In this blog post, Tanisha Agarwal, a student of Institute of Law, Nirma Universtiy, Ahmedabad, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, deliberates on the major reforms in Foreign Direct Investment of 2016.
The NDA government, in 2016 announced what it labelled as a “radical liberalisation” of the Foreign Direct Investment (FDI) by easing standards for various key sectors together with defence, civil aviation and pharmaceuticals, opening them up for full overseas ownership. In the previous two years, Government has brought chief FDI policy reforms in a variety of sectors viz. Defence, Construction Development, Insurance, Pension Sector, Broadcasting Sector, Tea, Coffee, Rubber, Cardamom, Palm Oil Tree and Olive Oil Tree Plantations, Single Brand Retail Trading, Manufacturing Sector, Limited Liability Partnerships, Civil Aviation, Credit Information Companies, Satellites- establishment/operation and Asset Reconstruction Companies.
Actions taken on by the Government have occasioned improved FDI inflows at US$ 55.46 billion in the financial year 2015-16, as against US$ 36.04 billion during the year 2013-14. This is the highest ever FDI inflow for a particular financial year. However, it was sensed that our country has prospects to attract much more foreign investment which can be attained by further liberalising and streamlining the FDI regime. As on date, India has been rated as the top most FDI Investment Destination by several International Agencies. Consequently, the Government has decided to present a number of amendments to the FDI Policy.
Reforms (Industry Wise):
Changes announced in the policy contain the rise in sectoral caps, fetching more activities under automatic direction and facilitation of circumstances for foreign investment. These modifications seek to further ease the protocols governing FDI in the country and make India an eye-catching terminus for foreign investors. The specific details are as follows:
Civil Aviation
100% FDI has been allowed under the automatic route in brownfield airport projects for airlines, while 100% FDI is legitimised, but with a limitation. FDI up to 49% is allowed under the automatic route, and beyond that, it is essential to obtain the prior FIPB consent. However, foreign airlines would still be permitted to invest in the capital of Indian companies offering scheduled and non-scheduled air transport services up to 49% of the paid-up capital only. In effect, this eliminates the foreign airlines looking at the Indian skies; Non-resident Indians can invest up to 100% devoid of any prior approval in aviation largely.
Although the 49% limit will confine foreign carriers to obtain majority control, yet, the total increase to 100% might possibly make Indian carriers striking to foreign capital markets. Additionally, there may be likelihoods that through partnerships with funds or other investment bodies in their home jurisdiction but with interest in India, overseas carriers may be able to develop inventive structures such that they are able to go beyond 49% and partner with a current airline, all within the permitted framework. The simplification of the rules could, hopefully, fill capital which, in turn, could resurrect aviation and elevate n the infrastructure at many airports.
Defence Sector
Earlier, FDI beyond 49% was allowable only through the government approval route in cases of access to contemporary or ‘state of the art’ technology in the country. Now, this condition of ‘state of the art’ machinery has been removed. Government approval is required for investments beyond 49%, in cases wherever it is expected to result in access to modern technology in the country or other extraordinary reasons, which are to be documented. Furthermore, this FDI limit for the defence segment has also been applied to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959, which was until now reserved exclusively for Government Agencies.
Single-Brand Retail
While the limitations in defence can be assumed simply on account of the dominant concerns of “national security,” the inability of the government to open the retail sector has, perhaps, captivated bigger controversy on account of the impact on resident vested interests. Indian retail is separated into two categories: multi-brand, i.e., big supermarkets and department stores; and a single brand, which is related to well-known brands allowed to sell their own merchandise. The peril to local interests comes largely from the multi-brand sector and, hence, the limitations are in place.
In comparison, however, single-brand retail has been gradually stimulated and liberalised. The present system permits foreign merchants to set up 100% subsidiaries, although only 49% can come via the automatic route and beyond that prior FIPB approval is compulsory. Furthermore, the FDI policy obliges companies starting wholly-owned stores to meet with the local sourcing norms of 30% within five years of their first store opening. Basically, these sourcing norms, which kick in when FDI crossed 51%, require that companies source 30% of the value of goods acquired, if possible from micro, small and medium enterprises, village and cottage industries, artisans and craftsmen. The stakeholders saw these requirements as disruptive and a possible compromise on the quality of the products. The dispute has seen diverse highs and lows over time, concluding in visits by senior spokespersons of such companies who have tried to triumph upon the government to move from such norms. It appears that now there is a move in the correct direction, though there are plenty criticizers too. Now, the necessities of local sourcing standards for single-brand retail transactions have been eased for products believed as having state-of-the-art and cutting edge equipment up to three years and a further relaxation for another five years. Pending the present proclamation, there was no time limit for discharge from local sourcing norms. While there is no clear-cut definition of state-of-the-art, technology that has never been made before in India and cannot be copied is worthy of being considered as cutting-edge.
Pharmaceuticals
The existing rules require FIPB approval for brownfield ventures in pharma and, in a struggle to avoid takeover by foreign drug manufacturers, the officials had posited that existing ventures will face a scrutiny on different counts, including a review by the Competition Commission of India to assess the non-compete clause, which is not allowed except in special circumstances. This was mainly done to stop generic drugs and bigger cost of medication by foreign companies. The current policy allows 100% FDI under automatic route in greenfield pharma and up to 100%, with prior government approval, in brownfield pharma companies with a right to impose further conditions. Now, this government sanction will be needed only when the investment is beyond 74% in brownfield pharma. In other words, investment till 74% will be under the automatic route. The industry and market prospect are that the simplification should provide an incentive to M&A in pharmaceuticals, which was distressed due to the lack of confidence in the rules. It is now conceivable that either international pharma companies or financial investors, who are keen on investing or acquiring Indian drug companies, will be able to do so more effortlessly by buying up to 74% equity without any prior clearances from the government. However, drug manufacturers invest a lot in R&D and, thus, planned investors would possibly take their own time to analyse the long-term impact of the changes and how that affects in-country and company strategies.
Formation of branch, liaison or project office
A very prevalent form of occurrence in India is via an unincorporated entity structure, i.e., by establishing a branch, liaison or a project office. For this, a foreign business needs the previous sanction of the RBI, and there is an equally arduous set of documentary and financial necessities, and applications undergo inspection by the relevant ministries also. Such scrutiny is intensified when the industry is a delicate one. Now, the government has said that if the principal business of a candidate is defence, telecom, private security or information and broadcasting, RBI approval or separate security clearance would not be obligatory in cases where FIPB approval is obtained or where the essential authorisation has been arranged by the upset sector-specific regulator.
Products Manufactured in India
100% FDI is now permitted under the government approval route for trading in respect of food products manufactured or produced in India. This also includes trading through e-commerce. Earlier, the sectoral limit on the trading of the aforesaid food products depended on the nature of trade (whether it was a single brand, multi-brand or wholesale cash and carry). Applications for FDI in food products retail trading would be processed by the DIPP before being considered by the Government for approval.
Private Security Agencies
FDI up to 49% is now allowed under automatic route in this sector, and FDI beyond 49% and up to 74% will be allowed on government approval route. Earlier, only up to 49% FDI was allowed under the government route. A Private Security Agency has been defined to mean a person or body of persons other than a government agency, department or organisation engaged in the business of providing private security services including training to private security guards or their supervisor or providing private security guards to any industrial or business undertaking or any person or property.
Others
For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it isdelivered that approval of RBI or distinct security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been approved. Also earlier, 100% FDI in Animal Husbandry, Pisciculture, Aquaculture and Apiculture was permitted under Automatic Route under well-ordered conditions. It has now been decided to scrap this requirement of ‘controlled conditions’ for FDI in these activities.
The New FDI Policy has presented some important modifications as highlighted above and has elucidated several issues that needed clarity. They are in line with the government’s initiatives such as ‘Make in India’ and Ease of Doing Business in India and certainly a lot more is to follow in the positive direction.
References:
- http://pib.nic.in/newsite/PrintRelease.aspx?relid=146338
- http://indembassy.or.kr/pdf/fdi_review_10112015.pdf
- http://www.thehindu.com/specials/the-big-ticket-fdi-reform/article8755687.ece
- http://www.thehindu.com/news/national/modi-reviews-fdi-policy/article8751860.ece
