FDI: Will the Diwali Reforms Light Up the Investment Sentiment?

The Central Government has recently announced Foreign Direct Investment (FDI) related reforms and liberalization to boost the investment environment and to bring in foreign investments in the country. The proposals include changes in general FDI policy and procedures, as well as, activity/sector specific changes. Significant changes have been brought about in many sectors including Construction Development, Defence, and Retail. Below is an overview of the key changes brought about in this set of FDI reforms.

A. Changes in General FDI Policy and Procedures
  • Threshold limit for Foreign Investment Promotion Board (FIPB) increased to Rs.5,000 crore from Rs.3,000 crore.

[FIPB will now consider proposals having a total foreign equity inflow of up to Rs.5,000 crore. Proposals above Rs.5,000 crore will be placed for consideration of Cabinet Committee on Economic Affairs (CCEA)].

  • Establishment and ownership/control of companies in sectors/activities which are under Government approval route would require government approval.

[Earlier Government approval was required for companies in all capped sectors. Now it has been restricted to only companies operating in sectors/activities which are under Government approval route].

  • No approval of Government is required for investment in automatic route sectors by way of swap of shares.
  • Companies, trusts, and partnership firms which are incorporated outside India and are owned and controlled by NRIs will be treated at par with NRIs for investment in India.

[NRIs have special dispensation for investment in construction development and civil aviation sector. Certain investments made by NRIs are also deemed to be domestic investment at par with investments made by residents. Such special dispensation of NRIs has now been extended to entities that are owned and controlled by NRIs].

  • Investments in Limited Liability Partnerships (LLPs) will not require Government approval.

[100% FDI is now permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route, and there are no FDI-linked performance conditions].

  • LLPs 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 and there are no FDI-linked performance conditions.
  • For infusion of foreign investment into a company which does not have any operations and also does not have any downstream investments, Government approval would not be required for undertaking activities which are under automatic route and without FDI-linked performance conditions, regardless of the amount or extent of foreign investment.
B. Sector/Activity Specific Changes
Construction Development Sector
  • 20,000 sq mts floor area restriction in construction development projects, and minimum capitalization requirement of US$ 5 million to be brought in within the period of 6 months of commencement of business have been removed.
  • 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/shopping complexes and business centers.
  • FDI will not be permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses, and trading in Transferable Development Rights (TDRs).

[Development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, do not come under the definition of real estate business].

  • Each phase of the construction development project would be considered as a separate project.
  • Foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, subject to a lock-in period of 3 years. Exit will be permitted if project is completed before the lock-in period. Condition of lock-in period will not apply to Hotels & Tourist Resorts, Hospitals, SEZs, Educational Institutions, Old Age Homes and investment by NRIs.
  • Transfer of stake from one non-resident to another non-resident, without repatriation of investment will not be subject to any lock-in period, or to any government approval.
Defence
  • Foreign investment up to 49% will be under automatic route. Proposals for foreign investment in excess of 49% will be considered by FIPB.
  • Portfolio investment and investment by Foreign Venture Capital Investors (FVCIs) will be allowed up to permitted automatic route level of 49%.
  • Government approval will be required in cases of fresh foreign investment within the permitted automatic route level that results in change in the ownership pattern or transfer of stake by existing investor to new foreign investor.
Single Brand Retail Trading (SBRT)
  • Entities which have been granted permission to undertake SBRT will be permitted to undertake e-commerce activities.
  • A single entity will be permitted to undertake both the activities of single brand retail trading (SBRT) and wholesale. Conditions of FDI policy on wholesale/cash & carry and SBRT must have to be complied by both the business arms separately.

[Earlier a wholesale/cash & carry trader could not open retail shops to sell to the consumer directly].

  • Indian manufacturers will be permitted to sell their own branded products through wholesale, retail, including through e-commerce platforms.

[The Indian manufacturer must be the owner of the Indian brand, must manufacture in India at least 70% (in terms of value) of its products in house, and source, at the most, 30% from Indian manufacturers. Indian brands should be owned and controlled by resident Indian citizens, and/or companies which are owned and controlled by resident Indian citizens.]

  • Relaxation for Indian brands.

[Certain conditions of the FDI policy, like, products to be sold under the same brand internationally; 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].

Private Sector Banks
  • Full fungibility of foreign investment in private sector banking introduced.

[Foreign Institutional Investors (FIIs), Foreign Portfolio Investors (FPIs), Qualified Foreign Investors (QFIs), can now invest up to 74% provided that there is no change of control and management of the investee company].

 Other Sectors

Activity/Sector

Foreign Equity Cap and Approval Route

Plantations (Coffee, Rubber, Cardamom, Palm Oil Tree and Olive Oil Tree).

100%

Automatic Route

Duty Free Shops located and operated in Customs bonded areas.

100%

Automatic Route

Regional Air Transport Service.

49%

Automatic Route

Non-Scheduled Air Transport Service;

Ground Handling Services;

Credit Information Companies.

100%

Automatic Route

Satellites – Establishment and Operation.

100%

Teleports;

DTH;

Cable Networks;

Mobile TV;

HITS (Headend in the Sky Broadcasting Service).

100%

Up to 49% — Automatic Route

Beyond 49% — Government Route

FM Radio;

Up-linking of ‘News & Current Affairs’ TV Channels.

49%

Government Route

Up-linking of Non ‘News & Current Affairs’ TV Channels;

Down-linking of TV Channels.

100%

Automatic Route

The Central Government claims that the reforms are aimed at further easing, rationalizing, and simplifying the process of foreign investments in the country. While the changes no doubt simplify the process, it remains to be seen how effective these reforms would be in attracting foreign investment into India.

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