Vignesh Iyer

DIPP seems determined to bring achche din for India Inc. The pace at which the current government is mending the FDI norms is really astonishing. After the launch of Make in India initiatives in September 2014, there has been a 48 percent increase in FDI equity inflows during October 2014 to April 2015. The FDI inflow under the approval route saw a growth of 87% during 2014-15.These are clear signs of increasing investor confidence in India. The initiative has made a positive impact throughout the various sectors of the economy with regard to FDI inflows. Frost & Sullivan, a US based agency has, on a number of indicators, selected the Make in India initiative as the best initiative to drive manufacturing. Further, India has jumped up 12 places in the World Bank’s ranking in the 2016 Study of Ease of Doing Business and IMF has branded India as the brightest spot in the Global Economy.

DIPP has issued press note 12 of 2015[1], thereby amending the Consolidated FDI Policy, 2015 with immediate effect. We have analyzed the amendments briefly in this article.

Highlights of FDI amendments in certain sectors:

Changes in definitions:

Construction (Para 6.2.11):

The construction sector saw significant relaxations in the FDI norms. The major changes are:

  • Restriction on Minimum area to be developed and minimum investment has been removed.
  • The exit option for the investor has been liberalized and the investor need not wait till completion of the project. However, a lock-in-period of three years, calculated with reference to each tranche of foreign investment needs to be completed. Further, exit will be permitted before completion of lock-in period too, in case the project or trunk infrastructure (e. roads, water supply, street lighting, drainage and sewerage) is completed. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is permitted.
  • Lock in requirement to be computed with reference to each tranche of FDI and transfer of immoveable or part will not be permitted during this period.
  • Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business. Transfer has been defined for the sector to mean the following:

a. the sale, exchange or relinquishment 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 immoveable 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; or

e. 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 immoveable property.

In view of the wide definition, it is difficult to ascertain which rental income or income from lease of property will fall outside the purview of transfer.

  • Other conditions remain same as provided under Consolidated FDI Policy, 2015.

Defence (Para 6.2.6):

  • FDI in defence sector was formerly allowed upto 49% under government route. Now, the same has been allowed upto 49% under automatic route.
  • Portfolio Investments by FVCIs has been permitted upto 49% rather than 24% under automatic route.
  • Government approval needed in case of fresh infusion within 49% resulting in change in ownership pattern.
  • FDI above 49% will be considered by FIPB rather than the Cabinet Committee on Security.

Broadcasting (Para 6.2.7.1):

  • FDI in Broadcasting Carriage Services has been raised to 100% from 74% subject to approval of Government beyond 49%.
  • FDI in Cable networks (other MSOs and Local Cable operators) has been permitted FDI upto 100% from 49%, subject to approval of Government for FDI beyond 49%.
  • Terrestrial broadcasting FM (FM Radio) activity too witnessed a hike in the permissible FDI limit. FDI permitted upto 49% under government route which was formerly permitted upto 26% only.
  • Up-linking of Non-‘News & Current Affairs’ TV Channels/ Down-linking of TV Channels permitted 100% FDI under automatic route which was formerly permitted under government route.

Banking – Private sector (Para 6.2.18.2):

FDI limit in private sector banks by FIIs/FPIs/QFIs has been increased from 49% to 74%, provided these institutions follow the due procedures and there is no change in control. Full fungibility is proposed to be introduced, thereby removing the sub-limit restrictions. Banks viz. ICICI Bank, Yes Bank etc with FDI will have a reason to cheer. Formerly, compliance of permissible limits under portfolio investment schemes was applicable. RBI guidelines relating to acquisition by purchase or otherwise of shares of a private bank, if such acquisition results in any person owning or controlling 5% or more of the paid-up capital of the private bank will apply to non-resident investors as well.

Plantation (Para 6.2.2):

Formerly, Tea was the only permitted plantation activity for FDI investment under government route. Now along with tea, FDI has been permitted upto 100% under automatic route in Coffee/Rubber/Cardamom/Palm Oil & Olive Oil Plantations. Other condition with respect to obtaining prior approval of the State Government concerned in case of any future land use change.

Investment by Companies/Trusts/Partnerships Owned & Controlled by NRIs on Non-Repatriation Basis (New Para after Para 3.1.3):

The special dispensation available to NRIs has also been extended to entities owned and controlled by NRIs too.

DIPP vide its Press Note No.7[2] dated 3rd June 2015 inserted Para 3.6.2 in the Consolidated FDI Policy Circular 2015 which read

“Investments by NRIs under Schedule 4 of the FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents”

In addition to this, investments made by Companies/Trusts/Partnerships Owned & Controlled by NRIs on Non-Repatriation Basis will also be regarded as domestic investment. This will lead to re-recognition of OCBs that were de-recognised long back in 2001.

Duty Free shops in Custom bonded areas (New Para 6.2.16.5):

100% FDI permitted under automatic route in duty free shops located and operated in Custom bonded areas at International Airports/ International Seaports and Land Custom Stations where there is transit of international passengers. FDI is subject to compliance of conditions stipulated under the Customs Act, 1962 and other laws, rules and regulations. Such shops are restricted from engaging in any retail trading activity in Domestic Tariff Area.

Single Brand Retail Trading (SBRT) (Para 6.2.16.3):

  • Another major booster has been for SBRT in the form of dilution in sourcing norms. Further, 30% to be sourced locally from the date of opening first store. Earlier, such companies had to ensure sourcing to the extent of 30 per cent of the value of goods purchased locally, as an average of five years’ total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received.
  • In case of “state-of-the-art” and “cutting-edge technology” ventures under the SBRT, sourcing norms will be relaxed subject to government approval. Further, single-brand retail companies can also undertake e-commerce business.
  • DIPP vide its press release[3] clarified that Indian Brands are equally eligible for undertaking SBRT and FDI policy on SBRT as contained in Para 6.2.16.3 of Consolidated FDI Policy Circular of 2015 equally applies to Indian brands. However, the requirement that products to be sold under the same brand internationally and investment by non-resident entity/ entities as the brand owner or under legally tenable agreement with the brand owner, will not be made applicable in case of FDI in Indian brands.
  • Manufacturers can undertake wholesale and/or retail sale, including through e-commerce, without government approval.

Wholesale Trading:

Para 6.2.16.1.2(f) of the Consolidated FDI Policy, 2015 prohibited a Wholesale/Cash & carry trader from opening retail shops to sell to the consumer directly. The government has done away with this prohibition which has given the option to a Wholesale/Cash & carry trader to carry out wholesale trade as well as SBRT subject to the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately.

FDI permitted in LLPs (Para 3.2.5):       

LLPs gain incredible relaxation in FDI norms. LLPs will be permitted to obtain 100% FDI through automatic route which previously was permitted only through government route. However, FDI shall be permitted only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions Further, LLPs with FDI are now permitted to make downstream investments in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. FDI in LLPs will be subject to the conditions of LLP Act, 2008.

An LLP will be considered as ‘owned’ by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities, which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.

Further, for the purpose of LLP, ‘control’ will mean right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP.

Regional Air Transport Services (Para 6.2.9.3)

The Consolidated FDI Policy, permitted upto 49% of FDI under automatic route in Scheduled Air Transport Service[4]/Domestic Scheduled Passenger Airline (SOP). FDI is now permitted upto 49% under automatic route even in ‘Regional Air Transport Service’ (RSOP).

RSOP means a Scheduled Air Transport service which operates primarily in a designated region and which on grounds of operational and commercial exigencies may be allowed to operate from its designated region to airports in other regions, except the metro airports of other regions.

Similarly, Non-Schedules Air Transport Service[5] has also been liberalized to have FDI upto 100% under Automatic Route. Formerly, FDI was permitted upto 74%, wherein 49% was permitted under Automatic route and beyond 49% to 74% under Government route. 100% FDI was formerly permitted only for NRIs.

Ground Handling Services (Para 6.2.9.4)

Ground Handling Services[6] have also been liberalized to have FDI upto 100% under Automatic Route. Formerly, FDI was permitted upto 74%, wherein 49% was permitted under Automatic route and beyond 49% to 74% under Government route. 100% FDI was formerly permitted only for NRIs.

FDI into Companies without operations and downstream investment (Para 3.10.3.3):

Para 3.10.3.3 of the Consolidated FDI Policy Circular 2015 mandated an Indian company which did not have any operations and also did not have any downstream investments to get approval of government/FIPB for obtaining FDI, regardless of the amount or extent of foreign investment. This norm has been relaxed thereby allowing infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments under automatic route, provided such company undertakes activities which are under automatic route and without FDI-linked performance conditions, regardless of the amount or extent of foreign investment.

Read the changes made in case of Downstream investments in “DIPP permits LLPs to make downstream investments”.

Establishment and Transfer of Ownership and Control of Indian Companies (Para 3.6.2):

Para 3.6.2 of Consolidated FDI Policy, 2015 mandated companies operating in sectors with caps, to obtain Government approval/FIPB approval in all cases where:

(i)  An Indian company is being established with foreign investment and is not owned by a resident entity; or

(ii) An Indian company is being established with foreign investment and is not controlled by a resident entity; or

(iii) The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc; or

(iv) The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc.

Now, it is proposed to mandate approval of the Government if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors.

Swap of shares (Para 3.5.6)

Further, no approval of the Government is required for investment in automatic route sectors by way of swap of shares.

Foreign Equity caps of certain sectors:

Foreign equity caps of sectors of Credit Information Companies (Para 6.2.18.5) has been increased from 74% to 100%. CICs fall under Automatic route. Sub-limit under PIS of 24% and overall limit of 74% with respect to investment by a registered FII/FPI is no longer applicable.

Foreign equity caps of Satellites- establishment and operation (Para 6.2.13) has been increased from 74% to 100%. However, Satellite establishment and operation continues to be under approval route.

Increase in Proposal Limit of FIPB:

Previously, FIPB used to approve proposals upto Rs. 3000 crores and the proposals above Rs.3000 crores were required to be placed for consideration of Cabinet Committee on Economic Affairs (CCEA). The recent change in the policy has proposed to increase the limit thereby empowering FIPB to approve proposals upto Rs.5000 crores.

Conclusion

New sectors have also been opened to foreign investments. These amendments are path breaking and provide a new direction to foreign investment regime in the country. Minimum government and maximum governance is surely a welcomed initiative

[1]  https://taxguru.in/rbi/govt-liberalises-reviews-fdi-policy-15-sectors-economy.html

[2]  https://taxguru.in/corporate-law/amendment-definition-nri-investment-rules-fdi-policy.html

[3] https://taxguru.in/rbi/clarification-fdi-policy-single-brand-retail-trading.html

[4] Defined to mean means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public

[5] means any service which is not a scheduled air transport service and will include Cargo airlines.

[6] means (i) ramp handling, (ii) traffic handling both of which shall include the activities as specified by the Ministry of Civil Aviation through the Aeronautical Information Circulars from time to time, and (iii) any other activity Specified by the Central Government to be a part of either ramp handling or traffic handling.

(Author is associated with Vinod Kothari & Co. and can be reached at vignesh@vinodkothari.com)

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