On January 10, 2018, the Indian Cabinet gave its approval to a number of major amendments to the Foreign Direct Investment (FDI) Policy of India, to further liberalise and simplify the same. This is to increase the ease of doing business in the country, and continue to attract much needed foreign capital to fuel India’s growth. In this post, we examine the latest amendments and their impact on the crucial sectors involved therein.

Key Reforms

Single Brand Retail Trading (SBRT)

The latest amendment has brought sweeping changes in FDI norms for SBRT, thereby enticing significant foreign brands into India’s promising retail space.

The current FDI Policy on SBRT allows 49% FDI under the automatic route, and FDI beyond that and up to 100% through the Government approval route. Earlier, a sourcing norm was also attached to such an investment. This meant that investors were required to source 30% of the value of goods purchased for their Indian businesses through local sources. Several investors have had to spend a significant amount of time developing good local suppliers as partners and their inability to procure locally proved a major stumbling block in setting up their business in India.

The amendment has diluted the mandatory requirement, now giving foreign companies five years to comply with the local sourcing requirement. Further, as per the new definition of ‘incremental sourcing’, whatever increase occurs in the entity’s sourcing from India for global operations every year would be included in the figures for ‘local sourcing’ for Indian operations. Hence, during the initial five years, sourcing for global operations will also be accounted as part of the mandatory 30% sourcing requirement.

More important, the amendment now allows 100% FDI under the automatic route, helping today’s investors enter the Indian market without having to seek approval.

It is anticipated that major firms such as Apple, IKEA and Xiaomi, which have been patiently waiting in the wings, particularly with respect to sourcing norms, are now more likely to undertake large investment projects under the revised regime.

Aviation

As per the current FDI Policy, overseas’ carriers are allowed to invest under the Government approval route in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. However, this provision was not applicable to Air India (India’s national carrier, which is currently in the process of being sold by Central Government). This implied that foreign airlines could not invest in the national carrier.

The amendment removes this restriction, and permits foreign airlines to invest up to 49% under the approval route in Air India, which was long considered as being a burden on the state-exchequer. This move by the Government is a bold one, chiefly because it had previously disfavoured the purchase of Air India assets by foreign investors.

It is to be noted that a parliamentary panel recently proposed that the Government should review its decision to privatise Air India, and explore the possibility of an alternative to disinvestment of the same. However, the recent amendment is a clear indication that Government is expediting the disinvestment process.

The amendment brings Air India on par with other domestic carriers. However, unlike other domestic carriers, capping the FDI at 49% in Air India and providing that ‘substantial ownership and effective control’ of Air India will remain in an Indian National, ensure that the Government retains the “national carrier” status of the airline.

FDI in Investment/ Holding Companies

In a very welcome move, foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian companies / limited liability partnerships and in ‘Core Investing Companies’ has been liberalised. In cases where such companies are regulated by any financial sector regulator, then foreign investment up to 100% under the automatic route shall be allowed. Whereas, in the absence of a financial sector regulator, where only part is regulated, or where there is doubt regarding regulatory oversight, foreign investment up to 100% will be allowed under the approval route, but it will be conditional upon the minimum capitalisation requirement and other terms, as may be decided by the Government.

Power Exchange

Currently, 49% of FDI under the automatic route is permitted in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. However, purchases by foreign institutional investors (FIIs) / foreign portfolio investors (FPIs) were restricted to the secondary market only. The Government has now decided to do away with this restriction and has allowed FIIs / FPIs to invest in Power Exchanges through the primary market as well.

Pharmaceuticals

The current FDI Policy for the Pharmaceuticals sector inter-alia provides that the definition of ‘medical device’ as contained in the FDI Policy would be subject to the amendment in the Drugs and Cosmetics Act, 1940. The Government has decided to remove references to the Drugs and Cosmetics Act, 1940 from the FDI Policy and the definition of ‘medical devices’ as contained in the FDI Policy will soon be amended. In the case of medical devices, the Government has permitted a wide range of items that can attract up to 100% FDI via the automatic route. This will certainly benefit health services in the country, as India will now gain access to modern equipment and machineries.

Construction Development with Respect to Townships, Housing, Built-up Infrastructure and Real Estate Broking Services

The amendment has also finally clarified that a ‘real-estate broking service’ does not amount to ‘real estate business’. Now, FDI up to 100% under the automatic route has been permitted in real-estate broking services.

Real-estate broking services in India is a largely unorganised segment, which needs significant reforms in term of corporate governance, and in respect of bringing transparency in dealings to prevent fraud to consumers. This move should enable international brokerage companies to invest in Indian counterparts and also set up their own subsidiaries here, thus bringing much needed structure in real estate broking services in India.

Issue of Shares for Non-cash Consideration

Issue of shares has now been permitted under the automatic route against non-cash consideration such as pre-incorporation expenses, import of machinery, etc. in sectors allowing FDI under the automatic route. Earlier, shares could only have been issued after obtaining prior Government approval.

Joint Audits

The current FDI Policy does not have any provisions in respect of specification of auditors that can be appointed by the Indian investee companies receiving foreign investments. The amendment now stipulates joint audits in investee companies (receiving foreign investments) in situations where the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company and one of the auditors should not be part of the same network. This would allow the investee company to appoint a particular auditor / audit firm of its choice. This move is expected to strengthen small and medium Indian audit firms to a great extent.

Competent Authority for Examining FDI Proposals from Countries of Concern

As per the exiting FDI Policy and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, as amended (FEMA 20), investment from countries of concern, which presently includes Pakistan and Bangladesh, needed approval as well as security clearance during investment through both automatic and government routes. It has now been decided that for investments in automatic route sectors, requiring approval only on the matter of investment being from country of concern, FDI applications will be processed by the Department of Industrial Policy & Promotion (DIPP). Cases under the Government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by the relevant Administrative Department/Ministry.

Way Forward

The constant overhauling and opening of sectors is a clear indication that the Indian Government is constantly aiming at easing the investment process in India. This latest liberalisation is the fourth major amendment in FDI Policy in the past three years. It is evident that the reform juggernaut is rolling, and further changes might be on the horizon. These policy changes will certainly make the investment climate more conducive to foreign investors, and help India become one of the largest markets for foreign investments globally.

* The author was assisted by Tanmay Patnaik, Principal Associate Designate.