FDI IN DIGITAL MEDIA - A CASE FOR FURTHER CLARIFICATION

 

The Government of India recently issued a clarification on FDI in digital media sector. The pre-cursor to this clarification is Press Note 4 of 2019 (“Press Note 4”) that allowed up to 26% FDI in entities engaged in uploading/ streaming of news and current affairs through digital media platforms under the Government approval route, similar to the print media sector. We have analysed the implications of the recent clarifications on entities that are engaged in the digital media sector.

Press Note 4 did not provide a definition of “Digital Media” and accordingly there were concerns regarding entities that fall within its ambit. The Government of India therefore issued the “Clarification on FDI Policy for uploading/streaming of news and current affairs through Digital Media” on October 16, 2020 (“Clarification”). The Clarification inter alia provides that Press Note 4 shall apply to the following types of entities registered or located in India:

  • digital media entity streaming or uploading news and current affairs on websites, apps or other platforms;
  • news agencies which gather, write and distribute or transmit news, whether directly or indirectly, to digital media entities and/or news aggregators; and
  • news aggregators, which use software or web applications, that aggregates news content from various sources such as news websites, blogs, podcasts, video blogs, user submitted links, etc., in one location.

The Clarification further requires that the above entities align their FDI to the requirements of Press Note 4, i.e., 26% threshold with government approval, within one year from the date of the Clarification.

Aspects Requiring Further Clarification

Digital media entity

While news agencies and aggregators, whether publishers or suppliers of news content, are clearly covered under paragraphs (b) and (c) above, it is not clear if intermediary platforms operating in the digital domain such as social media, search engines, websites, apps, etc., will be covered. A literal interpretation of paragraph (a) above indicates that they will be covered if they are registered or located in India.

Location Based Uploading or Streaming of Content

On the applicability of FDI norms, the Clarification does not make a distinction between the content being uploaded or streamed from within India and from outside India. The impact of the Clarification on platforms that upload or stream content outside India but are located in India will need to be assessed given the coverage of the regulations extends also to entities located in India.

Approvals for existing businesses: Branch Offices and Companies

The Clarification also states that it is applicable to entities registered or located in India. This includes registered corporates as well as branch offices in India. It is to be examined whether branch offices that may have been previously set up will now be required to seek approval from the Government for their continuous operations of uploading/streaming news and current affairs content on digital platforms.

Similarly, the cases of existing FDI in digital media entities need to be further analysed. As an illustration, the Clarification provides that investee companies are required to align their FDI to 26% with prior approval of the Government. However, it does not stipulate whether the media entities currently below the above threshold that are also engaged in uploading/ streaming of news and current affairs content through digital platforms also require prior approval of the Government within the one-year time period to continue their business operations. Further, whether the conditions relating to management and hiring personnel (set out below) will be immediately applicable to entities with existing FDI as well as branch offices is not clear.

Interface with Up-linking of ‘News & Current Affairs’ TV Channels sector (“News Channels”)

The FDI Policy allows up to 49% FDI with prior approval of the Government in News Channels. However, Press Note 4 read with the Clarification imposes a 26% FDI cap on entities engaged in uploading and streaming of ‘news and current affairs’ over digital platforms. News Channels that are also uploading the same ‘news and current affairs’ content over digital platforms and having foreign holdings of more than 26% will be required to restructure within the one year time period in order to meet the requirements of Press Note 4 or seek clarifications that the prior regulations would continue to applicable specifically for them or seek clarifications that the prior regulations would continue to applicable specifically for them.

Management and Personnel

The Clarification provides that the responsibility for compliance of conditions set out in the FDI Policy and applicable notifications rests on the investee company in India. Some of the additional restrictive conditions relating to management and hiring of personnel include:

  • The majority of the directors on the Board of the company are required to be Indian citizens;
  • The Chief Executive Officer is required to be an Indian citizen;
  • The investee company is required to obtain security clearance of all foreign personnel likely to be deployed for more than sixty (60) days in a year by way of appointment, contract or consultancy or in any other capacity for functioning of the company prior to their engagement. If the security clearance of any foreign personnel is denied or withdrawn for any reason, the investee company is required to ensure that the concerned person resigns or his services are terminated forthwith, upon receiving such directives from the Government.

Conclusion

Press Note 4 was perceived as a progressive liberalisation of the digital media sector. However, the recent notification, while attempting to clarify certain aspects, has in effect imposed additional restrictions. It needs to be seen whether the sector attracts further investment or will be looked upon as a highly regulated and restrictive business to invest and operate from India.


 

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Photo of Akila Agrawal Akila Agrawal

Partner and Head of the Mergers and Acquisitions practice at the Delhi office of Cyril Amarchand Mangaldas. Akila has over 19 years of experience in matters pertaining to mergers & acquisitions, joint ventures, corporate restructuring, general corporate and employment law. She has extensively…

Partner and Head of the Mergers and Acquisitions practice at the Delhi office of Cyril Amarchand Mangaldas. Akila has over 19 years of experience in matters pertaining to mergers & acquisitions, joint ventures, corporate restructuring, general corporate and employment law. She has extensively handled acquisitions, disposals, takeover offers, delisting offers, commercial contracts and SEBI related matters. Akila has considerable national and international experience having served several significant clients across a broad range of industries and sectors.

Chambers Global and Chambers Asia Pacific, has consistently ranked her for Corporate and M&A practice for several years. IFLR and AsiaLaw leading lawyers features Akila amongst the top rated lawyers in India for Corporate M&A. She has also been recognized in Legal 500 and Who’s Who Legal; and recommended by RSG Consulting for excellence in M&A. She can be reached at akila.agrawal@cyrilshroff.com

Photo of Varun Sehgal Varun Sehgal

Partner in the Corporate Practice at the New Delhi office Cyril Amarchand Mangaldas. Varun has more than 14 years of work experience and have advised several multinational and domestic clients in relation to cross border investments, M&A transactions, commercial contracts and general corporate…

Partner in the Corporate Practice at the New Delhi office Cyril Amarchand Mangaldas. Varun has more than 14 years of work experience and have advised several multinational and domestic clients in relation to cross border investments, M&A transactions, commercial contracts and general corporate matters across various sectors. Varun has also advised clients on multi-brand & single brand retail trade, e-commerce and public-procurement transactions in India. In addition to investments advisory, he has advised clients on pre-litigation contractual disputes and exit options and strategies.

Varun is a member of the Japan desk of the firm with focus on serving Japanese clients. Varun was seconded to Anderson Mori & Tomotsune, Tokyo, where he worked with the India Practice Group to advise Japanese clients on their India related investments and business operations. Varun has conducted seminars in Tokyo and Osaka in relation to legal and regulatory issues faced by Japanese companies in India. He can be reached at varun.sehgal@cyrilshroff.com