FDI policy further liberalized in key sectors Cabinet approves amendments in FDI policy

As per Press information Bureau press release dated 10th January 2018, The Union Cabinet chaired by Hon’ble Prime Minister Shri Narendra Modi has given approval to no. of amendments in FDI policy. This will simplify FDI policy and facilitate ease of doing business in country. Further, will lead to increase in inflow of FDI in country thus leading to growth of investment, income and employment.

This will also attract attention of foreign companies to go for formation of wholly owned subsidiary in India.

FDI policy

Highlights of liberalized FDI policy are as under

100% FDI under Single Brand Retail Trading (SBRT) is now under Automatic Route

  • Previously, only 49% FDI was allowed under automatic route, and FDI beyond 49% and up to 100% was allowed through Government approval route. It has now been decided to permit 100% FDI under automatic route for SBRT.
  • Now, SBRT Trading entity can set off set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1 April of the year of the opening of first store against the mandatory sourcing requirement of 30% of purchases from India.
  • After completion of this 5 year period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis.

For this purpose, incremental sourcing will mean the increase in terms of value of such global sourcing from India for that single brand (in INR terms) in a particular financial year over the preceding financial year, by the non-resident entities undertaking single brand retail trading entity, either directly or through their group companies.

  • A non-resident entity or entities, whether owner of the brand or otherwise, is permitted to undertake ‘single brand’ product retail trading in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking single brand retail trading and the brand owner.

This will attract more foreign investment in India as more and more foreign company will go for formation of wholly owned subsidiary in India for undertaking single brand retail trading.

 

  • Foreign airlines allowed to invest up to 49% under approval route in Air India

As per existing policy, foreign airlines are allowed investment only upto 49% of their paid up capital in Indian companies operating scheduled and nonscheduled air transport services under Government Approval Route. Also, foreign airlines could not invest in Air India at all.

Now, as per revised policy, foreign airlines are allowed to invest up to 49% under approval route in Air India subject to the conditions that:

  1. Foreign investment(s) in Air India including that of foreign Airline(s) shall not exceed 49% either directly or indirectly
  2. Substantial ownership and effective control of Air India shall continue to be vested in Indian National.

This will facilitate foreign companies to make investment upto 49% in wholly owned subsidiary in India by foreign company under automatic route.

 

  • 100% FDI allowed under automatic route in Construction Development

It has been decided to clarify that real-estate broking service does not amount to real estate business and is therefore, eligible for 100% FDI under automatic route.

 

  • Investment in Power Exchanges by FIIs and FPIs through primary market

As per existing policy, 49% FDI are allowed under automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. However, FII/FPI purchases were restricted to secondary market only.

It has now been decided to do away with this provision, thereby allowing FIIs/FPIs to invest in Power Exchanges through primary market as well.

 

  • Issue of equity shares against non-cash considerations is now allowed under automatic route.

As per existing policy, issue of equity shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. is permitted under Government approval route. It has now been decided that issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. shall be permitted under automatic route in case of sectors under automatic route.

 

  • Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian company/ies/ LLP and in the Core Investing Companies is now allowed under automatic route subject to conditions.

Under the existing law, foreign investment in aforementioned companies are allowed upto 100% with prior Government approval. It has now been decided to align FDI policy on these sectors with FDI policy provisions on Other Financial Services. Thus, if the above activities are regulated by any financial sector regulator, then foreign investment upto 100% under automatic route shall be allowed; and, if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% will be allowed under Government approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government. This will facilitate opening an Indian Subsidiary.

 

  • Competent Authority for examining FDI proposals from countries of concern

As per the existing procedures, FDI applications involving investments from Countries of Concern, requiring security clearance as per the extant FEMA 20, FDI Policy and security guidelines, amended from time to time, are to be processed by the Ministry of Home Affairs (MHA) for investments falling under automatic route sectors/activities, while cases pertaining to government approval route sectors/activities requiring security clearance are to be processed by the respective Administrative Ministries/Departments, as the case may be.

It has now been decided that for investments in automatic route sectors, requiring approval only on the matter of investment being from country of concern, FDI applications would be processed by Department of Industrial Policy & Promotion (DIPP) for Government approval. Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by concerned Administrative Department/Ministry. This will facilitate opening an Indian Subsidiary.

 

  • Pharmaceuticals Sectors

FDI policy on Pharmaceuticals sector inter-alia provides that definition of medical device as contained in the FDI Policy would be subject to amendment in the Drugs and Cosmetics Act. As the definition as contained in the policy is complete in itself, it has been decided to drop the reference to Drugs and Cosmetics Act from FDI policy.

Further, it has also been decided to amend the definition of ‘medical devices’ as contained in the FDI Policy.

 

  • Prohibition of restrictive conditions regarding audit firms:

The existing FDI policy does not have any provisions in respect of specification of auditors that can be appointed by the Indian investee companies receiving foreign investments. It has been decided to provide in the FDI policy that wherever the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company, then audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network.

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Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.

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