FDI Policy Reforms - Government of India

Publication August 2016

Developments in the liberalisation of India's FDI regime

Foreign Direct Investment (FDI) in India has grown significantly following the implementation of recent Government of India (GOI) initiatives, including the GOI’s high-profile “Make in India” campaign and the continuing liberalisation of the FDI regime across a wide range of sectors. The reforms have boosted India’s image as a preferred destination for foreign investment, with foreign investors now having unrestricted access to many industry sectors; the reforms have also contributed to a significant  jump in India’s ‘ease of doing business’ World Bank ranking since 2015. According to the World Investment Report, 2016 published by the United Nations Conference on Trade and Development, India’s FDI inflows increased by an impressive 26 per cent last year.

Some of the recently introduced key reforms to India’s FDI policy are highlighted below:

Defence

Defence is one of the key sectors in which FDI limits have been liberalised: up to 49 per cent FDI is now permitted under the automatic route, and up to 100 per cent FDI permitted under the approval route.

There was previously some ambiguity around the requirement for having “state of the art” technology for proposals involving FDI of more than 49 per cent. It is now understood that proposals showcasing access to modern technology will be favourably considered, and the GOI has also created flexibility for proposals which can demonstrate “other reasons” for allowing investment beyond 49 per cent. These are welcome developments.

The manufacture of small arms and ammunition under the Arms Act, 1959 is now expressly permitted and included under the revised limits for this sector.

To date, FDI in the defence sector has remained notably low, and  with major global players having expressed an interest in investing in this sector, these reforms are expected to result in considerable attention from foreign investors.

Broadcasting Carriage Services

Up to 100 per cent FDI is now permitted under the automatic route in Teleports, Direct to Home, Cable Networks, Mobile TV, and Headend-in-the-Sky Broadcasting Service (against the earlier limit of upto 49 per cent under the automatic route).

However, it is pertinent to note that an approval would be required in the event the ‘infusion of fresh FDI beyond 49 per cent results in a change in the ownership pattern or transfer of stake by an existing investor to a new foreign investor in a company not seeking license/permission from the concerned Ministry of the Government of India’. There is a certain level of ambiguity around the language used in the exception, in respect of which the industry is eagerly awaiting for a clarification from the GOI.

The liberalisation of this sector is designed to provide the cash strapped cable industry with the investment needed to speed up their digitisation efforts. With an ever increasing subscriber base and large infrastructure requirements, the potential for growth of investments in this sector remains quite high.

Civil Aviation

FDI in airport projects, both greenfield and brownfield, is now permitted up to 100 per cent under the automatic route. This is significant for brownfield projects, in which FDI was previously restricted to 74 per cent under the automatic route.

FDI in Air Transport Services is also now permitted up to 100 per cent, with FDI up to 49 per cent under the automatic route and FDI beyond 49 per cent under the approval route. Investment by Non-Resident Indians (NRIs) in Air Transport Services sector is now permitted up to 100 per cent under the automatic route.

However, the restriction on foreign airlines investing in excess of 49 per cent of the share capital of an Indian airline remains in place.

The reforms in this sector are also consistent with the recently introduced Civil Aviation Policy, 2016, which envisages development of under-used air strips amongst others. It is to be hoped that these developments will provide a shot in the arm to the airline industry.

Pharmaceuticals

While FDI limit for greenfield projects stands at 100 per cent under the automatic route, for brownfield projects, FDI is now permitted up to 74 per cent under the automatic route, and beyond 74 per cent under the approval route. Previously, approval had been required for any FDI in brownfield pharma projects.

Although investments in brownfield projects are subject to certain conditions prescribed by the GOI (such as maintaining production level of essential medicines, reporting of technology transfers, maintenance of R&D expenditure and other appropriate conditions as may be specified upon approval), the relaxation is anticipated to result in increased M&A activity in the sector and is a very positive step towards ease of doing business in this strategically important sector.

Trading of Food Products

100 per cent FDI under the approval route is now permitted for trading (including through e-commerce) of food products manufactured or produced in India. However, the conditions applicable to the trading of food products have not been relaxed.

The agro-processing industry is also set to gain impetus from the relaxation, particularly due to the exclusion of this sector from the restrictions placed on single/multi brand retail trading.

Single Brand Retail Trading

FDI in retail trading has been a key area in which the GOI hopes to attract major foreign investment. Investors on the other hand have remained concerned about various conditions that accompany their investment, predominantly on the local sourcing requirements which was seen as a difficult condition by foreign investors.

While the FDI limits permitting up to 49 per cent investment under the automatic route and an investment beyond 49 per cent under the approval route  remain untouched, a key development has been the relaxation of local sourcing norms of 30 per cent for FDI beyond 51 per cent in single brand retail trading for a period of 3 years.

The relaxed sourcing norms would benefit global players seeking to manufacture and market their flagship products in India’s enormous consumer goods market.

E-Commerce Activities

The GOI has segregated this sector into two models – firstly, inventory based (inventory of goods and services owned by the e-commerce entity); and secondly, marketplace based (e-commerce entity only providing a platform to act as a facilitator between the buyer and the seller). 100 per cent FDI under the automatic route has been permitted in the marketplace model (subject to certain additional conditions such as a limit of 25 per cent of all sales from a single vendor or its group companies). For the inventory based model, FDI remains not permitted.

Asset Reconstruction Companies (ARCs)

ARCs, which are expected to play a crucial role in solving India’s issues in relation to stressed assets, have been encouraged by the GOI’s decision to allow 100 per cent FDI under the automatic route (as opposed to the earlier limit of 49 per cent under the automatic route).

India’s major banks have accumulated very significant amounts of non-performing assets and require immediate assistance in this regard. While the limit on the shareholding of Foreign Institutional Investors/Foreign Portfolio Investors continue to remain at 10 per cent,  FIIs/FPIs are now permitted to invest up to 100 per cent (compared to the earlier limit of 74 per cent) of each tranche in securities receipts issued by ARCs subject to Reserve Bank of India guidelines.

Pension and Insurance Sectors

The Pension and Insurance sectors have been simultaneously permitted to receive FDI inflows through the automatic route up to the existing FDI limit of 49 per cent. Investments in the two sectors are also subject to conditions/regulations framed by the regulators of these sectors.

FDI in INDIA: The road ahead

The approval route has been retained only for critical sectors and most other sectors have been freed for investment under the automatic route. The GOI has also sought to clarify ambiguities in its existing policies to make the investment process more certain.

There has been a welcome move towards the automation of compliance processes, so as to minimise GOI intervention and delay.

The World Bank has predicted GDP growth for India at 7.6 per cent for 2016-17, despite global turmoil and uncertainties in the global economy. Taken together with ongoing reforms to FDI policy, India can be expected to continue to grow as an attractive destination for foreign investment.

Prepared by Luthra & Luthra Law Offices, this article is intended for general information purposes only and is not a substitute for legal advice.

Norton Rose Fulbright advises on English law, on international law and on international legal issues. For matters involving Indian law we work closely with or instruct, local Indian firms. Our lawyers have established close relationships with many leading Indian law firms and, equally importantly, with the leading individuals within these firms who understand the demands of our international clients.  Prepared by Luthra & Luthra Law Offices, this article is intended for general information purposes only and is not a substitute for legal advice.


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