PROPOSED REFORMS TO THE FOREIGN DIRECT INVESTMENT POLICY NOVEMBER 2015 On the eve of the G-20 summit, on November 10, 2015, the Prime Minister, Mr. Narendra Modi and the Finance Minister, Mr. Arun Jaitley, have proposed liberalization of the foreign direct investment norms in up to 15 sectors. The proposed liberalization has been intimated by way of a press release ( PIB Press Release ) by the Press Information Bureau, Government of India. The actual amendments to be made to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 ( FEMA 20 ), which governs foreign direct investment ( FDI ) in India are still awaited. However, the PIB Press Release does provide positive expectations on the reforms proposed to be brought into effect soon. As per the PIB Press Release, the key reforms include the following: Removal of approval requirement for foreign investment in Limited Liability Partnerships ( LLPs ) in sectors where 100% FDI is permitted; Extension of the special dispensations to entities owned by Non-Resident Indians ( NRIs ); Rationalising/Liberalisation of certain existing regulations in certain sectors like Construction Development, Single Brand Retail Trading, E-Commerce, Downstream Investments etc., Increasing FDI caps in certain sectors; Automatic Approval route being extended to certain sectors; and Full fungibility for portfolio and venture capital investment in certain sectors. Limited Liability Partnership (LLPs) - Investments in LLPs will not require Government approval and up to 100% investment will be permitted under automatic route provided that the limited liability partnership engages in automatic sector activities. Subject to tax treatment of LLPs, this may become a favourable investment vehicle. An LLP having foreign investment will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route with no FDI-linked performance conditions.
NRI investments through Companies/ Trusts / Partnerships on Non- Repatriation Basis- NRIs include non-residents who are Indian citizens or are Overseas Citizen of India cardholders. Investments made by NRIs on non-repatriation basis, as per Schedule 4 of FEMA 20, are currently are treated as domestic investment at par with investment made by residents. Further, for investments made by NRIs on repatriation basis, special treatment is also allowed in some sectors - in construction development, FDI-linked conditions are not applicable and civil aviation, no caps are applicable. Such dispensations are now proposed to be extended to companies, trusts and partnership firms, which are incorporated outside India and are owned and controlled by NRIs. This is a hark-back to the erstwhile Overseas Corporate Bodies or OCBs route that was abolished in 2003 because of allegations of abuse now by bringing NRI owned or controlled entities within the scope of regulation and the benefits of the liberalised policy, it remains to be seen if the new regime will avoid the controversies of that which was abolished over a decade ago. Rationalisation /Liberalisation of FDI-linked Conditions and Sector Caps- Construction Sector: Previously in order for a construction project to become FDI compliant, the project had to meet the following requirements: (i) minimum floor area of 20,000 sq. mts; and (ii) and minimum capitalization of US $ 5 million to be brought in within the period of six months of the commencement of business. This condition is proposed to be removed. This amendment will bring about greater scope of investment in small and mid-sized projects and also assist foreign investors to buy out Indian developers who are presently incapable of completing such projects at attractive prices. Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy. Exit from projects is being simplified as follows: (i) a foreign investor may exit and repatriate foreign investment before the completion of project under automatic route, post a lock-in-period of three years (to be computed on a per tranche basis); (ii) lock in as well as the governmental approval requirement will not apply to stake sale from one non-resident to another non-resident, without repatriation of investment; and (iii) if project or trunk infrastructure is completed before 3 years, then the project may be exited earlier. 100% FDI under 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, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period. Liberalising exit norms will attract more private equity and financial investors with an
objective of early monetization. Simplification of change in control norms should also encourage foreign strategic investors. (c) The definition of real estate business has been amended to clarify that, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business. There is also an attempt to define the term transfer to mean: (i) the sale, exchange or relinquishment of the asset; (ii) the extinguishment of any rights therein; (iii) the compulsory acquisition thereof under any law; (iv) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract; and (v) any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property. Lease and mortgaging is excluded from the definition. Defence Sector: Presently investment up to 49% was permitted under the sector under the approval route. The approval requirement is being dispensed with. Further the portfolio investment and FVCI cap of 24% is being done away with and the threshold for such investors is being raised to 49%. Investment beyond 49% will require prior approval of the Foreign Investment Promotion Board ( FIPB ). The requirement to approach Cabinet Committee on Security ( CCS ) for investments that are likely to result in access to modern and state-of-art technology in the country are being done away with. Broadcasting Sector: The caps in broadcasting carriage service (i.e. teleports, DTH, MSOs, Mobile TV, HITs and analogous cable networks) is being increased from 74% to 100% (although investments in excess of 49% will continue to require FIPB and MIB approval). We assume corresponding changes will be made to the license agreements by the Ministry of Broadcasting. In the broadcasting content space, the cap is being increased from 26% to 49%. Uplinking and downlinking of Non- News & Current Affairs TV Channels and other TV Channels is being brought under the automatic route up to 100%. The security conditions and the other MIB conditions may continue to apply. E-Commerce: A manufacturer will be permitted to sell its product through wholesale and/or retail, including through e-commerce without Government approval. It has further been provided that any entity which has been granted permission to undertake single brand retail trading will be permitted to undertake e-commerce activities. This will encourage companies such as Ikea to set up portals in India.
Single Brand Retailing: Sourcing norms have been liberalised and the requirement to source 30% of the goods domestically will only apply from the date of opening of first store and not from inflow of foreign investment. Further these sourcing norms may be dispensed with the prior approval of Government in case of brands dealing with state-of-art and cutting-edge technology. (c) To open up Indian brands to raise foreign investment, the condition requiring international presence of the brand will not apply to investments into Indian entities carrying on single brand retail trading. 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 FDI Policy, 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. Further Indian brands are required to be owned and controlled by resident Indian citizens and/or companies, which are owned and controlled by resident Indian citizens. Going forward, a single entity will be permitted to undertake both the activities of single brand retail trading (SBRT) and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately. This will significantly reduce set up and operation costs of wholesalers who also have a single brand retail arm. Aviation Sector: Regional Air Transport Service ( RSOP ) will also be eligible for foreign investment up to 49% under automatic route. This is a growing space with airline companies being developed within limited geographies (such as Air Costa). Duty Free Shops in Customs Bonded Areas: 100% FDI is proposed to be allowed under automatic route. Tea / Coffee / Rubber / Cardamom / Palm Oil & Olive Oil Plantations: Currently, FDI is not allowed in either of the above (except tea plantation where FDI is allowed under the approval route). Pursuant to the proposed amendments, 100% FDI is proposed to be allowed under automatic route. Simplification of Setting Up Process: For infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government approval would not be required, if such company is undertaking activities which are under automatic route and without FDIlinked performance conditions, regardless of the amount or extent of
foreign investment. Previously investment into non-operating entities would attract approval requirement. Approval of the Government will be required if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors. Foreign Equity caps of certain sectors viz. Non-Scheduled Air Transport Service, Ground Handling Services, Satellites- establishment and operation and Credit Information Companies have now been increased from 74% to 100%. Further, sectors other than Satellites- establishment and operation have been placed under the automatic route Full Fungibility of Foreign Investment Permitted in Banking- Private Sector- Government has decided to introduce full fungibility of foreign investment in Banking- Private sector. Accordingly, FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral limit of 74%, provided that there is no change of control and management of the investee company. Previously FII, QFI and FPI investments were capped at 26% which could be raised to 49 per cent of the total paid-up capital by the bank concerned through a resolution by its Board of Directors followed by a special resolution to that effect by the shareholders. This will result in a boost in the secondary markets for listed banks with promoters looking to monetize stake. Raising the threshold limit for investment approval from FIPB - As per the FDI policy, FIPB considers proposals having total foreign equity inflow up to Rs. 3000 crore and proposals above Rs. 3000 crore are placed for consideration of Cabinet Committee on Economic Affairs ( CCEA ). In order to facilitate faster approvals, the threshold limit for FIPB approval is proposed to be increased to Rs. 5000 crore. The CCEA approval process was lengthy and time consuming and therefore this is a very positive development. Please feel free to reach out to us if you have any specific queries. www.samvadpartners.com