India: Government Approves Major FDI Policy Reforms

Last Updated: 30 August 2019
Article by Rabindra Jhunjhunwala, Moin Ladha and Stuti Galiya

Introduction

The Union Cabinet on 28 August 2019 has issued a press release proposing some significant changes to the Foreign Direct Investment ("FDI") policy of the Government of India, specifically relating to 4 (four) sectors as detailed below. Whilst the fine print of the revised policy is awaited, following are some of the key changes proposed:

Key changes proposed to the FDI policy

(a) Contract Manufacturing

Whilst the extant FDI policy permits 100% FDI under automatic route (that is, without the prior approval of any governmental authority) in the manufacturing sector, there is no specific provision for contract manufacturing. It is now proposed to clarify that 100% FDI is also permitted under the automatic route specifically for contract manufacturing activities undertaken in India. This clarifies that foreign investors can set up and operate entities engaged solely in the business of contract manufacturing. The liberalization has been announced with a view to boost 'Make In India' campaign and will benefit high value sectors, such as, pharma.

(b) Digital Media

The extant FDI policy allows 26% FDI under approval route for print media (that is, publishing of newspaper and periodicals dealing with news and current affairs) and 49% under approval route in 'Up-linking of News and Current Affairs' TV channels. There is no express provision with respect to digital media in the extant policy. Considering the growing number of internet users, it has now been decided to bring digital media at par with print media and allow 26% FDI under approval route for 'uploading/streaming of news and current affairs' on digital media. It is interesting to note that the extant FDI policy does not include any limit or restriction on investment in digital media, hence this in a way has introduced a limit on the permissible FDI in this sector. One would need to see the fine print of the revised policy (specifically definition of digital media) to ascertain the impact and extent of this restriction.

(c) Single brand retail trading (SBRT)

While the extant FDI policy permits 100% FDI under automatic route in SBRT entities, there is a condition that 30% of the value of goods has to be procured from India, if SBRT entity has FDI of more than 51%. The local sourcing requirement has to be met as an average of five years total value of the goods purchased, beginning 1st April of the year of commencement of business (that is, opening of first store) and thereafter has to be met on an annual basis.

Sourced goods could be exported: The extant FDI policy does not provide any specific condition/restriction with respect to end use of the sourced goods. However, with a view to boost exports, it is now proposed that the goods sourced could be sold in India or be exported as well. Further, the current cap of considering export for 5 (five) years only is intended to be removed.

E-commerce operations permissible prior to opening of physical stores: The extant FDI policy allows only SBRT entities operating through brick and mortar stores to undertake retail trading through e-commerce. With the digital age ushering a new era of commerce and online shopping options, it is now proposed to allow online trade by SBRT entities prior to opening of brick and mortar stores, on the condition that the SBRT entity will open brick and mortar stores within 2 (two) years from the date of start of online retail. This will help SBRT entities to undertake online sales prior to having a physical presence in India.

Incremental sourcing for global operations done by unrelated third party on behalf of SBRT entity/group companies allowed: Under the extant FDI policy, incremental sourcing for global operations by the SBRT entity, either directly or through its group companies is counted towards local sourcing requirement for the initial 5 (five) years. The Government while recognizing prevalent market practice where such global sourcing may even be done by unrelated third party at the behest of the SBRT entity or its group companies, has decided to include such purchases as well for the purpose of satisfying local sourcing requirement, provided there is a legally tenable agreement authorizing the unrelated third party to make such purchases.

Entire sourcing from India for global operations to be counted for the purpose of local sourcing: The extant policy provides that only that part of the global sourcing which is over and above the previous years' value will be counted towards the local sourcing requirement. It has now been decided that entire sourcing from India for global operations (and not just for the incremental value) will be counted towards local sourcing requirement. This move will eliminate discrimination which was faced by companies with lower exports as against companies with consistently high exports.

(d) Coal Mining

The extant FDI policy permits 100% FDI under automatic route in coal and lignite mining for captive consumption by power projects, iron and steel and cement units and other eligible activities subject to applicable laws. Also, 100% FDI under automatic route is permitted for setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

With a view to attract global miners to invest in India and tackle the issue of fuel shortage, it has now been decided to lift the ban on commercial coal mining activities and permit 100% FDI under automatic route for sale of coal, for coal mining activities including associated processing infrastructure, subject to applicable regulations. Associated processing infrastructure would include coal washery, crushing, coal handling and separate (magnetic and non-magnetic).

Conclusion

The proposed changes have been announced with a view to fast track the economy, increase foreign inflows into the country, promote 'Make in India' campaign, boost exports and overall make India an attractive destination for foreign players. Having said this, there are still certain ambiguities in the extant FDI policy which have not been addressed by the Government. For example, for SBRT, there is no clarity on the meaning of the term "state of the art" and "cutting edge technology", or on whether SBRT entities can undertake retail trading of sub-brands. Further, so far as digital media is concerned, the limit proposed could be construed as a restriction, unless the fine print of the revised policy appropriately includes suitable clarifications in this regard.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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