MAJOR FDI REFORMS| A SNAPSHOT

The Government last week issued a Press Note announcing reforms (Reforms) in 15 major sectors in respect of Foreign Direct Investment (FDI). The objective of the Government is to ease the process of foreign investments in the country and bring substantial foreign investments under the automatic route in order to avoid the delay in FDI investment in India. These Reforms are also another example of the Government’s emphasis on the ease of doing business. The Key Reforms are as follows:

1. Limited Liability Partnership (LLP): FDI in LLP was permitted under the government approval route only in sectors in which: (i) 100% FDI was allowed through the automatic route; and (ii) there are no FDI-linked performance conditions (such as minimum capitalisation norms, etc.). Also, LLPs with FDI were not eligible to make downstream investments.
   
   As per the Reforms, FDI in LLPs is now permitted under the automatic route in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions. Further, LLPs with FDI are now permitted to make downstream investments 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.
2. Companies owned and controlled by Non Resident Indians (NRIs):NRIs include non-residents who are Indian citizens or are Overseas Citizens of India (OCI) cardholders. Currently, investments made by NRIs on non-repatriation basis are treated at par with domestic investments made by residents. Further, for investments made by NRIs on non-repatriation basis, special dispensation for investment is allowed in construction development (i.e. FDI-linked conditions are not applicable) and civil aviation sector (there are no caps). However, the Government of India realised that larger investments can be attracted not through individuals but largely through corporate entities.
   
   Pursuant to the Reforms, the above-mentioned special dispensation is 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.
3. Construction Development Sector: FDI in the construction projects is permitted under the automatic route, subject to fulfilment of certain conditions. The Reforms have liberalised fulfilment of the said conditions, namely: 
   • Conditions of restriction of floor area of 20000 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 done away with;
   • 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.
4. Single Brand Retail Trading (SBRT): Currently, the FDI Policy on SBRT mandates that: (a) sourcing of 30% of the value of goods purchased should be reckoned from the date of receipt of FDI; (b) products are required to be sold under the same brand internationally and that the foreign investor is required to be the brand owner or have the right to use the brand name under a legally tenable agreement with the brand owner. Also, SBRT by means of e-commerce is not permissible.
   
   As per the Reforms, the 30% sourcing rule would be triggered only after the first store is set up (and not immediately post receipt of foreign investment). For ‘state-of-art’ and ‘cutting-edge technology’, sourcing norms may be relaxed with Government approval. Also, 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. Instead, 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. Further, SBRT can now be undertaken through e-commerce platform.
5. Wholesale and Retail without Government Approval: As per the Reforms, Indian manufacturers with foreign investment would be allowed to sell their products through wholesale and/or retail formats, including through e-commerce platform, without Government approval. However, for this purpose, the manufacturer is required to be the owner of the Indian brand and manufacture at least 70% of its products (in terms of value) in-house, i.e. in India, and source at most 30% from Indian manufacturers. It is pertinent to mention herein that the requirement of sourcing 30% from Indian manufacturers is a new concept introduced by the government.
6. Defence Sector: Currently, foreign investment upto 49% is allowed in the Defence Sector under the Government approval route. Portfolio investment and investment by foreign venture capital investors (FVCIs) is restricted to 24% only. Foreign investment above 49% is also permitted, subject to approval of Cabinet Committee on Security (CCS) on case to case basis, wherever the investment is likely to result in access to modern and ‘state-of-art’ technology in the country.
   
   The Reforms have introduced the following changes:
   • Foreign investment up to 49% will be under automatic route;
   • Portfolio investment and investment by FVCIs will be allowed up to permitted automatic route level of 49%;
   • Proposals for foreign investment in excess of 49% will be considered by Foreign Investment Promotion Board (FIPB);
   • 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.
7. Broadcasting Sector: FDI policy on broadcasting sector has also been amended. New sectoral caps and entry routes are as provided hereinbelow:
   
   

   Activity	Announced cap and route	Existing cap and route
   Teleports(setting up of up-linking HUBs/Teleports);	100% (Up to 49% - Automatic route; Beyond 49% - under Government approval route)	74% (Up to 49% - Automatic route; Beyond 49% and up to 74%- under Government approval route)
   Direct to Home (DTH);
   Cable Networks (Multi System operators (MSOs) operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability)
   Mobile TV
   Headend-in-the Sky Broadcasting Service(HITS)
   Cable Networks (Other MSOs not undertaking upgradation of networks towards digitalization and addressability and Local Cable Operators (LCOs))
   Terrestrial Broadcasting FM (FM Radio)	49% Government route	26% Government route
   Up-linking of ?News & Current Affairs? TV Channels
   Up-linking of Non-?News & Current Affairs? TV Channels	100% Automatic route	100% Automatic route
   Down-linking of TV Channels

   
   
8. Banking Sector: The Government has decided to introduce full fungibility of foreign investment in the private banking sector. Accordingly, FIIs/FPIs/QFIs can now invest up to sectoral limit of 74% after following the due procedure, provided that there is no change of control and management of the investee company.
9. Enhancing limits for certain sectors: Foreign equity caps of (a) Non-Scheduled Air Transport Service; (b) Ground Handling Services; (c) Satellites- establishment and operation; and (d) Credit Information Companies have now been increased from 74% to 100%. Further, sectors other than Satellites-establishment and operation have been placed under the automatic route.
10. Tea/Coffee/Rubber/Cardamom/Palm Oil & Olive Oil Plantations: 100% FDI to be allowed under automatic route in the said sectors. Currently, FDI is not allowed in either of the above (except tea plantation where FDI is allowed under the approval route).
11. Single entity to carry out both Wholesale and SBRT: As per the current FDI policy, 100% foreign investment is permitted under the automatic route in wholesale cash & carry activities (e.g. Metro Cash and Carry Stores), but a wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly (i.e. only B2B is permitted).
    
    Now, as per the Reforms, it has now been decided that a single entity will be permitted to undertake both the activities of single brand retail trading and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately.
12. Companies without Operations: 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.
13. Transfer of Ownership and Control of Indian Companies: Currently, the FDI Policy provides that 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.
14. Simplification of Conditionalities: It has been announced in the Reforms that certain conditions of FDI policy on Agriculture and Animal Husbandry, and Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities have been simplified. However, the details with respect to these reforms have not been announced yet.
15. Raising the threshold limit: As per the FDI policy, FIPB considers proposals having total foreign equity inflow up to Rs. 3000 crore and proposals above Rs. 3000 crore are placed for consideration of Cabinet Committee on Economic Affairs (CCEA). In order to achieve faster approvals on most of the proposals, it has been decided that the threshold limit for FIPB approval may be increased to Rs.5000 crore.

MHCO COMMENT

Overall, we believe the aforesaid Reforms are a dynamic step to integrate the Indian market with the rest of the world for attracting investments, technology, and enhancing India’s position destination as a destination for foreign investments.

This article was released on 17 November 2015.

AMENDMENT TO INDIAN ARBITRATION ACT

Very recently the president of India has promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015 (“Ordinance”). The Ordinance seeks to achieve major changes in the (Indian) Arbitration and Conciliation Act 1996 ("Arbitration Act") that may be helpful in conducting the arbitral proceedings more effectively and may also help attract more foreign investment.

The Ordinance makes following key amendments to the Arbitration Act:

• Expeditious Appointment: The arbitrator is to be appointed expeditiously and most preferably within a period of 60 days. The Ordinance further imposes a restriction on the Courts under Section 11 from exercising its powers other than examination of the validity of the arbitration clause alone.

• Relationship: Section 12 imposes an obligation on the arbitrator to make a clear disclosure in writing of any relationship whether past or present or any vested interest thereof. In the event of any established relationship, the person shall not be eligible to be appointed as an arbitrator.

• Time Bound Arbitration: In order to have a time bound arbitration proceeding, the Ordinance provides for a time period of 12 months for passing of the award from the initiation of the proceeding. The period may further be extended by a further period of 6 months only with the consent of the parties. The Ordinance imposes a further restriction on extension of time beyond the period of six months. If at all the parties want further extension they will have to approach the court. If they are able to show sufficient cause the court may extend the period further. While so extending the period, the courts are empowered to reduce the fees of the arbitrator up to 5% for each month of such delay and can also substitute one or all the arbitrators. If the arbitration is not completed within the prescribed time limits the mandate of the arbitrator shall terminate.

• Fast Track Procedure: The Ordinance also provides for a fast track procedure for settlement of the disputes with mutual consent of the parties. Under this method, the parties will choose a sole arbitrator. Further, the parties agree to have the arbitration based on written pleadings, documents and submissions without any oral hearing. Oral hearing shall be held only if the parties make a request to the arbitral tribunal. Under this method, the award has to be made within 6 months from the date of reference.

• Challenges in the name of Public Policy: The Ordinance provides for an amendment in Section 34 of the Act giving a restricted meaning to the use of the term “Public Policy of India”. This is important because the courts had given a very wide interpretation to the term ‘public policy’. Therefore, mostly all awards could be challenged on the ground of ‘violation of public policy’ under Section 34 of the Act. The restriction of the definition will give the courts a limited chance to use this ground to set aside an arbitration award and the same is permitted only in the case wherein the award was passed fraudulently or in contravention of any fundamental policy of Indian Law or which is against the most basic principles of morality or justice.

• Stay of an Award: The Ordinance provides for amendment of Section 36 such that filing of an application for challenge of an award would not automatically stay execution of an award. The award shall be stayed only in the event the court passes an order to such effect.

• Interim Orders: Under Section 9 of the Act, any interim measure for protection pronounced by the Court, the arbitration proceedings must commence within a period of 90 (ninety) days from the court passing the order. It is also provided that no application for any interim measure shall be entertained after the constitution of the arbitral tribunal unless the court is of the opinion that the circumstances may not render the remedy provided under Section 17 is effective. Section 17 also provides that after the arbitral award is passed but before the award is enforced in accordance with Section 36, the party may apply to the arbitral tribunal for the following reasons:

* Appointment of a guardian for minor or person of unsound mind;

* Securing the amount in dispute in the arbitration;

* Measuring protecting goods, or amount of money, or property which is subject matter of the    dispute;

* Interim injunction or appointment of receiver.

• Time and cost effective: In addition to the aforesaid, further amendments have been proposed to be made in Section 2(1)(e),(f)(iii), 7(4)(b), 8(1) and (2), 14(1), 23, 24,25, 28(3), 37, 48, 56 and 57 for making the process of arbitration more time and cost effective.

MHCO COMMENT

The Ordinance has indeed set out very important amendments that were required to overhaul the old school laws that were very biased and time consuming which acted as a deterrent in attracting foreign investment in the country. This positive change in the legal system shall be only a huge relief for litigants subject to the effective implementation of the Ordinance by the Indian courts.

This article was released on 6 November 2015.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)