An Update on the FDI Reforms

[The following guest post is contributed by Bhushan Shah and Neha Lakshman of Mansukhlal Hiralal & Company. The views expressed are personal.]After significant changes in the Foreign Direct Investment (FDI) policy in November 2015, the Union Government through Press Note No. 5 (2016 Series) issued on 24 June 2016[1]announced further important changes to the FDI Policy. Changes introduced in the FDI policy include (a) increase in the FDI sectoral caps; (b) bringing more activities under the automatic route; and (c) easing of conditions for foreign investment in certain sectors. Following are the significant changes introduced by the Government:1.         Defence Sector: Earlier, FDI beyond 49% was permissible only through the government approval route in cases of access to modern or ‘state of the art’ technology in the country. But now, this condition of ‘state of the art’ technology has been removed. Government approval is required for investments beyond 49%, in cases wherever it is likely to result in access to modern technology in the country or other exceptional reasons, which are to be recorded. Further, this FDI limit for the defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959, which was until recently reserved exclusively for Government Agencies. However, foreign investment in this sector is subject to the clearance of the Ministry of Defence. Further the investee company should be self-sufficient in areas of product design and development. The investee/joint venture company, along with a manufacturing facility should also have  maintenance and life cycle support facility of the product being manufactured in India.2.         Civil aviation: 100% FDI has now been allowed in Greenfield projects and existing projects in the civil aviation sector. Earlier the policy on airports permitted 100% FDI under automatic route in Greenfield Projects and 74% FDI in Brownfield Projects under automatic route. Now 100% FDI is permitted in both Greenfield and Brownfield projects under the automatic route.Earlier, in the case of domestic airlines, FDI of up to only 49% (under automatic route) was permitted. Now FDI up to 49% has been allowed under the automatic route and up to 100% after government approval. However, 100% automatic FDI has been allowed for non-resident Indians (NRIs) in case of domestic airlines. 100% FDI has now been allowed in non-scheduled air transport services and helicopter services/ seaplane services requiring approval of the Director General of Civil Aviation.3.         Single Brand Retail Trading (SBRT): Earlier, FDI above 49% in SBRT was permitted under the government route. However, if the FDI exceeded 51%, additional conditions, including the condition on sourcing 30% of the value of goods from India, was imposed. This sourcing requirement now has to be met in the first instance as an average of five years total value of the goods purchased beginning on the financial year where the first store was opened. Thereafter it has to be met on an annual basis. 4.         Pharmaceuticals:74% FDI is now permitted under automatic route in brownfield pharmaceutical sector and the government approval route will continue beyond 74%. Earlier, 100% FDI in brownfield pharma was allowed only through the government approval route. A non-compete clause would not be allowed under the government or automatic approval route except with the approval of the Foreign Investment Promotion Board (FIPB). The Press Note also lays down additional conditions for investment in brownfield pharma projects.                                                           100% FDI is under the automatic route is permitted for manufacturing of medical devices. Hence the  aforesaid conditions are not applicable to greenfield and brownfield projects in this industry.5.         Food 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 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.6.         Entry routes in Broadcasting Carriage Services: Earlier 100% FDI was permitted with up to 49% being under automatic route and above 49% was under the government route in Teleports (setting up of up-linking HUBs/Teleports); Direct to Home; Cable Networks; Mobile TV; Headend-in-the Sky Broadcasting Service (‘Broadcasting Carriage Services’). Broadcasting Carriage Services can now avail of 100% FDI under automatic route. However, infusion of fresh FDI beyond 49% in a company, which has not sought license/permission from sectoral Ministry, resulting in a change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval.7.         Private Security Agencies: FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% would be permitted with government approval route. Earlier, only up to 49% FDI was permitted 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 organization 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.8.         Establishment of branch office, liaison office or project office: 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 has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted. 9.         Animal Husbandry: Earlier, 100% FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture was allowed under Automatic Route under controlled conditions. It has now been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.These changes are in consonance with the Make in India initiative of the government. The aim of Government is clearly to liberalise the FDI regime and provide an environment where doing business in India much easier than before.- Bhushan Shah and Neha Lakshman [1]

Source: Corporate

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