23 June 2016

FDI REFORMS | INDIA IS NOW THE MOST OPEN ECONOMY IN THE WORLD FOR FDI

After significant changes in the Foreign Direct Investment (``FDI``) policy in November 2015, the Union Government through a very recent Press Release announced further important changes that now make India one of the most open economies in the world.

Changes introduced in the FDI policy include (a) Increase in the FDI sectoral caps; (b) Bringing more activities under automatic route; and (c) Easing of conditions for foreign investment in certain sectors. 

Following are the significant changes introduced by the Government:

• 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 cases 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.

• Civil aviation: Earlier the policy on airports permitted 100% FDI under automatic route in Greenfield Projects and 74% FDI in Brownfield Projects under automatic route. FDI beyond 74% for Brownfield Projects was under government route. 100% FDI has not been permitted under automatic route in Brownfield airports. 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.

• 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. It has now been decided to relax local sourcing norms up to 3 years and provide a relaxed sourcing regime for another 5 years for entities undertaking SBRT of products having ‘state-of-art’ and ‘cutting edge’ technology. However, the terms state-of-art and cutting edge technology have not been defined.

• 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.

• 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).

• 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.

• 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.

• 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.

• 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.

MHCO COMMENT

Presently, only the press release has been issued by the Government. However, the Press Note and amendments to FEMA will provide better clarity with regards to the effect that the aforesaid change shall bring about. 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. 

This article was released on 23 June 2016.

(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.)