access to state of the art technology would stand deleted.
Further, permission may also be granted under the Approval Route for other reasons as may be recorded in writing.
Equally importantly, the Announcement extends these limits to entities operating in the manufacturing of GOI-designated small arms[3] and ammunitions. Currently, the manufacturing of such small arms is undertaken by GOI agencies exclusively.
Pharmaceuticals: Currently, FDI is permitted in a brownfield pharmaceutical entity under the Approval Route. The Announcement indicates that for brownfield pharmaceutical entities, up to 74% FDI would be under the automatic route, i.e. no GOI approval would be needed (Automatic Route).
Civil Aviation Sector: FDI beyond 74% for brownfield civil aviation projects is currently under the Approval Route, as per the Policy. As per the Announcement, 100% FDI would be permitted in brownfield airport projects under the Automatic Route. Another key change set forth in the Announcement pertaining to this sector deals with FDI in scheduled air transport service[4] and regional air transport service: FDI up to 49% will now be permitted under the Automatic Route and beyond 49% through the Approval Route. The Announcement also clarifies that foreign airlines would be entitled to invest in the capital of Indian entities operating scheduled and non-scheduled air-transport services up to 49% of their paid up capital and subject to conditions stipulated.
Some Other Sectors: The Announcement further indicates amendments to the following sectors:
Broadcasting Carriage Services: 100% FDI permitted under the Automatic Route for specified broadcasting carriage services. However, where (a) an infusion of FI beyond 49% is proposed; and (b) where such FI would result in a change in the ownership pattern or transfer of stake by existing investor to a new foreign investor; and (c) such company has not sought an approval from the relevant Ministry of the GOI (Information and Broadcasting, for instance) thereto, then such FI would be under the Approval Route.
Private Security Agency Sector[5]:- FDI of up to 49% permitted under the Automatic Route, FDI beyond 49% and up to 74% permitted under the Approval Route;
Animal Husbandry[6]: Under the Policy, 100% FDI in this sector was under the Automatic Route and was subject to the relevant activities being undertaken under “controlled conditions” (i.e. under GOI prescribed conditions only) – this requirement of “controlled conditions” will now be done away with; and
Indian-Produced Food Products: 100% FDI under the Approval Route for trading.
Establishment of Certain Offices in India: The Announcement indicates that if the principal business of an applicant is defence/telecommunications/private security or information and broadcasting and if relevant GOI approval/ license/permission has been obtained, then the approval of the Reserve Bank of India (RBI) or separate security clearance would not be required. Currently, the establishment of a branch office, liaison office or project office requires approval of the RBI and as such the Announcement seeks to curb the requirement of multiple approvals.
[1] Pending the issuance of a formal regulation by the Government of India, this information has been sourced from a press release issued by the Prime Minister’s Office on June 20, 2016. A copy of the said release may be accessed here. Further clarity on these aspects will most likely be provided in the formal regulations once notified.
[2] A copy of the said circular may be viewed here. All other terms and conditions mentioned in the said Policy continue to subsist.
[3] Legislative guidance may be drawn from certain draft rules of the GOI which indicate that the term “small arms” would include revolvers, self-loading pistols, rifles, carbines, sub-machine guns, assault rifles and light machine guns, as well as their parts, components and ammunition. In addition, certain caliber of shotguns and sporting rifles would also be covered under “small arms”.
[4] As per the Policy, the term “scheduled air transport service” includes an air transport service undertaken between the same two/more places, which is operated as per a published time table/ recognizably systematic series and which is open to use by public.
[5] The Policy indicates that a “private security agency” would include a person or body of persons, other than a government agency, engaged in the business of providing private security services (i.e. services aimed at protecting or guarding person or property) to any company or any person.
[6] This would also include pisciculture, aquaculture and apiculture.
For further information, please contact:
Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas
cyril.shroff@cyrilshroff.com
