Indian government proposes relaxed FDI norms to boost investments
In order to improve the investment environment and the ease of doing business, the Government of India published a Press Note on 10 November 2015, aimed at liberalising and simplifying the FDI process in order to attract more foreign investments into India.
A summary of the policy changes brought about across various sectors is as follows:
Source: SKP Group
- Foreign investment up to 49% will be allowed under the automatic route.
- The requirement of mandatory permission from the Cabinet Committee on Security (CCS) for FDI beyond 49% will also be done away with. Now, such proposals for foreign investment beyond 49% will be considered only by the Foreign Investment Promotion Board (FIPB).
- Portfolio investments and investments by Foreign Venture Capital Investors (FVCIs) will be allowed up to the permitted automatic route level of 49%.
- In the event of fresh foreign investment within the 49% limit which results in a change in ownership or transfer of stake by the existing investor to a new foreign investor, government approval will be required.
- Construction Development
- The conditions of area restriction of 20,000 square metres in construction development projects and minimum capitalisation of USD 5 million to be brought within 6 months of commencement of business, will be removed. The rules for foreign investors to exit and repatriate their investments will also be eased. Each phase of construction development will be considered a separate project for the purpose of FDI.
- Earning of rent/income on lease of property, not amounting to transfer (as defined in the Press Note), will not be regarded as a real estate business that is prohibited from receiving FDI under the FDI Policy.
- A foreign investor may exit before the completion of the construction development project under the automatic route, subject to a lock-in period of three years calculated with reference to each tranche of foreign investment. However, exit is permitted even within the lock-in period if the project or trunk infrastructure is completed.
- Any transfer of stake from one non-resident to another non-resident, without repatriation, will not be subject to any lock-in period or government approval.
- The lock-in period will not be applicable to hotels and tourist resorts, hospitals, Special Economic Zones (SEZs), educational institutions, old age homes and investments by non-resident Indians (NRIs).
- It has been clarified that 100% foreign investment under the automatic route is permitted in completed projects for operation and management of townships, malls/shopping complexes and business centres.
- Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, transfer of immovable property or part thereof is not permitted during the lock-in-period of three years, calculated with reference to each tranche of FDI.
- Single Brand Retail Trading (SBRT)
- The norm of sourcing 30% of the value of the goods purchased will be reckoned only from the opening of the first store instead of the date of receipt of FDI.
- In case of ‘state-of-the-art’ and ‘cutting-edge technology’ segments, the sourcing norms can be relaxed subject to government approval.
- Entities that have been granted permission to undertake SBRT will also be permitted to undertake e-commerce activities without obtaining any additional approval.
- An Indian manufacturer is 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 would be the investee company, which 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, at most 30%, from Indian manufacturers. Furthermore, Indian brands should be owned and controlled by resident Indian citizens and/or companies that are owned and controlled by resident Indian citizens.
- A single entity can undertake both SBRT and wholesale activities, provided that all conditions of the FDI Policy on wholesale/cash & carry and SBRT have been complied with by both the business arms separately.
- Duty-free Shops: 100% FDI is now permitted under the automatic route in duty-free shops located and operated in the customs bonded areas.
- Manufacturers: Manufacturers are permitted to sell product(s) through wholesale and/or retail, including through e-commerce, without government approval.
- Limited Liability Partnerships (LLP): 100% FDI is now permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed and there are no FDI-linked performance conditions. Furthermore, LLPs will be permitted to make downstream investments in another company or an LLP operating in sectors/activities where 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions.
- Investments by Non resident Indians (NRIs): For the purposes of investment into India, companies/trusts/partnership firms that are incorporated outside India and owned and controlled by NRIs will be treated at par with NRIs. As a result:
– such entities will have special dispensation for investment in construction development and civil aviation sectors, and
– investments made by such entities on a non-repatriation basis will be deemed to be domestic investments at par with investments made by residents.
- The foreign investment cap has been increased from 74% to 100% in teleports, Direct-to-Home, cable networks, mobile TV and Headend-in-the-Sky broadcasting services. For these sectors/activities, up to 49% FDI is permitted through the automatic route and, beyond that, through the FIPB approval route.
- In terrestrial broadcasting FM (FM radio) and up-linking of ‘news and current affairs’ TV channels, the cap has been increased from 26% to 49% through the FIPB approval route.
- In up-linking of non-‘news and current affairs’ TV channels and down-linking of TV channels, 100% foreign investment is now permitted through the automatic route.
- Plantations: In addition to tea plantations, 100% FDI will also be allowed in certain other plantation activities, namely: coffee, rubber, cardamom, palm oil tree and olive oil tree plantations. FDI in this sector will now be permitted under the automatic route.
- Civil Aviation
- In addition to Schedule Air Transport Service/Domestic Scheduled Passenger Airline (SOP), Regional Air Transport Service (RSOP) will also be eligible for foreign investment up to 49% under the automatic route now.
- Foreign equity caps in certain sectors viz. Non-Scheduled Air Transport Service, ground handling services, satellite establishment and operation, and credit information companies have now been increased from 74% to 100%. Except for Satellite establishment and operation, the other sectors stated above have been placed under the automatic route.
- Banking – Private Sector: The new norms allow full fungibility of foreign investment in private sector banking. Accordingly, Foreign Institutional Investors/Foreign Portfolio Investors/Qualified Foreign Investors (FIIs/FPIs/QFIs), following due procedures, can now invest up to a sectoral limit of 74%, provided there is no change of control and management of the investee company.
- FDI in Companies without Operations: Government approval would not be required for infusion of foreign investment into an Indian company, which does not have any operations and also does not have any downstream investments, for undertaking activities which are under the automatic route and without FDI-linked performance conditions, regardless of the amount or extent of foreign investment.
- Establishment and Transfer of Ownership and Control of Indian Companies: As per the extant FDI Policy, FIPB approval is required for establishment and transfer of ownership and control of Indian companies operating in sectors/activities with caps. However, FIPB approval is now required only in case the companies operate in sectors/activities which are under the government approval route rather than capped sectors. Furthermore, no government approval is required for investing in automatic-route sectors by way of share swaps.
- Increase in the threshold limit for approval by FIPB: As per the extant FDI Policy, FIPB can consider FDI proposals up to INR 30 billion. The threshold limit for FIPB approval will be increased from INR 30 billion to INR 50 billion. FDI proposals above INR 50 billion will be considered by the Cabinet Committee on Economic Affairs (CCEA).
These reforms are intended to liberalise and simplify the FDI Policy in order to increase the ease of doing business in the country and encourage FDI inflows.