Diwali Bonanza – DIPP floats exciting offers to lure foreign investors

Vignesh Iyer

DIPP seems determined to bring achche din for India Inc. The pace at which the current government is mending the FDI norms is really astonishing. After the launch of Make in India initiatives in September 2014, there has been a 48 percent increase in FDI equity inflows during October 2014 to April 2015. The FDI inflow under the approval route saw a growth of 87% during 2014-15.These are clear signs of increasing investor confidence in India. The initiative has made a positive impact throughout the various sectors of the economy with regard to FDI inflows. Frost & Sullivan, a US based agency has, on a number of indicators, selected the Make in India initiative as the best initiative to drive manufacturing. Further, India has jumped up 12 places in the World Bank’s ranking in the 2016 Study of Ease of Doing Business and IMF has branded India as the brightest spot in the Global Economy.

While a press note is awaited to be issued by DIPP, we have analysed the proposed amendments as specified in the press release[1]

Highlights of FDI amendments proposed in certain sectors:

Construction:

The construction sector saw significant relaxations in the FDI norms. The major changes are:

Restriction on Minimum area to be developed and minimum investment is proposed to be removed.
The exit option for the investor proposed to be liberalized and the investor need not wait till completion of the project. However, a lock-in-period of three years, calculated with reference to each tranche of foreign investment needs to be completed. Further, exit will be permitted before completion of lock-in period too, in case the project or trunk infrastructure (e. roads, water supply, street lighting, drainage and sewerage) is completed. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents likely to be permitted.
Lock in is proposed to be computed with reference to each tranche of FDI and transfer of immoveable or part will not be permitted during this period.
Further, earning of rent/ income on lease of the property not amounting to transfer, will not amount to real estate business. Transfer has been defined under Section 2 (ze) of FEMA Act, 1999 to include sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.
Other conditions remain same as provided under Consolidated FDI Policy, 2015.
Defence:

FDI in defence sector was formerly allowed upto 49% under government route. Now, the same is proposed to be allowed upto 49% under automatic route.
Government approval needed in case of fresh infusion within 49% resulting in change in ownership pattern.
FDI above 49% will be considered by FIPB rather than the Cabinet Committee on Security.
Broadcasting:

FDI in Broadcasting Carriage Services proposed to be raised to 100% from 74% subject to approval of government beyond 49%.
FDI in Cable networks (other MSOs and Local Cable operators) proposed to be permitted FDI upto 100% from 49%, subject to approval of government for FDI beyond 49%.
Terrestrial broadcasting FM (FM Radio) activity too likely to witness a hike in the permissible FDI limit. FDI is proposed to be permitted upto 49% under government route which was formerly permitted upto 26% only.
Up-linking of Non-‘News & Current Affairs’ TV Channels/ Down-linking of TV Channels is proposed to be permitted 100% FDI under automatic route which was formerly permitted under government route.
Banking – Private sector:

FDI limit in private sector banks by FIIs/FPIs/QFIs is proposed to be increased from 49% to 74%, provided these institutions follow the due procedures and there is no change in control. Full fungibility is proposed to be introduced, thereby removing the sub-limit restrictions. Banks viz. ICICI Bank, Yes Bank etc with FDI will have a reason to cheer. Formerly, compliance of permissible limits under portfolio investment schemes was applicable.

Plantation:

Formerly, Tea was the only permitted plantation activity for FDI investment under government route. Now along with tea, FDI is proposed to be permitted upto 100% under automatic route in Coffee/Rubber/Cardamom/Palm Oil & Olive Oil Plantations.

Investment by Companies/Trusts/Partnerships Owned & Controlled by NRIs on Non-Repatriation Basis:

A special dispensation to NRIs is proposed to be extended to entities owned and controlled by NRIs too. DIPP vide its Press Note No.7[2] dated 3rd

“Investments by NRIs under Schedule 4 of the FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents”

In addition to this, the government has proposed to consider investments made by Companies/Trusts/Partnerships Owned & Controlled by NRIs on Non-Repatriation Basis as domestic investment.

Manufacturing

Manufacturers are proposed to be permitted to undertake wholesale and/or retail sale, including through e commerce, without government approval.

Duty Free shops in Custom bonded areas:

100% FDI proposed to be permitted under automatic route in duty free shops located and operated in Custom bonded areas.

Single Brand Retail Trading (SBRT):

Another major booster has been proposed for SBRT in the form of dilution in sourcing norms. Further, 30% to be sourced locally from the date of opening first store. Earlier, such companies had to ensure sourcing to the extent of 30 per cent of the value of goods purchased locally, as an average of five years’ total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received.
In case of “state-of-the-art” and “cutting-edge technology” ventures under the SBRT, sourcing norms proposed to be relaxed subject to government approval. Further, single-brand retail companies can also undertake e-commerce business.
DIPP vide its press release[3] clarified that Indian Brands are equally eligible for undertaking SBRT and FDI policy on SBRT as contained in Para 6.2.16.3 of Consolidated FDI Policy Circular of 2015 equally applies to Indian brands. However, the requirement that products to be sold under the same brand internationally and 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.
Wholesale Trading:

Para 6.12.16.1.2(f) of the Consolidated FDI Policy, 2015 prohibited a Wholesale/Cash & carry trader from opening retail shops to sell to the consumer directly. The government has proposed to do away with this prohibition in its recent amendment to the policy which has given the option to a Wholesale/Cash & carry trader to carry out wholesale trade as well as SBRT subject to the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately.

FDI permitted in LLPs:           

LLPs are also proposed to gain incredible relaxation in FDI norms. LLPs will be permitted to obtain 100% FDI through automatic route which previously was permitted only through government route. However, FDI shall be permitted only in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions Further, LLPs with FDI are now permitted to make downstream investments 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.

Regional Air Transport Services

The Consolidated FDI Policy, permitted upto 49% of FDI under automatic route in Scheduled Air Transport Service[4]/Domestic Scheduled Passenger Airline (SOP). FDI is proposed to be permitted upto 49% under automatic route even in ‘Regional Air Transport Service’ (RSOP).

RSOP means a Scheduled Air Transport service which operates primarily in a designated region and which on grounds of operational and commercial exigencies may be allowed to operate from its designated region to airports in other regions, except the metro airports of other regions.

FDI into Companies without operations and downstream investment:

Para 3.10.3.3 of the Consolidated FDI Policy Circular 2015 mandated an Indian company which did not have any operations and also did not have any downstream investments to get approval of government/FIPB for obtaining FDI, regardless of the amount or extent of foreign investment. It has been proposed to relax this norm thereby allowing infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments under automatic route, provided such company undertakes activities which are under automatic route and without FDI-linked performance conditions, regardless of the amount or extent of foreign investment.

Establishment and Transfer of Ownership and Control of Indian Companies:

Para 3.6.2 of Consolidated FDI Policy, 2015 mandated companies operating in sectors with caps, to obtain Government approval/FIPB approval in all cases where:

(i) An Indian company is being established with foreign investment and is not owned by a resident entity; or

(ii) An Indian company is being established with foreign investment and is not controlled by a resident entity; or

(iii) The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc; or

(iv) The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to non-resident entities through amalgamation, merger/demerger, acquisition etc.

Now, it is proposed to mandate approval of the Government if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors. Further, no approval of the Government is required for investment in automatic route sectors by way of swap of shares.

Foreign Equity caps of certain sectors:

Foreign equity caps of sectors viz. Non-Scheduled Air Transport Service, Ground Handling Services, Satellites- establishment and operation and Credit Information Companies have now been increased from 74% to 100%. However, Satellite establishment and operation continues to be under approval route. Further, FDI in duty free shops is permitted upto 100% and in private security agencies upto 49% under automatic route.

Increase in Proposal Limit of FIPB:

Previously, FIPB used to approve proposals upto Rs. 3000 crores and the proposals above Rs.3000 crores were required to be placed for consideration of Cabinet Committee on Economic Affairs (CCEA). The recent change in the policy has proposed to increase the limit thereby empowering FIPB to approve proposals upto Rs.5000 crores.

Conclusion

New sectors have also been opened to foreign investments. These amendments are path breaking and provide a new direction to foreign investment regime in the country. Minimum government and maximum governance is surely a welcomed initiative

[1]  http://taxguru.in/rbi/govt-liberalises-reviews-fdi-policy-15-sectors-economy.html

[2]  http://taxguru.in/corporate-law/amendment-definition-nri-investment-rules-fdi-policy.html

[3] http://taxguru.in/rbi/clarification-fdi-policy-single-brand-retail-trading.html

[4] Defined to mean means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public

(Author is associated with Vinod Kothari & Co. and can be reached at vignesh@vinodkothari.com)