Latest Foreign Direct Investment (‘FDI’) Reforms

The Government of India in the wake of Ease of Doing Business in India issues Press Note 12 (2015 series) dated 24 November 2015 announcing major Foreign Direct Investment (‘FDI’) Reforms in 15 major sectors. This seems to a very positive development on behalf of the Government to draw a lot of FDI from around the world and emphasising on its commitment to make India one of the biggest investor friendly destinations.

Some of the key reforms by virtue of amendments in the Consolidated FDI policy circular of 2015 (FDI Policy) are as follows:

 Limited Liability Partnership (LLP):

• FDI in LLPs is now permitted under the automatic route (earlier it was only government route) in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions.
• LLPs with FDI are now permitted to make downstream investments (earlier it was company with FDI) in companies or LLPs engaged in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions.
• Definition of “Control” under Para 2.1.7 and “Owned” under Para 2.1.28 of the FDI Policy are extended to include LLP. Further Para 3.10.4.2 of the FDI policy dealing with conditions subject to which ‘Downstream investments by India Companies’ can be made is also amended to include LLP.

 Companies without operations and Control and Swap of Shares:

• Under the FDI Policy approval of the Government was required for infusion of foreign investment in to an Indian Company which does not have any operations and also does not have any downstream investment.
• The amended position is that Government approval is not required for infusion of foreign investment into an Indian company which does not have any operations and any downstream investments, for undertaking activities which are under automatic route and which have no FDI-linked performance conditions, regardless of the amount or extent of foreign investment.
• Further, earlier the approval of the Government will be required for establishment and ownership or control of an Indian company in sectors/activities with caps. However, as per the Reforms, this provision has been amended to provide that approval of the Government will be required 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.

 Special Dispensation to Companies owned and controlled by Non Resident Indians (NRIs):

• ‘As the investments made by NRIs on non-repatriation basis is treated at par with domestic investments made by residents’ the same dispensation is now also extended to companies, trusts and partnership firms, which are incorporated outside India but are owned and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be treated at par with NRIs for investment in India.

 Increasing the Foreign Investment Promotion Board (FIPB) threshold limit:

• The new reforms have increased the threshold limit of proposals of FIPB approval from Rs. 2,000 crores to Rs.5000 crores. This step will help in fast-track approval process.

 Increase in Sectoral cap in Tea Plantation:

• 100% FDI is now allowed in Tea, Coffee, Rubber, Cardamom, Palm Oil & Olive Oil Plantations under automatic route. Earlier, FDI was allowed only in tea plantation where under the approval route.

 Defence Sector:

• Foreign investment up to 49% will be under automatic route rather than government approval route as earlier provided.

• Proposals for foreign investment in excess of 49% shall be under government approval route on case to case basis, wherever it is likely to result in access to modern and state-of-art’ technology in the country.

• In case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, Government approval will be required.

 Broadcasting Sector:

The amended position is as follows:

 Airport Transport Services:

The amended position is as follows:

 9. Other Services under Civil Aviation Sector:

The amended position is as follows:

1. Satellite – establishments and operations:

The amended position is as follows:

1. Credit Information Companies:

The amended position is as follows:

1. Construction Development:

100% FDI is allowed under the automatic route subject to certain conditions. Certain amendments to the existing conditions are as follows:

• Restriction of floor area of 20,000 square meters in construction development projects have been removed;
• Investee Company’s obligation to bring in a minimum of USD 5 million within 6 months of commencement of the project has been removed;
• For projects under the automatic route, a foreign investor will be permitted to exit and repatriate the foreign investment before the completion of the project, provided that the lock-in requirement of three years is complied with;
• Transfer of stake from one non-resident to another non-resident on a non-repatriation basis will not be subject to any lock-in period or to any government approval;
• Exit is permitted at any time if the project or trunk infrastructure is completed before the lock in period;
• Condition of lock-in period will not apply to Hotels &Tourist Resorts, Hospitals, Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs; and
• 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.

1. Cash and Carry Wholesale Trading/Wholesale Trading (WT):

• A wholesale cash and carry trader can undertake single brand retail trading subject to conditions applicable to single brand product retail trading and wholesale/ cash & carry. Further, separate accounts are required to be maintained for the two separate arms of businesses.

 14. Single Brand product Retail Trading (SBRT):

• Sourcing of 30% (to be done form India) of the value of goods purchased would be prompted only after the first store is set up (and not immediately post receipt of foreign investment).
• SRBT entity operating through brick and mortar stores, is permitted to undertake retail trading through e-commerce.
• An Indian manufacturers is permitted to sell its owned branded products in any manner i.e. wholesale, retail formats, including through e-commerce platform.
• Indian manufacturer would be the investee company which is the owner of the Indian brand and manufacture at least 70% of its products (in terms of value) in-house and source at most 30% from Indian manufacturers.
• Indian brands are required to be owned and controlled by resident Indian citizens and/or companies, which are owned and controlled by resident Indian citizens
• Government may relax sourcing norms for entities undertaking SBRT of the products having ‘state-of-art’ and ‘cutting-edge technology’, and where local sourcing is not possible.
• Entities with foreign investment in SBRT can sell products with an Indian brand name, and in that case the requirement of using the same brand name internationally and the foreign investor having right to use or own the brand name does not apply.

1. Banking Sector:

• The permissible limit under portfolio investment schemes through stock exchanges for FII/FPIs in the private banking sector is increased up to sectoral limit of 74%.